Covering hydraulic fracturing can be profitable: Reinsurer

Covering hydraulic fracturing risks can be profitable for primary insurers and reinsurers, but insurers need to watch the outcome of lawsuits, suggest experts who spoke to A.M. Best Company Inc. in a recent video.

On a BestTV video, posted by the Oldwick, N.J.-based credit rating provider to its website Wednesday, two insurance experts talked about covering hydraulic fracturing.

“It has been a profitable line to date,” Brian McCarthy, president and CEO of Energi Inc., stated in the video.

“Especially for the companies like Travelers and Berkely, who have really had an emphasis on engineering loss control to make sure that they are getting the companies that are going to implement best practices.”

Peabody, Mass.-based Energi’s holdings include Energi Insurance Services Inc. and Energi RE LLC, a captive reinsurance company.

McCarthy noted it is “critical” for insurers to spread risk and manage limits.

“Having good strong reinsurance support is good for us in the long haul,” he said, noting that “key concerns” — to both the public and to reinsurers — include the risk of pollution of the water supply, and air pollution.

“In any industry, there are good actors and there are bad actors and there are employees who don’t do their jobs and cut corners. When that happens, like any other industry, you are going to have claims.”

Kate Smith, A.M. Best’s senior associate editor, noted lawsuits related to hydraulic fracturing “are just beginning to make their way through the legal systems and until we have either jury verdicts either valuing these claims or invalidating them, we may continue to see some insurers and reinsurers grappling with whether or not they want to take on these risks.”

“The insurance industry really needs to keep an eye on how case law progresses,” she added.

Jeremy Goodman, executive managing director for Aon Benfield, also appeared on the BestTV episode.

He noted hydraulic fracturing has been around “many many years.”

“What has improved is the technology, the ability to be able to access this in a more effective and cost efficient manner,” Goodman said, “but also in a far safer or secure environment to avoid any of the potential environmental exposures that people have had concerns about.”

But Goodman added “media exposure” has caused the industry to suffer.

“People have less knowledge about hydraulic fracturing than perhaps they do for other risks and the media attention to it has given rise to a negative perception.”