Category Archives: Regulatory Risk

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Haulers of Crude Finding Coverage Scarce

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HOUSTON—The recent spike in oil and natural gas production has led trucking companies to grow so quickly that they sometimes scramble to find qualified drivers. This has meant tightening coverage with a limited number of carriers and a market in “disarray,” Anthony Dorn, a broker with Sloan Mason Insurance Services, said today at the IRMI Energy Risk and Insurance Conference.

“Carriers have taken a bath on construction risks,” he said. “Only nine carriers will write crude hauling.”

There is a huge need for risk management in trucking right now, he added. “A lot of these are fly-by-night companies. They are running with drivers that have no experience, they are getting violations from the DOT left and right for not having licenses and adequate brakes on their trucks and they are running on dirt roads that aren’t made for 100,000 pound units,” Dorn said. “It’s a very risky place for underwriters. If we don’t do something as agents and as risk managers there will be fewer carriers.”

The recent downturn in the oil and gas market has also been a game-changer for some companies. Dorn predicts a “cleaning of the crop” of truckers. Inexperienced companies with new drivers will “fall by the wayside. What we are going to be left with are companies that are well-run with proper safety procedures in their fleet.”

Once that happens, he believes more carriers will enter the market. “But as of now, in general the whole market is in disarray,” he said.

He noted that agencies such as the Department of Transportation have vehicle reports available online, which insurers now frequently access when considering whether to take on a trucking company as a risk. He suggested that companies looking for coverage also check these reports and work closely with their risk managers and safety directors to correct any problems, such as drivers without adequate experience.

“There is a huge opportunity out there right now for risk managers to approach these companies and tell them, ‘If you don’t have a risk manager to help with your losses, you are not going to be able to find insurance.’ Right off the bat, I’d say 50% [of trucking companies] are declined as soon as they walk in the door,” Dorn said. As a result, he has seen companies declined by every insurer and forced to form a new LLC or even shut down.

Loren Henry, also a broker with Sloan Mason, said that another thing they are seeing as oil prices drop is companies formed to haul salt water for hydraulic fracturing looking to other opportunities. “They start hauling agricultural products and paper products, whatever there is that is not oil and gas related,” he said. “That is typically not going to be covered under their auto policy.

” He advised fleet owners to be aware of this and communicate any changes to their broker to find out specifically what is covered.

“We have had some losses recently, where a company made a shift from what they were hauling because they had lost some saltwater accounts. They were hauling cattle and they had a loss and it wasn’t covered because it is not in the policy language,” Henry explained.

“I don’t know where all these water-haulers are going to go,” Dorn added. “You’re going to see massive fleets go on sale and you’ll get huge discounts on trucks. You are going to see some transitions.”

Dorn added that one of his clients is now hauling salt water with half of his trucks and cattle with the rest. He advised his client to form another LLC for the cattle-hauling if he expects to get insurance coverage, as insurers would cover one or the other, but not both.

Asked whether companies are hiring risk managers and if they are also listening to their advice, he said, “Yes, especially after they get their premium. When they go from $5,000 a unit to $12,000 a unit their ears perk up pretty quick. They are willing to do almost anything to get that pricing down. It’s sad because companies are actually being put out of business because their premiums are too high.”

He expects the next year to see a lot of changes. “A lot of companies will go by the wayside,” he said. “A lot of smaller companies will be gone—they will sell their trucks or be bought out by bigger fleets.”

Shale Shakes Up Energy Sector

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shale oil industry

HOUSTON—In the words of the well-known rock group REM, “It’s the end of the world as we know it,” at least for the energy sector in the last decade, said Ross Payne, managing director of Wells Fargo Securities and keynote speaker at the IRMI Energy Risk and Insurance Conference here. Since 2009, production in the United States is up 72%, he said. “That’s a phenomenal increase, driven by shale production.”

The huge boon in shale production was the result of technology. “Just sticking one straw into shale was not going to be economic, butwhen you were able to take that drill bit and turn it horizontal, and go out one to two miles horizontally and pop a hole into the ground every hundred yards along that one or two miles, you got enough flow to make that economically an option,” he said. “That’s why, when we broke the technology on that, it did change the world as we know it.

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”

Looking at energy from 30,000 feet, he explained that, since the early ’90s, the energy sector has enjoyed “one way pricing,” which was brought about by constricted supplies. The only new technology before developments to extract shale came along was in the deep water offshore arena, “a brand new territory for drilling in the 1980s and ’90s.”

Adding to that was dramatic global growth and demand, primarily from the BRIC countries–Brazil, Russia, India and China–and geopolitical issues such as the Arab Spring and the Iraq war, Payne said.

With high prices, however, “you get substitutions and you get disrupters. Clearly shale has become a disrupter.” What kind of impact has shale had on the industry? “Just since 2011 to 2013, the Energy Information Administration (EIA) doubled their crude basin estimates to 95. There are now 41 countries out there with significant shale assets.

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Shale reserves increased 980% in that two year time frame. Currently in the United States, 42% of production is through shale, with crude production around 50%,” he said.

As technology continues to evolve, Payne said, “we are continuing to do a better job of pulling this gas and crude out at a lower price. We are going to get more prolific and drive down costs even further.” Meanwhile, other countries, including China and Russia, are doing the same.

“Shale is the future, it’s the future on a global basis as well,” he said. The country with the largest shale reserves, he noted, is Russia, with the United States in second place. “We’re obviously the largest producer of shale crude, and China is number three.

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On the natural gas side, China is number one and the U.S. is number four.”

But how long will crude prices stay low? “We think it’s going to be awhile,” Payne said. “Because of shale, prices will be capped. As prices start to come up, we will see a situation where rigs come back on line very quickly. We think that, as we get into the $65 to $70 per barrel range, a lot of rigs will come back on line,” he said. “At peak, we were at 1,610 crude rigs in the U.S., and if you have 1,610 rigs working in the fields primarily on shale, you will get 1 million barrels of growth year-over-year.” He also does not see prices going much above $80 because of the ability to turn these rigs so quickly, primarily in the U.S.

A poll among energy experts in the audience as to where prices will be by the end of 2015 reached a consensus of $55 to $60 per barrel. Asked whether he believes the Nixon-era ban on exporting oil will be lifted, Payne pointed out that a number of CEOs have been pushing for U.S. exports of crude. “I’m surprised that Obama let LNG [liquefied natural gas] exports materialize as quickly as he did,” he said, adding that the president has allowed for other similar exports as well. However, he warned, “Once we start to export, there could be a knee-jerk reaction from OPEC. We are going to be viewed as a competitor rather than a customer, and they may want to squelch that competitor a bit longer than people’s expectations. So I think there is a danger to doing that, but it could very well move forward.”

Executive Focus Shifting to Operational Risks in 2015, Study Finds

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Board members and C-suite executives across industries perceive the global business environment in 2015 as somewhat less risky for organizations than in the past two years. In “Executive Perspectives on Top Risks for 2015,” consulting firm Protiviti and the Enterprise Risk Management Initiative at the North Carolina State Univeristy Poole College of Management found that this is far from bad news for risk managers, as organizations are actually more likely to invest additional resources for risk management. Internal challenges like succession, attracting and retaining talent, regulation and cybersecurity are drawing the most attention, according to the report.

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“Our survey findings indicate that operational risk issues are keeping many senior executives up at night,” said Mark Beasley, Deloitte Professor of Enterprise Risk Management and NC State ERM Initiative director. Indeed, for the third consecutive year, regulatory changes and heightened regulatory scrutiny ranked as the number one risk on the minds of board members and corporate executives, with 67% indicating that it will “significantly impact” their organizations. More than half of global survey respondents indicated that insufficient preparation to manage cybersecurity threats is a risk that will “significantly impact” their organizations in 2015, pushing cyberrisk up three spots from last year to the third-greatest risk.

The Top 10 Risks for 2015

The top 10 risks identified in the annual risk survey, along with the percentages of respondents who identified each risk as having a “Significant Impact” on their business, were:

1. Regulatory changes and heightened regulatory scrutiny may affect the manner in which our products or services will be produced or delivered (67%)

2. Economic conditions in markets we currently serve may significantly restrict growth opportunities for our organization (56%)

3. Our organization may not be sufficiently prepared to manage cyber threats that have the potential to significantly disrupt our core operations and/or damage our brand (53%)

4. Our organization’s succession challenges and ability to attract and retain top talent may limit our ability to achieve operational targets (56%)

5. Our organization’s culture may not sufficiently encourage the timely identification and escalation of risk issues that have the potential to significantly affect our core operations and achievement of strategic objectives (51%)

6. Resistance to change may restrict our organization from making necessary adjustments to the business model and core operations (49%)

7. Ensuring privacy/identity management and information security/system protection may require significant resources for us (52%)

8. Our organization may not be sufficiently prepared to manage an unexpected crisis significantly impacting our reputation (46%)

9. Sustaining customer loyalty and retention may be increasingly difficult due to evolving customer preferences and/or demographic shifts in our existing customer base (48%)

10. Our existing operations may not be able to meet performance expectations related to quality, time to market, cost and innovation as well as our competitors (46%)

The survey also identified differing perceptions of the current risk environment between boards of directors and members of the executive team. CEOs and boards of directors reported more optimism about risk issues, while CFOs and chief audit executives perceived a more risky business environment.

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“Given encouraging signs in the economy, we’ve observed an overall shift in focus from macroeconomic risks to operational risks, which had the greatest increase in risk scores from 2014.

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Notably, however, CEO respondents remained extremely focused on macro trends affecting their business,” Beasley said.

Check out the infographic below for more of the study’s key findings:

Protiviti Top Risks for 2015

Key Takeaways from the White House Summit on Cybersecurity

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Stanford University, Feb. 13, 2015

It was an honor to attend the White House Summit on Cybersecurity and Consumer Protection and I applaud President Obama’s efforts to bring together an impressive group of leaders across a broad range of industries, government and law enforcement officials, and consumer and privacy advocates to discuss cybersecurity. This is an issue that affects us all and clearly has no borders.

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While there were several core themes discussed throughout the day, three key takeaways are of particular interest to private industry:

Public-Private Collaboration is Critical
The overarching theme presented by the White House was how to boost the collaboration between companies and agencies in order to combat hackers. The announcement in the days preceding the Summit of the new Cyber Threat Intelligence Integration Center (CTIIC) was just a first step. As a further validation of the importance and urgency on behalf of the White House surrounding the issue at hand, at the Summit President Obama signed an Executive Order directing the creation of Information Sharing and Analysis Organizations (ISAOs) which will enable companies and the government to share classified cyber threat information. Only with an ongoing sharing of threat information between the government, including the Department of Homeland Security and the Federal Bureau of Investigation, and companies across industry groups, will we be successful.

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With much of the order voluntary, companies across all industries are also being asked to step up to the table now to not only share threat information but to establish best practices within their organizations in order to protect their constituencies in the future. This too is critical, since the maintenance of best practices is closely tied to a company’s ability to get cyber insurance.

Understanding Vulnerabilities is Key to Improving Best Practices
While the need to focus on the security systems operating behind consumer payment systems in order to make it harder for hackers to steal information is absolutely critical, and Apple CEO Tim Cook was quite persuasive on this point, to stop at payment systems alone would not solve cyber hacks. In order to enhance consumer protections online, single factor authentication, or the password as the primary form of security, is a dated practice that should be replaced with more secure technologies.

Companies also need to be mindful that criminals can breach a business’ defenses in any number of ways – directly through company networks and also indirectly through the network of vendors and third party service providers. What is needed is a fuller understanding of all the possible threats, malicious actors and the broad range of tactics those actors will employ. Across all industries, companies are facing a highly complex and constantly evolving threat environment with new attackers and attack methods to be wary of in order to protect their partners, clients and customers.

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What Comes Next is Even More Meaningful
While it is essential for the United States to take a leadership role on this important issue, with guidelines and processes for internal consumption, we cannot merely look inward. We are living and working in an increasingly interconnected and globalized environment, and that environment also includes criminal elements. Cyber threats from foreign countries, such as Russia, China and North Korea, keep growing. Sharing information alone won’t stop them. The next steps from our government in protecting our nation’s business must be even more meaningful. We urge cooperation with international law enforcement agencies to help protect companies from foreign-based threats and to help make significant progress in this area.