The 5.6-magnitude earthquake that struck Oklahoma Saturday was not only one of the strongest in state history, it was one of the first that insurance companies linked directly with hydrofracking and wastewater injection – an association that could lead to complications for quake coverage for homeowners and liability policies for oil and gas companies.
The quake hit just after 7AM near Pawnee, Oklahoma and was followed by massive aftershocks throughout the day measuring as much as magnitude 3.6. Though there was just one injury over the weekend, the tremor tied with a 2011 quake near Prague as the strongest in Oklahoma history.
And now several insurance professionals are using the quake to discuss the changing face of risk – specifically the increase in scientific evidence suggesting fracking is a primary cause of heightened seismic activity.
Swiss Re released a white paper Tuesday showing the number of magnitude-3.0 earthquakes in Oklahoma has risen from roughly two per year in 2008 to an average of nearly three per day. That makes the state the most seismically active of the lower 48 states.
Along with the increase in tremors, Oklahoma has also seen growth in its oil and natural gas operations since 2008 – specifically fracking. Similar associations have been made throughout the US and in Western Canada, where 62% of the 258 magnitude-3.0+ earthquakes recorded from 1985 to 2015 have been associated with hydrofracking wells.
“It’s highly likely that this dramatic rise in earthquake occurrence is largely a consequence of human actions,” Swiss Re said. “A consensus of scientific opinion now links [fracking] practices to the observed increases in seismic activity…and present[s] an emerging risk of which the insurance industry is taking note.”
Swiss Re estimates the expected frequency of a damaging event has increased nearly 15 times, and losses are roughly 5% higher. As of yet, however, most insurers have not incorporated the fracking-associated increase in seismic hazard into their underwriting.
That could lead to a significant increase in premiums for an already expensive insurance product when carriers do begin to include this data in their rate-making practices. Already, the take up rate for earthquake insurance is low – kept away by high pricing, just 15% of property owners have some level of earthquake protection, according to Swiss Re. What’s more, the insurance industry paid just eight of 100 earthquake-related claims in 2014 due to high deductibles and masonry damage exclusions.
“The combination of high deductibles, common policy exclusions and a low overall take up rate leads to a potentially large uninsured loss in the event of a big earthquake,” Swiss Re said.
In that event, the insurance firm believes quake victims are much more likely to seek financial restitution in the form of litigation against oil and gas companies.
In 2015, the Oklahoma Supreme Court unanimously ruled that citizens can sue fracking firms for damages following an induced earthquake. An ongoing lawsuit filed by people in nine counties who claim their homes were damaged by earthquakes is also seeking class action status; if granted, litigation against fracking companies will become much more attractive.
All of this is concerning for liability carriers insuring the oil and gas industry. While Swiss Re notes that “it may be extremely difficult to hold an operator liable for inducing an earthquake,” the legal costs alone may result in greater losses for insurers and resulting premium increases for insureds.
This is particularly true if an earthquake were to occur beneath a heavily populated area like Oklahoma City or Tulsa, Swiss Re suggested.
“It’s unlikely that most well operators carry enough insured limit, if any, for these scenarios,” the company said. “Here, there’s an opportunity for insurers and reinsurers to take a lead role in encouraging risk averse behavior among the operators they insure. For example, underwriters could consider the seismic monitoring capabilities of an operator and location of its wells to improve risk selection and portfolio management.”
Swiss Re also urged insurance professionals to begin considering products that incorporate an aggregate cover for those suffering multiple small losses, or decreased deductibles and decreased limit of cover option for those concerned about small levels of damage.
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The state of Oklahoma’s problematic earthquake insurance market