POINT: Rates are Adequate

Carriers are right to take a go-slow approach to underwriting the risk from hydraulic fracturing.

By DAN REYNOLDS is senior editor of Risk & Insurance®.

Carriers, rightly so, will take a conservative approach to the long-term environmental risks of hydraulic fracking in natural gas extraction and pick up plenty of premium revenue covering the short-term nonenvironmental risks. When we're talking about natural gas extraction in Texas, Pennsylvania, New York, and West Virginia, we are talking about an industry that will add about $25 billion to the U.S. economy by 2020, according to experts.

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That's a lot of money, and insurers are right to go after that kind of premium volume in this soft market as long as they know their partners and limit their exposures. Because as we know, the supply chain for those forcing water into shale and tapping natural gas is long and involved. It's not just the drillers and the sellers of gas that insurers are picking up premium from.

In this market and industry, big carriers are willing to go after the much smaller customers that make up this supply chain because that is where business is growing. Carriers aren't necessarily dropping their prices to participate in this market, but they are on the record as saying that they are dropping their premium minimums as far down that supply chain as they can go.

In Pennsylvania, where much of the Marcellus Shale gas is located, there is a long and problematic history with coal mining. Carriers and their drilling partners are aware of this history and are taking a much more holistic approach to mining risk than the coal industry took 100 years ago. Insurers, as they are in many industries, are engineering partners to energy producers and are becoming more and more so.

Look into the policy of a natural gas driller in Pennsylvania, Ohio or West Virginia these days and you can bet there will be exclusions in the area of environmental risk, if that coverage is offered to a driller, that will give the carrier an out if the driller is found to have violated established and accepted protocols.

There is an additional piece to this story. The book is not even half written in terms of what regulators in New York, Pennsylvania and even New Jersey are going to do in connection with this industry.

Good old Chris Christie, the Republican governor of New Jersey, just enacted a one-year moratorium on natural gas drilling until his or a future administration can get a grip on the risk. Pennsylvania's Republican Gov. Tom Corbett isn't showing the same caution, but New York's Andrew Cuomo is and that's a good thing for all concerned.

There may be gold in them thar' hills in the form of natural gas in its gaseous or liquid form, but a slower, more cautious approach can only help insurers and their partners in side-stepping significant environmental risk exposure down the line.

October 15, 2011

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