Among the most interesting developments in environmental liability coverage is that the recovering economy is turning businesses from window-shoppers into buyers.

According to Marsh's analysis of the environmental market, demand for environmental insurance across all U.S. industries increased in the first half of 2013, a qualitative assessment based on the broker's assessment of activity, placements and dialogue with insurance carriers.

Richard M. Sheldon, Willis North America environmental practice leader, concurs: “We are seeing many more submissions for environmental coverage related to merger-and-acquisition activity than we have in the year or two prior. There has been a growing desire to understand what's available in all areas of environmental cover, and particularly a greater demand for owner-controlled contractors' pollution liability (CPL) over the past year.”

Program manager Freberg Environmental Inc. also has seen “significant” growth in CPL policies, driven by EPA regulations applicable to contractors—particularly those dealing with lead paint.

“For $5,000, a midsized contracting firm can buy $1 million of coverage and be protected against any number of environmental or pollution exposures,” observes Stacy Brown, president and managing partner at Freberg Environmental. “As word gets out that inexpensive CPL is available, you'll have many more firms seeking this coverage.”

But while brokers and carriers may be increasing their policy counts, they are struggling to grow premium volume. The demand for environmental liability coverage is strengthening, but the policy limits being purchased and renewed are decreasing. Marsh reports a five-year trend of decreasing pollution legal liability (PLL) limits, representing a total drop of more than 25 percent.

Environmental rates had experienced free fall through the previous decade as the number of carriers offering the coverage doubled. During the past few years, rates have stabilized, but pricing still remains highly competitive, even for industries that routinely work with hazardous materials or need to clean up contaminated sites, such as manufacturing and chemicals, according to Marsh. Underwriters are trying to obtain single-digit renewal price increases, but their efforts are generally unsuccessful on “clean” accounts thanks to robust market capacity.

“There's actually overcapacity in the market,” says Marla Donovan, executive in the office of the chairman at Burns & Wilcox. “The ramifications of Deepwater Horizon and Superstorm Sandy haven't caused any major rate strengthening, and there have been no notable recent shocks to the system in environmental since then.”

“In the late 1990s, carriers would provide $100 or $200 million capacity themselves. Today it's more like $20 to $25 million per carrier, so you're involving more carriers to get the same level of coverage. That's not necessarily a bad thing, and is actually a beneficial risk management practice for tougher risks.”

Insurers also are underwriting long-term policies more closely. Some markets have pulled back from 10-year terms and are only providing five-year terms, Brown says. Nationwide, the gap in limits purchased among annual, multi-year, and long-term policies is shrinking (see graphic).

In a competitive environment, carriers are developing niche coverages for targeted groups.

Where carriers see an opportunity to write pollution for a particular line, they're making enhancements and striking deals with associations to target that business, Sheldon says.

“We also see more additions to coverage for things that aren't related to bodily injury or property damage—things like public relations, disaster response and other peripheral elements of a pollution loss,” he adds.

For example, XL Group launched seven new environmental products in 2013 and plans a similar rollout in 2014. Those products provide coverage for risk that goes beyond traditional pollution concerns—such as product recall for food manufacturers and restaurants and noise pollution for fixed based operators at airports.

Accounts experiencing large losses are finding carriers less aggressive, with 10% or greater renewal premium increases the norm. “We have seen more claims over the last couple of years than ever before, including decent-sized losses in mold and legionella, making subsequent renewals on accounts experiencing those claims more challenging,” Sheldon adds.

However, as insurers experience more claims they are also becoming more experienced in claims-handling in this often highly specialized market. Because environmental claims involve specialized services, regulatory compliance and other facets that drive up the price tag of recovery, insurers have learned the importance of taking an active role in the process.

“We've seen cases where environmental remediation companies come into a spill location and, if the insurer doesn't have boots on the ground, they can really be taken advantage of,” says Justin Russo, senior vice president of safety and loss prevention at Energi, a provider of specialized insurance programs to targeted sectors of the energy industry in the U.S. and Canada.

“There are certain areas where the cost of cleanup is driven dramatically higher because of the equipment brought in by municipalities,” adds Energi CEO Brian McCarthy. “Sometimes fire departments and other emergency services look at a cleanup event as a way to make a month's pay in a two-day period.”

Russo recounts a case in California where the insured was pulling a trailer filled with 1,800 gallons of diesel fuel. The trailer tipped and the contents spilled—generating a $600,000 initial quote for remediation.

“We sent our loss control specialist to the site to meet with the remediation company, and we got the cost reduced to $200,000,” he says. “That was the first time [the remediation company] had seen anyone from an insurance company on site.”

Industry observers anticipate that the strong demand for environmental coverage will continue.

“Right now we write primarily environmental contractors and consultants, and the universe of those businesses is limited—perhaps 80,000 in the U.S.,” Brown says. “Compare that to the million or more facilities that handle materials that could be construed as hazardous if they are released into the environment, and the potential marketplace is huge. As brokers gain a better understanding of what environmental impairment liability is all about, we are only going to see an increased submission flow for these types of policies.”

“In the recession, buyers bought just enough coverage to get along—it was considered a discretionary spend,” Donovan adds. “Today, with greater awareness of the exposure and the notion that all businesses need environmental coverage, it's a growth opportunity for good, savvy brokers. I don't see us ever going back to a time when nobody buys it.”

Markets Struggle to Understand Fracking Risk

The process of hydraulic fracturing, or “fracking,” involves pumping massive quantities of water, sand and chemicals underground to break apart rocks and free natural gas. It's a process that sounds rife with environmental peril, but proponents of this practice maintain that the risks involved are largely misunderstood.

“Hydraulic fracking has been done in the U.S. for 60 years,” says Justin Russo, senior vice president, safety and loss prevention at Energi, which provides specialized insurance to specific sectors of the energy industry in the U.S. and Canada. “It is a very tech-heavy, highly regulated process that has been fine-tuned to be safe.”

However, many environmental reinsurers are wary of the risk, with only a handful willing to offer pollution coverage for fracking operations. “We've found resistance to the process in the London market in particular,” says Brian McCarthy, Energi's CEO. “Underwriters are concerned that fracking is the next asbestos.”

Companies that do underwrite the coverage are very selective about what operations they will insure. “We've been very clear about our appetite,” says Mary Ann Susavidge, managing executive underwriter of environmental at XL Group. “We don't write startup entities or monstrous entities. Between 100 and 5,000 wells is our niche.”

Energi believes that continued education is key to expanding the market for coverage. The company hosted an Oil & Gas Drilling Symposium in October 2013, with an emphasis on risk mitigation related to fracking, to try to affect the market's perception of the process.

Russo stresses that carriers need to understand the process thoroughly before underwriting it. “Insurers that are doing this right have boots on the ground and dedicate engineering resources to make sure [energy] companies are following best practices established by the API [American Petroleum Institute] and by regulatory codes,” he says. “There are good companies and bad ones in this industry, just like any other.”

Check out Energi CEO Brian McCarthy's contributed piece on this topic, “Hydraulic Fracturing: Insurance's New Frontier,” on PC360.com.

Special Reports /

Market Checkup: Environmental Cover

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