Energy Risks | Risk Management Monitor

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.

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” 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.

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“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.”

Business will never embrace regulation. The market yearns to be free and regulation, most of the time, places restrictions on unbridled capitalism. Some rules improve the competitive landscape for nearly all stakeholders, but that is the rare case.

One constant problem regarding regulation is the question of who does the regulating.

In order to provide proper oversight of something, you naturally must know a good deal about it. For example, if you have never traded securities on Wall Street, it is very difficult to have enough knowledge of all the nuanced realities that take place in that arena. This is just common sense. You can study, research and inquire as much as you want, but there will always be something lacking in your understanding if you have no first-hand experience.

Generally, the ideal person to oversee something, particularly when it is a complex, specialized marketplace, is a person from that marketplace.

Of course, the rub is that anyone who has existed within that marketplace long enough to learn all these complexities will also have developed relationships and biases. If Steve the securities trader worked in a trading room for 20 years, he likely was passed over for jobs by some companies and had a bi-weekly steak dinner with peers from various firms. He developed affinity for some companies and colleagues while developing resentment for other industry players and practices. So if he is to later become a watchdog of those people, it is hard to believe he will not bring those biases with him — intentionally or not — in his rule enforcement.

The SEC and Treasury departments have long been criticized for this.

The offshore drilling regulation world is similar. And a new report by AP shows just how pervasive the concern is among industry players and regulators with interests in the Gulf of Mexico.

Documents obtained by The Associated Press show that about 1 of every 5 employees of 109 involved in inspections in the Gulf has been recused from some duties because of the risk of coming into contact with a family member or friend working for a company the inspector regulates. Ten people hired since mid-August 2008 were barred for two years from performing work where they could be in a position of policing their previous employer—a company or contractor operating offshore.

In the Lafayette, La., office of the Bureau of Ocean Energy Management, Enforcement and Regulation nearly 35 percent of inspectors have been disqualified because a friend or relative works for a company they could interact with on the job. In Lake Charles, La., nearly 30 percent of inspectors held their last job with an oil and gas company, meaning they can’t perform any duties involving their former employer for two years.

The numbers come from recusal forms under a new ethics policy instituted last year by the Obama administration to identify and prevent possible conflicts of interest before they arise.

Offshore drilling regulation does not have the resources or manpower of the SEC. So it is important that the smaller number of people regulating this segment of the energy sector do so well. And who else but industry vets could know all the ins and outs surrounding practices like ensuring proper anchoring standards for various types of oil rigs, installing blowout preventers and determining safe levels for gas releases?

Then again, if so many of the public servants (at least in name) transitioning from industry to the regulation side of things, how can you trust them to leave their biases at the door? (Especially when there is, like Wall Street, a revolving door practice of people who go from industry to regulation and then back to industry?)

In an ideal world, you would hope that a person who becomes a regulator could take that responsibility seriously enough that their conflicts of interest, while real, do not impede them from creating and enforcing good rules to govern the industry.

And I’m sure that in many instances, that would be the case. But these recusal policies are understandably necessary. And the degree to which they are being issued perhaps highlights a larger question.

How can a regulatory body properly operate when up to 35% of its inspectors are deemed to have conflicts of interest?

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How Conflicts of Interest Hinder Offshore Drilling Regulation