While environmental liability underwriters feel they have a muchdeeper understanding of the exposures they are assuming thanks tomore scientific risk assessments, the vast majority of commercialinsurance buyers are still taking a pass on the coverage eventhough rates have fallen to historically low levels for all but themost problematic accounts, players in the field complain.

Whether a high-profile event such as the BP oil spill in theGulf will awaken more buyers to the need for such coverage remainsto be seen, according to these market participants, who warn thatmany risk managers are underestimating their pollutionliabilities.

“Pricing is extremely soft and competition is steep,” reportsGina Jones, director of environmental programs at insurancewholesaler Burns & Wilcox.

Policies that were $100,000 about a decade ago are now offeredat the bargain basement price of $2,500, and “each one of us arescrapping for them,” Ms. Jones added.

The reduction in premium is due in part to the industry's betterunderstanding of the enormous exposures environmental liabilitiescan present, but there's no doubt that rates have been driven downby more competition and lack of demand, these players say.

“Never has there been more capacity in the market than rightnow,” according to Rod Taylor, managing direct of Aon RiskServices. Indeed, despite the fairly soft demand, “there are lotsof new entrants into the market.”

Part of the problem is macroeconomic, according to WilliamMcElroy, senior vice president of environmental at LibertyInternational Underwriters.

“Demand is contracting in response to economic conditions,” hesaid. “Less actual business is happening.”

For many environmental liability providers, placements aregenerated from mergers and acquisitions and new construction, notedJohn Beauchamp, head of the environmental liability focus group atspecialty insurer, Beazley.

A construction company building on a site once occupied by a gasstation with tanks underground will be looking for coverage, forinstance, he pointed out.

However, the contracting economy has had its impact here aswell, as the recession and credit crunch have affected thefrequency of M&As and severely cut back on the amount ofconstruction going on, thus grinding the sale of associatedenvironmental liability policies–which are in many cases mandatedin order to complete an M&A transaction or get a constructionproject off the ground–to a halt.

About 30 percent of Aon's business is generated by suchtransactional accounts, which have remained flat for twoyears–actually an accomplishment considering the overall marketconditions, Mr. Taylor said.

“The market is stagnant,” said Mr. Beauchamp. “These accountswill come back to us when the economy improves.”

There are many more carriers these days waiting for such arecovery, softening the market further. Ms. Jones said this timelast year there were 25 markets, up from the year before. Now thereare 32.

Looking for new niches to make up for premium drops in a softmarket and a shrinking economy, more standard property and casualtycarriers have started their own environmental groups, with expertsacquired from other companies leading them, she observed.

Mr. Taylor, who said he has been contacted by headhunters,thinks these new entrants are “working behind the times”considering the current market status.

In addition, experts said they would expect some dropouts as themarket strengthens, or a big loss shines a spotlight on companiesthat did not write their risks properly.

There is a hope in this market that the BP oil spill will raiseawareness among risk managers about the need for environmentalliability coverage to fill out a commercial insurance program.

Mr. Taylor said he estimates 80 percent of risk managers do notpurchase environmental liability coverage outside of the insurancethey are forced by regulation to buy–such as for fuel tanks andlandfills.

Less than 10 percent of all environmental claims are covered byinsurance, according to Ms. Jones. This, Mr. Taylor added, even asthe cost remains relatively inexpensive for moderate risks.

“It is a low-frequency, high-severity line,” said Mr. Beauchampof Beazley. He added that given “the financial consequences–evenfor an event you had nothing to do with–one would figure companieswould be more sensitive.”

However, he suggested that the expense of adding environmentalliability coverage to a standard program might be difficult tojustify to a risk manager's superiors, particularly given thecost-consciousness in this tough economic environment.

Still, whether driven by cost or a lack of long-term vision, thechoice of many risk managers with potential pollution exposures topass on this coverage continues to baffle insurers.

“I don't know why risk managers don't consider [environmental]coverage more of a necessity,” Mr. Taylor said. “They haven'tfilled the gap. They still don't purchase it.”

Since the BP oil spill, Ms. Jones said Burns & Wilcox hasreceived calls from businesses threatened by the oil's landfall,but “we can't insure it now,” she said. “It is a knowncondition.”

Since the spill, some insurers, such as LIU, have writtencoverage for those taking part in the clean-up effort, said Mr.McElroy, who added he did not think the BP catastrophe would havemuch of an effect on the market. Much of the loss will be coveredby self-insurance set aside by the companies involved in theoil-drilling venture, he noted. Absent a loss of payment by theprivate sector, “a risk that was acceptable before is stillacceptable now,” he reasoned.

The line is driven, maybe more than any other, by science,according to Mr. Taylor. The technical data, and the technicalbackgrounds of those involved in evaluating environmental risks, isintegral in understanding processes for remediation, heexplained.

“Every site is looked at on a more intelligent, scientificbasis,” Mr. Taylor said. The availability of such data, he added,is one big reason why insurers have grown from shying away fromenvironmental risk to embracing it.

New trends and liabilities in the environmental market arecontinuously emerging as well.

For example, the political landscape has not yet introduced manynew environmental regulations but it has led to an emphasis onenforcement, Mr. Beauchamp explained.

Manufacturers of alternative fuel also create new challengesand/or new markets for underwriters, Ms. Jones noted.

Nanotechnology and genetically modified organisms may createadditional risks and generate new policies in this niche as well,Mr. McElroy suggested.

Some old problems, such as mold, are resurfacing. A commondangerous chemical present at many sites is chlorine, but again,risk managers have passed on coverage despite the serious healthproblems an accident could cause.

Global warming may be another hot topic, but not in terms ofmore environmental liability insurance sales–at least not yet.

“I don't think it's a huge boost,” Mr. Taylor theorized. “It isnot an excluded peril. There is no such thing as climate changeinsurance.”

Coverage is “experimental at best,” Mr. McElroy added.

“There has been legal activity attempting to assign liabilityfor the consequences of climate change, but it hasn't successfullybeen assigned,” he said.

How carbon emissions might be classified as a pollutant couldalso affect the market for environmental liability coverage, andthe “potential impact is enormous,” Ms. Jones predicted.

For now, however, a bigger challenge may be selling the coverageto the corner paint storeowner, who doesn't realize his risk, Ms.Jones suggested.

It may be quite some time before market conditions change,according to Mr. McElroy, who doesn't see that happening until into2011.

“Thereafter something has to happen–something has to breakloose,” he said, raising the possibility of a significantenvironmental event, or even a smaller event triggering a lot ofloss activity.