For weeks on end in 2010, live footage of a ruptured pipeline spewing oil underwater in the Gulf of Mexico served as a 24/7 reminder of the potential for environmental devastation. Underwriters and brokers dealing with Environmental insurance initially feared the worst in terms of the disaster’s impact on the industry.
“Everyone thought it would be the ‘Katrina’ for Environmental Liability,” recalls Marla Donovan, head of product development at Burns & Wilcox.
But while the images of the Deepwater Horizon spill were striking, the multi-billion-dollar event had surprisingly little effect on the Environmental sector.
“Because BP is self-insured for a majority of that risk, we haven’t seen that loss impacting the insurance marketplace,” observes Mike Szot, environmental practice leader at Aon Risk Solutions.
In fact, pricing in the Environmental market has been soft in recent years, thanks in large part to continually increasing capacity.
“In 2007, there might have been just over a dozen Environmental markets. Today there are nearly 40,” says Stacy Brown, president of Freberg Environmental Insurance.
The increased capacity has been driven in part by carriers’ exploration of new lines of business to try to grow revenue in a soft commercial-lines market. “Everybody just wanted to be able to say they were into Environmental,” says Donovan.
As a result, capacity in recent years has outpaced demand, particularly as the economy depressed mergers & acquisitions and new construction—two activities typically requiring Environmental coverage. Additionally, economic pressures caused many businesses not required to purchase Environmental coverage by regulation or contract to retain the risk instead.
“A lot of clients who recognized the need to buy environmental risk coverage chose not to. They saw it as a luxury they could not afford,” says William McElroy, senior vice president of environmental for Liberty International Underwriters.
Also keeping pricing tamped down in recent years: Carriers actually have recorded a profitable experience across many lines of Environmental insurance, even with pricing reductions.
Ralph Molyneux, vice president at Legends Environmental Insurance Services, observes that Contractors’ Pollution liability, in particular, became a lucrative line for carriers in the wake of EPA regulations on lead paint that prompted remodeling contractors to carry Environmental coverage.
“Underwriters made a ton of money on contractors,” says Molyneux. “They’re selling it at a minimum premium of $2,500. It’s been a nice little expansion [of business].”
POINTS OF DIFFERENTIATION
In such a competitive market, carriers have taken steps to differentiate their products and to target niches.
“What I’ve seen is a big shift from ‘one size fits all’ to products that focus on different exposures for different industries—health care, real estate, personal-care products, agricultural products, things of that nature,” says Kerry Simon, underwriting officer for the environmental division in the U.S. and Canada for Chartis Insurance.
For example, Chartis created a form for the health-care industry called PPL Wellness Protect. The form is tailored to environmental risks health-care providers face such as mold and Legionella pneumophila; waste disposal; and evacuation expenses in the event of a covered environmental crisis.
Another popular option offered by some carriers is coverage for increased restoration costs, including those for green-building upgrades, either required or desired due to environmental concerns.
But one area in which capacity has dried up is Remediation Stop Loss coverage, also known as Cleanup Cost Cap. This coverage, usually triggered by regulatory changes or the discovery of additional contaminants, indemnifies the insured for costs above the estimated budget (plus an additional retention level) up to the policy cap.
The problem for insurers with this class of coverage is that cleanup projects are notorious for cost overruns, which have destroyed insurers’ loss ratios on these policies.
“It was hard to pick a set amount that would pay for the remediation, and the longer the remediation was in effect, the more expensive it became,” says Simon, adding that Chartis has ceased offering the coverage.
“That’s not to say you can’t put [a Stop Loss program] together,” Szot adds. “However, those types of policies and coverages are few and far between.”
POISED FOR HARDENING?
Although underwriters and brokers wouldn’t go so far as to claim the market is hardening, most believe that the years of double-digit renewal premium decreases are over.
There are several factors contributing to a likely turnaround in the environmental marketplace. On the supply side, capacity, while still strong, is not increasing at the rate it had been over the past few years.
“Eighteen months ago we were still seeing an influx of new capacity and very, very aggressive pricing reductions. That has stabilized in the last 12 months,” says Chris Smy, global leader of Marsh’s Environmental Practice. “We are seeing what appears to be a bottoming of the market and some level of transition.”
Rich Sheldon, environmental practice leader at Willis, has seen a tighter market for Secured Creditor products, coverage for underground storage tanks, and policy forms that combine General, Professional and Pollution Liability coverage.
“There has been over-capacity,” adds Burns & Wilcox’s Donovan. “It will be interesting to see if there are players who don’t have what it takes to go the long haul, and what happens as a result.”
Losses are also increasing. “People are no longer buying [environmental insurance] just to put in a filing cabinet for when disaster strikes,” says Mary Ann Susavidge, managing executive underwriter of environmental at XL Group.
“Claims on polices are also driven by discovery,” she says, adding that an uptick in the economy is prompting new claim activity as companies look to expand. “Companies are doing more environmental studies for financing and are discovering problems. Or they are excavating for remodeling projects and finding new pollution issues.”
“Manufacturing facilities have obvious [pollution] exposures, but even small-business facilities can have exposures that aren’t readily apparent,” adds Freberg Environmental’s Brown. “There are millions of facilities that actively mange materials that could be considered hazardous.”
Those materials include items not normally thought of as pollutants. For instance, Freberg insured a food-manufacturing facility that purchased coverage because it operated a refrigerator that contained ammonia. “Instead, they had a molasses spill that caused a $75,000 loss,” Brown says.
Two of the biggest worries for risk managers and buyers are vapor encroachment and mold.
Other concerns include the unknown, long-term hazards of fracking operations in the energy sector; concerns about electric and magnetic field (EMF) radiation in the telecom sector; and Legionella, which has been impacting buying decisions in the hotel, leisure, real estate and health-care sectors.
DRIVING THE MARKET: INTERNATIONAL DEMAND, PREMISES COVERAGE
On the demand side of the equation, the slowly improving economy is increasing the need for new environmental coverage.
“Projects for bridges, tunnels and infrastructure are coming back,” says Simon. “It’s a shift in the economy—and that will drive the need for coverage.”
Demand for Premises Pollution coverage in particular is being driven by buyer due diligence and lender risk management.
“Eventually every bank will require [Premises coverage] in real estate deals, because they don’t want to take ownership of a site that has an issue if there is a loan default,” says Molyneux.
The trend of increased demand for Environmental coverage, even as prices firm, has brokers and carriers alike feeling optimistic.
“We feel there’s strong opportunity across the marketplace, particularly for international growth,” says Sheldon of Willis. “Several of the veteran carriers in this business that have broad international capabilities have already shown that international [business] can be a significant component of their growth, whether it’s foreign companies entering the U.S. market or U.S. companies expanding internationally.”
Adds Marsh’s Smy: “For the vast majority of buyers, there is a lot of capacity and a lot of innovation. It’s still a favorable marketplace.”