Congress Must Act in 2015
I am disappointed by Congress’ decision to adjourn last week without taking action on legislation to reauthorize of the Terrorism Risk Insurance Act (TRIA) and enact the National Association of Registered Agents and Brokers (NARAB) — and I speak for the entire NAPSLO organization and membership.
As a result of that inaction, insurers and insureds are astounded and scrambling to address the increased exposure of the expiring federal backstop.
Carriers, brokers and insureds are now faced with potential terrorism exclusions and/or acceptance of the exposure between Dec. 31 and the time by which Congress takes needed action — exposure that was assessed and priced assuming Congress would reauthorize TRIA before adjourning in 2014.
NAPSLO believes TRIA has been an important tool for insurers to better manage the risk of terrorism events and provides certainty to the industry in offering private capital and solutions to policyholders.
Surplus lines insurers provided certain terrorism coverage pursuant to the mandatory provisions and subject to the deductibles and triggers of the existing federal program.
In general, we believe private market solutions should be exhausted before government-sponsored programs or residual markets are considered, and governments should not provide coverage options the private or open market is able to address.
However, we also believe a role exists for the federal government in the management of terrorism risk. Insurers can model the severity of a hypothetical terrorist attack, but it is impossible to model the likelihood or frequency of those attacks.
As a result, we have long supported a thoughtful and thorough review of TRIA with a goal of maintaining or increasing opportunities for capacity and solutions delivered by the private market.
NAPSLO has also strongly supported the enactment of NARAB. This critical legislation will streamline agent and broker licensing for those operating on a multi-state basis.
It would create a nonprofit board to be governed by state insurance regulators and industry representatives to create rigorous standards and ethical requirements with a goal of applying licensing, continuing education and nonresident insurance producer standards on a multi-state basis.
We were very pleased when the House of Representatives passed TRIA legislation on Dec. 10 that appeared to be a middle-ground compromise between the House and Senate proposals that had passed through their respective committees last June. That legislation would have extended TRIA for six years and enacted NARAB.
Unfortunately, when the TRIA and NARAB legislation moved to the Senate, leaders were unable to overcome the objections of one Senator in order to pass the bill. When a Member refused to support NARAB absent provisions allowing for states to opt-out of participation in the national licensing system, it marked the end of compromise for this year, and the end of TRIA until further action is taken.
This was a disappointing outcome for our industry and our nation’s insureds.
We at NAPSLO urge Congress to act on this issue as soon as members return on Jan. 6, 2015, as we believe this is an important issue for our nation’s economic security. We look forward to working with our industry partners and the new Congress to see legislation passed that will reauthorize TRIA and enact NARAB in early 2015.
Left To Die On the Vine
For once, Congress came up with a plan that made sense; wasn’t a boondoggle; and had bipartisan support. And on 1/1/15 they will let one of the best plans ever conceived simply die on the vine.
Congress established TRIA following the September 11, 2001 attacks as a risk-sharing partnership that allowed the federal government and the insurance industry to share losses in the event of a major terrorist attack.
The program would provide resources to businesses to help them recover/rebuild if they are the victims of a terrorist attack. The plan worked by restoring stability to the insurance and reinsurance markets.
Even better — it cost taxpayers nothing. That was a classic Congressional win-win.
So why would Congress pack up their kit bags and abandon a successful plan?
Apparently there was quibbling within the ranks over the right of each state to decline joining TRIA, as well many who wanted to force more of the financial burden on the insurance industry.
Regardless, instead of working towards a compromise, Congress simply walked away. I find that deplorable.
It’s deplorable because the private sector does not have the capacity to provide insurance/reinsurance for terrorism risk to the extent currently provided by TRIA.
Without TRIA, terrorism risk insurance would be limited and exceedingly expensive. Any coverage available would pale compared to the limits covered by the TRIA plan. I imagine the deductibles would be outrageous.
As a risk manager, my other concern would be the effect on workers’ compensation programs. Employers with a large concentration of workers at one location could see their rates increase significantly.
Insurers, as you know, can’t exclude terrorism-related losses. My employer has large manufacturing plants and highly populated corporate offices across the US. I dread my 2015 work comp renewal … and the sleepless nights leading up to it.
Ditto for property insurance. With no TRIA backstop, insurers will be less likely to write certain locations, or they will place a number of exclusions and sunset clauses to lessen or totally eliminate the terrorism exposure.
From an overall economic standpoint, without TRIA our national security would become destabilized and we become less resilient to future terrorist attacks.
Think of where we were prior to 9/11, The United States was coming off a recession stemming from a bursting bubble; a decline in consumer confidence; and predatory lending had been uncovered. And then we were attacked. The traumatic events magnified and accelerated the underlying trends already in motion in the U.S. economy.
It was a perfect storm for economic disaster. We survived … barely.
As of 1/1/15 we will return to the same place we were prior to the 9/11 attacks – weak and vulnerable from an economic standpoint. If another 9/11 occurs without the TRIA backstop, would we rely on federal aid (which is already stretched beyond capacity)? Imagine what that would do to the economy?
I hate to be one of “those guys” who blames everything on our elected officials, but this time they deserve it. Congress had a chance to do the right thing and they failed.
Read all of Dan Holden’s Risk Insider contributions.
Passion for the Prize
In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.
Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.
While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.
The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.
But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.
Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.
For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.
Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.
Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.
Risk in Motion
Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.
One of those changes is in the area of commercial auto and related coverages.
Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.
The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy
For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.
Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.
In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.
That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.
Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.
When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.
For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.
Those are two different distinct coverages, both of which a lease holder needs.
Matt Waters discusses the need for stand-alone environmental coverage.
The Energy Cycle
Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.
While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.
Matt Waters discusses future growth for midstream oil and gas companies.
In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.
Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.
Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.
Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.
Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.
For Waters, politics and the trends of the moment have little place in his long-term thinking.
“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.
And that holds true for the latest extraction technologies.
“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.
To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.