The rise of oil and gas production is having a dramatic economic impact around North America and helping the U.S. become energy self-sufficient, but the drilling and hydraulic fracturing production process remains controversial to the general public and to the insurance industry as well.

Many oil and gas producers have been forced to utilize coverage perceived as too expensive or lacking some desired coverage. There are, however, several insurers willing to provide coverage to producers and oil field service contractors. Among them is Energi, a national energy reinsurer based in Peabody, Massachusetts, that currently offers insurance and risk management solutions to oil field service contractors.

“Energi’s founder, Brian McCarthy, was tired of what he perceived to be his better energy customers being mistreated by the insurance industry and formed a captive [which insures risks with policyholders acting as shareholders]. We started writing policies in our core businesses of fuel distribution and energy transportation in 2006. We no longer operate as a captive, but the majority of our stockholders remain as policyholders,” Dave Tiedgen, senior vice president of research and development at Energi, tells Midstream Business.

Although the oil and gas production industry can be perceived as high hazard, Energi believes that the risks associated with oil and gas production sites can be safely managed. Many exposures found in this industry segment are similar to other industries— such as heavy fleet operations—that Energi successfully insures.

“There are a lot of what some of us believe to be frivolous claims in this market segment, and the costs of these claims are a concern to underwriters. These claims have been defended successfully over time, but those defense costs are meaningful,” Tiedgen says.

In order to prevent property damage and bodily injury, Energi assembles best practices in the sectors it operates in—including oil and gas production. Energi uses best practices developed by industry leaders and regulatory bodies, and ensures that these practices are then instituted by their insured companies.

“The implementation and reinforcement of best practices will not only limit environmental damages and personal injuries but will also reduce the legal costs. You can’t prevent everything. You do have claims, and that’s why you have insurance. However, analyzing this industry, analyzing what these folks do, spending time on R&D, and then training insurers—both management and front line employees—can help mitigate a lot of this risk,” Justin Russo, senior vice president of safety and loss prevention at Energi, tells Midstream Business.

Russo said best practices that are followed by Energi’s oil and gas production and oil field service companies include efforts to protect water resources; keep the public informed through communications with local authorities and the public; determine where there are existing abandoned wells, natural fractures, faults, drinking water aquifers and shallow natural gas zones are located through site characterization; select pad locations away from bodies of water; and determine water quality variability by identifying sources of water locations and sampling private wells.

As part of Energi’s risk-selection process for oil and gas production companies, Russo said that Energi reviews the company’s best practices and meets with its management to make sure it has the right mindset, policies and procedures in place. Energi also requires extensive documentation and sends safety specialists into the field to ensure these policies are being followed and employees are properly trained.

“As best practices are developed and enforced, relatively lower costs should result for a couple of reasons. The absolute cost of losses should go down, and that will also encourage more insurance companies to participate, leading to increased competition,” Tiedgen says.

Even through the increased use of best practices, risk will still remain an inherent part of the oil and gas industry, including drilling and hydraulic fracturing. “The oil and gas production industry overall has relatively high hazard operations and these types of operations show the most improvement from the increased implementation of best practices,” Tiedgen says.

Energi, like other insurers, reinsures some of the risk with other insurance companies. This is similar to how some oil and gas producers subcontract their oil field services in order to lower their costs and associated risks. “There’s an awful lot of negative perception about the industry from reinsurers who do not understand the process of recovering natural gas and oil. Old practices that were not prudent have been replaced by new technology, but it takes a while for perception to catch up,” Tiedgen says.

Tiedgen notes that Energi is planning on bringing reinsurers to production sites in an effort to educate them on modern production techniques. “We have to educate reinsurers about best practices, convince them that we understand best practices, and that we will follow them in our risk selection of policyholders.”

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