Could Democrats Election

Hike Pollution Claim Costs?

Insurers could see a rise in environmental claims if aDemocratic administration or green groups push the EnvironmentalProtection Agency to revitalize its dwindling efforts to clean uptoxic waste sites, an investment-banking firm warns.

Morgan Stanley said environmental claims have remainedrelatively low since 2001 because EPA toxic waste site cleanupactivity has fallen off and insurers have been focusing heavily onasbestos losses but all that could change drastically in the comingmonths.

Over the past three years at the EPA, under the BushAdministration, toxic site cleanups have fallen by half, noted theNew York-based firm. From 2001 to 2003, the EPA declared an averageof 43 sites cleaned up each year, down 50 percent from the averagespanning 1997 to 2000.

Annual site listings have sunk well below the EPA's projectionsin 2000with ongoing cleanups slowing down as well. The number ofsite listings for 2003 was 20, and 19 in 2002. In comparison, theaverage number between 1993 and 2000 was 30 per year, MorganStanley said.

The investment firm reported that the EPA has been underfundedby between $1.3 billion and $1.9 billion since 2001. Furthermore,the trust fund used by the EPA to enforce the cleanup laws hasdwindled to almost zero, with the budgeting for cleanupadministration expected to come 100 percent from general taxrevenue in 2004.

Morgan Stanley remarked that it is not convinced by suggestionsthat there are now simply fewer sites to remediate. The firm notedthat its research suggests responsibilities for more sites arebeing pushed back to the states and that exploratory work is notproceeding at the same pace it had in the late 1990s.

This slowdown of cleanup efforts at the EPA is significant,Morgan Stanley commented, because there appears to be a connectionbetween the slowing pace of cleanups and insurers' calendar-yearloss payments.

“Have insurers benefited from a slowdown at the EPA?” MorganStanley analysts asked rhetorically in their report. “Yestheparallel between the fall-off in insurance payments and the slowingpace of activity at the EPA seems quite strong.”

But the investment firm cautioned that the slowed activity levelat the government agency may pick up again under certaincircumstances. Most significantly, the EPA could be re-energizedand its toxic-site cleanups could rise back to pre-2001 levelsfollowing a change in administrations after the 2004 presidentialelection, or due to political pressure from environmentalgroups.

“It's no secret that environmental groups do not approve of thecurrent administration's handling of environmental affairs,” theinvestment firm commented. And if the cleanup efforts are to pickup steam again, “we believe insurers' costs would once again beginto rise.”

If environmental costs were to rebound, many insurers may bepoorly equipped to handle such a change. As of 2002, A.M. Bestestimated underfunded environmental liabilities to be some $25billion, compared with $20 billion for asbestos. This gap betweenenvironmental and asbestos shortfalls could have widened even morein 2003, Morgan Stanley said, as insurers continued to takeasbestos charges.

Another trend that worries the investment firm is the dropping“survival ratio” for environmental reserves for many insurers,which measures the number of years current reserves can fund annualaverage-loss payments from a recent year. “Do we really think itplausible that insurers' payments will slow down so dramaticallythat two, three or even four years of payments held in reserve willbe sufficient?” the Morgan Stanley analysts asked. “We suspect theanswer is no.”

Beyond the election of Sen. John Kerry, the MassachusettsDemocrat, as president, pressure on insurers to hike theirenvironmental reserves could come from a more familiar sourcerating agencies.

“We believe the risks from environmental liabilities remainsquarely on rating agencies' radar screen,” Morgan Stanley said.“It may take several more months or even a year or so but at somepoint we expect to hear more noise about the surprisingly lowsurvival ratios at many of the nation's largest insurers.”

Reproduced from National Underwriter Edition, April 9, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.