2010 saw a rapid expansion of the environmental insurancemarketplace in the face of daunting conditions. Why this growth hasoccurred, and what it means to an agency, are important tounderstand.

The performance of this niche clearly illustrates the effortsbeing made to find success in our evolving market, and agents thatcan correctly tap into it will see significant return on theirinvestment.

In 1990, four companies offered dedicated environmentalinsurance products. In 2000, there were closer to 10. At the end of2010, there were at least 40 companies with environmentalpractices.

One thousand percent growth over 20 years is significant, buteven more significant is the growth in the last three years, from20 to 40. Companies including XL (formerly ECS), Chartis (formerlyAIG), Zurich, Markel, Liberty, Chubb and others have been involvedalmost from the beginning.

In the face of the most difficult market most can remember, whyhas environmental been such a draw for carriers? And what does thisexplosive growth mean for the insurance agent?

At the root of the growth in environmental carriers is theunderlying shift in how insurance works. Carriers have longunderwritten to very small underwriting profit goals, recognizinginvestment income as the true driver of their profitability fortheir investors. Equity market returns of 10 percent or greaterwere the norm for many years. Carriers generated premium, reservedconservatively, putting that money into incurred-but-not-reportedloss reserves, and saw the investment income profits roll in.

This model served our industry very well for many years andthrough many market cycles.

Unfortunately, this underlying dynamic has changed. Theinvestment market is no longer able to return such generous resultsto its investors, and this is in turn is forcing companies to findtheir profits elsewhere. The only viable solution is to try tounderwrite accounts more profitably than before.

While this seems like a simple task, it is anything but.Well-known factors eroding property and casualty insurerunderwriting profits include:

• A difficult economic environment.

As whole sections of the economy lose value, the insurers thatcover them generate less in premium.

• Unemployment levels hovering at just under 10 percent,depressing payroll—an important exposure base for p&c insurance premiums.

• Reduced loss reserve cushions from prior years available tobolster current bottom lines.

• An influx of capital into the industry.

How does this all lead to an increase in environmental programsover the last several years?

While there are exceptions in certain areas, the generalconsensus is that environmental risks are more profitable than manyother mature market segments.

When environmental business was first written in the late 1970sand early 1980s, carriers had no idea how to price it. Coming offof horrific asbestos-related claims, carriers were very cautious inhow they priced these products.

Over the intervening 30 years, it has been shown thatenvironmental exposures are not significantly more challenging thanmany other casualty lines.

This is where things get interesting. While this may be true, itis by no means universally true. Over the last 10 years, carriershave blended coverages to sell under the heading “environmental.”Many of these combine commercial general liability and productswith site or contractors pollution.

While the environmental component of the package may in fact beprofitable, there is ample evidence that casualty business is, andwill always be, casualty business. If you write tough products, youare going to have some real claims. If you write a combined CGL andcontractors pollution policy for a tank installation contractor,you are more likely to see claims from people falling into holesthan you are from pollution.

So while “environmental” insurance has proven itself to be veryprofitable over the last 30 years, it is mutating into somethingdifferent where the genes of its more standard components may wellbe dominating the results.

Another challenge is the people.

Environmental insurance has had a very shortand squat pyramid—a broad base but not much room at the top. Overthe last 10 years many talented men and women have risen in theranks of environmental insurers. Many of them have been looking forthe next step into senior management.

Heading an environmental unit is often the crown jewel ofsomeone’s career. Many of these people are looking hard for theopportunity to jump their careers to the next level and areaggressively reaching out to carriers without an environmental unitto try to create the job they seek.

All of the above pieces have lined up over the last severalyears. We have an influx of capital. We have carriers looking forways to write more business more profitably. We have a marketsegment with a history of profitability, and we have people willingto lead these new divisions. Given all of the above, it’s a wonderwe don’t have even more markets focusing on environmentalaccounts.

What does this mean for an agent?

Many may think choice is a good thing, and in many respects itis.

Environmental insurance is a class of business where individualunderwriter appetite often dictates what a carrier will write, orat least will try to write aggressively. Having only one or tworelationships leaves an agent at the mercy of one or twoindividuals.

If, on the other hand, an agent can go to 40 different markets,he or she should never have to worry about any single underwriterblocking the path to success.

While on the surface this makes some sense, it is a verydangerous path for an agent to follow for a few reasons.

The characteristics of a good carrier relationship differ formany agencies, but in general they include carrier stability andcommitment to the line, underwriter knowledge and responsiveness,solid claims-handling system and track record, and proven servicecapabilities. All of these components add up to not only successwriting an account but also to long-term success in servicing andmaintaining the business.

Compounding growth only comes through happy insureds renewingyear after year. If claims are not being paid and endorsements notdelivered, it makes every renewal a fight instead of anaffirmation.

CHOOSING PARTNERS: COMMITMENT & COVERAGE

The environmental marketplace has grown quickly, and thedevelopment of many programs has been somewhat mixed. There aresurface indications that agents can review to determine if a marketwill be a good partner for them.

The first is the commitment carriers have made to environmentalinsurance. Are they in this for the long haul, or are they simplytrying to write some quick business?

A gauge of this commitment is their staffing situations. Howmany employees have they hired? How many offices or locations dothey have?

Are they making enough of a commitment for an agent to know thatthey can adequately service the business they are writing and thatthey are in it for the long run?

We have seen markets enter this arena recently with two or threeemployees, and we have seen others enter with 15. Clearly, one ismaking a bigger commitment than the other.

A similar issue is the claims-handing staff. Has it hired atleast a few key claims people to handle environmental claims?Environmental claims are not the same as regular casualty claims,and people with experience in this area are critical for long-termsuccess of a program.

The final key component is management and underwriting staffing.Is the person the insurer hired to put the program together anexperienced environmental and insurance professional? A seniorunderwriter making the move to management can be fraught withproblems, as the management role is so complex.

Does the person coming on board have the background to besuccessful? Also, who has been hired as underwriters? Do they haveexperience and credibility in the marketplace? Again, seasoned,experienced underwriters and a structure to enable them to succeedare very important.

Agents need to partner with companies that arecommitted to the line of business. A company that hopes to be doingthis in 10 years is far more likely to responsibly deal with theissues that will inevitably come up than one who is in it forshort-term premium volume. While the above do not guaranteecommitment, they certainly indicate it.

Once an agent is satisfied with this, the next importantcomponent is reviewing and understanding the coverage beingoffered. No two environmental policies are the same, and there ishuge diversity in the type of coverage being offered. Knowing whatyou’re offering the client is crucial—certainly as crucial asknowing the carrier you are offering it from. (See related textbox,“The Coverages.)

Given the above, an agent may find that the best way to accessenvironmental carriers is to go through a specialty broker. In thecurrent marketplace these brokers typically pay the samecommissions that direct carriers would, and give the addedadvantage of having done a lot of the above legwork for theagent.

The same criteria need to be utilized to make this selection aswas used for the carrier review. Longevity, commitment, expertise,reputation are all import and easily judged items. Spending a fewmoments researching the Web and talking to other agents andcarriers can bring you excellent choices for partners.

AWARENESS INCREASES

The environmental market is still growing fast. One of thepositive offshoots of so much competition is a huge increase inmarketing. All of these carriers, and the many brokers focusing onthe line of business, are marketing the coverage. This is leadingto an increased awareness at all levels. (See related article,“Awareness Prompts Growth For Environmental Insurance,”posted on NU’s website www.propertycasualty360.com.)

More job specs are requiring pollution coverage, as arelandlords, lenders and attorneys. This increase in exposure is adefinite plus for agents seeking new coverages to offer theirclients.

Last year’s BP oil spill has been yet another driver ofincreased interest. Many of the business impacted by the spill—fromcoastal property owners to people making their livings along theGulf Coast—could have been protected by the right environmentalcoverage. Many businesses have learned from this situation, andother lesser-known ones in their own backyards, and are reachingout to their agents to discuss what coverage is available tothem.

Most insureds can talk about a similar business or an associatethey know that has had an environmental issue come up. Thisincreases the population buying these products from hundreds in theearly days to hundreds of thousands today.

The evolving insurance industry has challenged many but has alsocreated opportunities unlike any seen before. Agents wield a greatdeal of power in this market, being the gatekeepers to theirclients. With so many agents and carriers scrambling to findbusiness, and in some cases willing to do almost anything for it,the potential fallout is huge.

Inadequate coverage, carriers gone from the business after ayear or two, and similar problems will force many agencies andcarriers to the sidelines. Those that take time to consider thechoices they are making, and the long-term ramifications of them,will rise above their competition.

This is already beginning to happen, as some are seeingsignificant growth in new business and strong renewal retention,while others are falling fast. As the economy continues to improve,and with it the equity markets, the frenzy of the last few yearswill fade, and competence and professionalism will prevail. A solidenvironmental strategy is only one component, albeit an importantone, of the thoughtful agencies’ strategy to continue to succeed inour new marketplace.

This article was originally published in the Februaryedition of American Agent & Broker magazine, a SummitBusiness Media publication and a sister publication of NationalUnderwriter.