Buyers Brace For Hard Pollution Market

As the insurance industry braces for themassive onslaught of claims brought on by the Sept. 11 terroristattack that leveled New Yorks World Trade Center, players in theenvironmental insurance industry are gearing up for a tighterpollution liability market, industry sources say.

Small to mid-sized environmental insurers are feeling thebiggest impact, according to Brian Donovan, president of Steel TankInsurance Company, a captive in Burlington, Vt., pointing to thestrong dependence of such carriers on the reinsurance market, whichhas seen dramatically rising rates.

While the environmental market had already been on a downswingin terms of capacity, according to Mr. Donovan, he said he believesthe Sept. 11 disaster increased the pace of the decline.

The entire insurance market, including environmental liability,is “going through upheaval now. It was before Sept. 11 and more sonow,” Mr. Donovan said in a telephone interview.

A broad overview of the market finds environmental insurancepremiums at 20-to-35 percent above rates last year during the sameperiod, based on Mr. Donovans observations.

A big part of what is fueling the squeeze in the environmentalmarket is a fear of obtaining the reinsurance needed to writebigger risks, Mr. Donovan said.

“Major players are backing away from this class of businessbecause much of their capacity to write new business dependsheavily onreinsurance,” he noted, explaining that the reinsurancemarket is also expected to harden now at a more rapid rate.

Premiums for environmental insurance were rising throughout 2001before the industry was rocked by the terrorist attacks, but thefull impact, in terms of how much more buyers will have to pay forenvironmental coverage, cannot be ascertained until the bulk of thepolicies come up for renewal on Jan. 1, 2002, Mr. Donovanexplained.

Bill McElroy, president of Kemper Environmental Insurance inPrinceton, N.J., also cited firmer rates in the environmentalinsurance market. For example, he pegged 2001 increases forenvironmental contractor insurance roughly at 15 to 20 percent.

The majority of environmental insurance coverages, such aspollution legal liability and environmental impairment liability,are underwritten as multi-year contracts, industry sourcessaid.

Scott Houldin, president of Twins Elms Environmental InsuranceAgency, LLC based in Cos Cob, Conn., a national brokerage firm thatspecializes in environmental insurance, typically writes multi-yearpolicies. “We write 5-to-10-year environmental policy contracts,”he said. Twins Elms places environmental business with KemperInsurance, AIG Environmental and Gulf Underwriters InsuranceCompany, he noted.

Pat Hedrig, senior vice president for risk management at Marshand McLennan in Houston, Texas, agreed that most pollutionliability policies are structured as multi-year contractagreements, but he did note one exception. He said contractorpollution policies are sometimes renewed on an annual basis.

However, Mr. McElroy believes that greater uncertainty in themarket could result in insurers writing shorter-term environmentalinsurance policies, with annual renewal dates instead of extendedpolicies providing coverage for, perhaps, five years.

Using the impact on the national psyche of the recent attack onAmerica to illustrate a severe level of uncertainty among insurers,he said, “three years ago, writing a terrorist risk was probably agood move. But now that does not seem to be such a good idea.”

Market conditions driving premiums upward also might have beentriggered by the departure of key environmental carriers, accordingto Mr. Donovan. Among the insurers that exited the market, henoted, are the defunct Reliance Group Holdings, Frontier InsuranceGroup and CNA.

While environmental carriers will compensate for the increase indemand among fewer carriers by raising premiums or tighteningterms, Steel Tank Insurance is not expected to raise rates on itsown line of coverages that include environmental impairmentliability and pollution legal liability, Mr. Donovan said.

“Demand remains strong but there are fewer suppliers. As acaptive, we are a policyholder-owned company and we do not have toincrease rates just because there is an opportunity to do so,” hesaid, adding that such knee-jerk rate hikes are more typicallyfound at publicly-traded insurers. “It doesnt make sense toincrease our rates unless we have an increase in the cost of doingbusiness,” he continued.

For example, he said that an increase in service provider feescoupled with higher reinsurance rates would drive up a captive'soperating costs, perhaps prompting a rate hike.

Asked if environmental insurers that had written policies withinthe vicinity of “Ground Zero” in New York should also prepare forclaims related to asbestos contamination, Mr. Donovan said many hadalready made moves in that direction. “Most major carriers haveincreased their reserves for asbestos claims this year, before thedisaster,” he said.

Looking at the debris and lingering gases in the aftermath ofthe attack, he said that the WTC destruction could spark a majorenvironmental cleanup.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 22, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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