Canadian Underwriter

Safety in the Numbers

May 23, 2014   by Regan Reid

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“The world has changed for shipment of oil by rail,” says Frances Weeks, partner at Iridium Risk Services in Calgary.

Before a train carrying millions of litres of crude oil derailed, exploded and killed 47 people in Lac-Mégantic, Que., the transportation of oil by rail was not a mainstream issue. But, understandably, Lac-Mégantic changed that. Today, the media reports on train derailments both major and minor, and the safety standards of tank cars frequently make the news on both sides of the border. But is transporting oil by rail inherently risky? Or has the  increased media focus on derailments simply skewed the public’s perception of how frequently these accidents occur? And perhaps most importantly, have the recent high-profile incidents of train derailments  altered how the industry views rail risk?

The Numbers

“The amount of train accidents has not increased. If anything, railway safety has gotten better,” says Lois Gardiner, senior vice-president, director risk consulting Western Canada, at Aon and a former managing director of risk management at Canadian Pacific Railway. “There are a lot more incidents making the media…but train accident frequency is not rising. Over the past 15 years, train accident frequency has continued to decline. The railroads have invested in safer operations.” According to the Railway Association of Canada (RAC), the rail industry’s accident rate based on its workload, or the rate per billion gross ton-miles (BGTM), has improved in recent years. The RAC reports that, in 2012, the freight rail sector moved a record 503.9 BGTM and recorded a rate of 2.1 accidents per BGTM, down from 4.1 accidents per BGTM in 2003. (The number of freight railway-related accidents actually increased slightly from 1,062 in 2011 to 1,068 in 2012, but decreased from 1,153 in 2010.)

While railway accident rates appear to be trending downward, the amount of oil being hauled by rail is skyrocketing. According to the RAC, of crude oil shipments that originated in North America, CN and CP (Canada’s only two Class 1 railways) hauled 529 carloads in 2009. In 2013, that number jumped to an estimated 160,000 carloads. Given that the Canadian Association of Petroleum Producers is expecting oil production to increase from 3.4 million barrels per day in 2013 to 4.85 million barrels per day in 2020, and the political and social issues surrounding pipeline development, rail will continue to be used as a means of transporting oil in the near future. “Crude shipments don’t necessarily pose a larger risk than other dangerous goods shipped by rail, but the amount of crude shipped is growing quickly,” says Michael Satre, vice-president, senior risk control executive at Willis. “This increased traffic means that a higher proportion of incidents will be associated with crude trains.” Despite the fact that accidents in general are happening less frequently, it’s clear that recent incidents have caused a heightened sensitivity to rail accidents involving oil. And the insurance industry has taken notice.

Industry Impact

Every year there’s a “hot topic” in the insurance industry, and “this year it’s definitely rail and that’s because of the claims. That’s had a big impact on how the insurance industry views the risk,” says Valerie Cusano, president of Iridium Risk Services. Ron Mathewson, assistant vice-president of railroad specialty products at Zurich North America (the sole insurance company that agreed to speak to Canadian Insurance Top Broker on the issue of transporting oil by rail) says, as a result of these large claims, the market is taking a closer look at crude exposures when it comes to underwriting railroads.

“Overall, the insurance industry is committed to the railroad space. After these high-profile losses, there have been some questions around the amount of limit an insurance company is willing to deploy to any single railroad,” he says. Mathewson stresses, however, that only a dozen or so railways haul crude (BNSF Railway, for example, transports approximately 40% of the Class 1 railroad crude oil shipments, and CP transports approximately 14%, he says). So the risk profile of a major transporter of oil may be different than that of a railway that does not transport dangerous goods. But regardless of what it hauls, Mathewson says all railways are reconsidering appropriate insurance limits. “I think there will be a drive to buy more limit overall. I think the railroaders are now thinking, ‘How much limit do I need to protect my shareholders, to protect the communities and other stakeholders around the tracks?’” And given that insurance companies are looking to reduce their vertical loss exposure to crude, the BNSFs and CNs of the world may have to look outside North America to fill their insurance needs, he adds.

But railway companies aren’t the only clients that have been affected by the increased focus on transporting oil by rail. Cusano and Weeks at Iridium say that many of their oil and gas company clients must also reconsider their insurance coverages. “In the Lac-Mégantic loss almost everybody who had any touch—people like Irving Oil, who hadn’t even received the oil yet—have been named in the suit,” says Weeks. “We’re seeing that people are being sued in ways that they hadn’t potentially envisaged. It’s important to make sure that you have enough limit, and to have strong indemnity and language in place to protect yourself should a loss occur.” Though the Lac-Mégantic lawsuits have yet to make their way through the courts and no producers have yet to be found responsible, now that that risk is known, producers are looking for more liability coverage, says Cusano.

“Markets that used to be comfortable providing this insurance at a certaincapacity, some of them have stopped providing the insurance; some of them have reduced the amount of capacity they will provide; some of them will provide the insurance, but with very strict sublimits and they’ll require a very explicit questionnaire to be filled in before the insurance is provided; and some of them will place the rail coverage as a separate type of insurance so that it has to be bought outside of the main program. So some of our clients will have to talk to more markets to replicate that capacity that they had before, or to buy increased limits,” says Cusano.

Managing the Risk

“We know that crude by rail is not going to go away. We know it’s going to get even bigger and bigger. There are really two big pieces of the puzzle to fit together to make sure this is safe,” says Mathewson. “Railroad safety is one and energy company practices are the other.”

There are a number of ways rail companies can manage their risk, and insurance is just one of the tools, says Aon’s Gardiner. “Look at your contractual arrangements; is there something you can do to minimize the risk exposure? If you do have transload operations [transferring a shipment from one mode of transportation to another], are you auditing those operations? How have you contracted with them? What exposure have you taken on in contract even? There are so many pieces in the puzzle, and you have to look through every single link in the supply chain from cradle to grave to understand where you could be [at risk],” she says. “Understand your equipment, your leasing arrangements; what is the profile of your fleet? There is a lot you can do. And there is a lot of risk you can take off the table if you have better tank cars.”

Tank car safety standards and the proper packaging of oil shipments are two of the many safety issues that have been brought forward following the Lac-Mégantic disaster. DOT-111 tank cars are used to ship crude, among other goods, and were involved in the Lac-Mégantic incident, as well as a January 2014 North Dakota derailment. Though tank car standards have only recently made mainstream news, the North American rail industry has been pushing for stricter safety regulations for years. The  American Association of Railroads (AAR) Tank Car Committee, in which Transport Canada participates, sets industry standards for tank cars. Since October 2011, DOT-111 tank cars that transport Packing Group 1 and 2 crude oil have been built to the Committee’s stricter standards, which includes a more puncture-resistant shell, extra protective head shields at both ends of the tank car and additional protection for the top fittings. According to the AAR, there are roughly 92,000 DOT-111 tank cars moving flammable liquids in North America today. Of these 92,000 tank cars, only an estimated 14,000 adhere to the Committee’s stricter safety standards. However, the AAR says that even these newer tank cars may require safety upgrades. According to media reports, the US Transportation Department’s Pipeline and Hazardous Materials Safety Administration is expected to propose new tank car standards by the end of the year, and these standards could ultimately affect Canadian companies.“Rule-making that will occur in the US ultimately could impact Canadian companies, because a lot of the movements are cross-border and require assets to be interoperable,” says Gardiner.

On the energy company side, it is important that oil companies properly classify and package the oil that is being transported, says Mathewson. In October 2013, the Canadian government began requiring any person who imports or transports crude oil to conduct classification tests. US regulators also recently announced that oil from the Bakken Formation, which can be more volatile than crude from other areas, must be classified as Packing Group 1 or 2, both of which are higher-risk categories than Group 3. The train that derailed in Lac-Mégantic was carrying Bakken crude that had been mislabeled as Packing Group 3. In February, the US Department of Transportation fined three oil companies for improperly classifying crude from the Bakken, according to a Reuters report. “If you intend to move crude oil by rail, then you must test and classify the material appropriately,” US Transportation Secretary Anthony Foxx said in a statement.

The world has changed for shipment of oil by rail. Lac-Mégantic, North Dakota and other high-profile incidents have led to stricter safety standards for an industry that has already been steadily improving its accident rate in recent years. It’s safe to say that the insurance industry will also continue to view rail risk differently following these front-page incidents—much in the same way as the losses of 2005 changed the market for insurance coverage for Atlantic-named windstorms.

“When we had Rita and Katrina in the same year, the markets focused tremendously on insurance coverage for Atlantic-named windstorms. The prices were exorbitant, and the capacity was very limited. We have not had—knock on wood—really bad hurricane seasons for quite some time. We are seeing the market come back. We’re seeing the prices go down, we’re seeing capacity increase. Is it free, like it used to be before Rita and Katrina? No,” says Cusano. “I think that’s the kind of trend we’ll probably see here as well.”

Copyright 2014 Rogers Publishing Ltd. This article first appeared in the March 2014 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.