As oil and gas picks up, insurance increases should be scrutinized

Drillers, suppliers and others connected to Marcellus Shale are hiring again, says Taylor Troiano, area vice president at Arthur J. Gallagher & Co. One company went from 35 to 69 employees in one month and still needed to hire 20 more.

Locally, Washington County has 1,146 open wells, with additional wells in the counties of Greene (870), Butler (321), Fayette (257) and Westmoreland (251).

“Energy has big swings,” Troiano says. “With the new presidential administration in place in Washington, an upturn is upon us.”

But as revenues go up, workers are hired and equipment is running again, insurance premiums will increase as well. The question for the business owner is: “How can I minimize those premium increases.”

Smart Business spoke with Troiano about what he expects to see with insurance and how energy companies can respond.

How should business owners manage through the rising costs?

First and foremost, safety is ‘huge.’ With workers’ compensation, for example, a service provider with an experience modifier above 1.00 can’t generally perform work for the larger exploration and production, or E&P, companies. Companies that want to hire more employees should have a strict process to ensure they’re hiring and continuously training the best workers.

When it comes to safety and risk, at a minimum, businesses need a certified safety committee that meets monthly. They will receive the 5 percent discount for their efforts, but perhaps more importantly, they will look more attractive to the insurance marketplace and give the insurance broker more leverage for negotiating renewal terms.

Property insurance rates may also increase as energy companies buy up more space and expand their risk profile (e.g., to build and repair their own equipment).

Another area to watch is umbrella coverage. As large energy companies, such as EQT, Range Resources Corp. and Rice Energy, start to contract for more services, subcontractors may be forced to purchase higher limits. Currently many of those requirements call for a $10 million umbrella limit, which could be $20,000 or more of additional upfront cost.

What about automobile rates?

In the first five months of 2017, the energy sector has seen about a 12 percent rate increase on automobile insurance. The National Highway Traffic Safety Administration found a 9 percent increase in fatalities, from 2014-2017, because of distracted driving. In addition, with unemployment low and more people on the road, an uptick in accidents is predicted.

To combat these increases, companies need to hire safe drivers — people without prior issues like DUIs. It’s a good idea to run motor vehicle reports (MVR) internally. If your insurance broker or insurance company does it, you can’t see the details of the report due to confidentiality. Also, be sure to clearly identify criteria for MVR and violations, reporting of accidents, etc. You might want to capture data by location or shift. It’s critical to implement strong policies, such as prohibiting cellphone use, even though state law allows it. Otherwise, make sure company vehicles have hands-free technology.

In addition, you can reward safe drivers so your employees see evidence of your commitment to creating a positive safety culture. Your insurance broker should be sharing best practices with you in this area.

What’s going on with the coal industry?

Experts believe the coal industry will stay steady or start to increase, as well. Even with the need for clean energy, coal is still an important part of the world we live in. Coal powers 35 percent of the world’s electricity and is also used in the industrial sector. With developing countries requiring more electricity for industrialization, this should help the global market. In the U.S., there has been a lot of consolidation.

How else can your insurance broker help?

Only a handful of insurance brokers have expertise in the energy industry within a 100 mile radius, so it’s critical for companies to work closely with the right broker to manage the total risk cost. Finally, as suppliers and drillers look for ways to generate new revenue, your energy insurance broker can help with referrals.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.