Could Democrats Election

Hike Pollution Claim Costs?

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

Morgan Stanley said environmental claims have remained relatively low since 2001 because EPA toxic waste site cleanup activity has fallen off and insurers have been focusing heavily on asbestos losses but all that could change drastically in the coming months.

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

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

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

Morgan Stanley remarked that it is not convinced by suggestions that there are now simply fewer sites to remediate. The firm noted that its research suggests responsibilities for more sites are being pushed back to the states and that exploratory work is not proceeding 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 connection between the slowing pace of cleanups and insurers' calendar-year loss payments.

“Have insurers benefited from a slowdown at the EPA?” Morgan Stanley analysts asked rhetorically in their report. “Yesthe parallel between the fall-off in insurance payments and the slowing pace of activity at the EPA seems quite strong.”

But the investment firm cautioned that the slowed activity level at the government agency may pick up again under certain circumstances. Most significantly, the EPA could be re-energized and its toxic-site cleanups could rise back to pre-2001 levels following a change in administrations after the 2004 presidential election, or due to political pressure from environmental groups.

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

If environmental costs were to rebound, many insurers may be poorly equipped to handle such a change. As of 2002, A.M. Best estimated underfunded environmental liabilities to be some $25 billion, compared with $20 billion for asbestos. This gap between environmental and asbestos shortfalls could have widened even more in 2003, Morgan Stanley said, as insurers continued to take asbestos 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 annual average-loss payments from a recent year. “Do we really think it plausible that insurers' payments will slow down so dramatically that two, three or even four years of payments held in reserve will be sufficient?” the Morgan Stanley analysts asked. “We suspect the answer is no.”

Beyond the election of Sen. John Kerry, the Massachusetts Democrat, as president, pressure on insurers to hike their environmental reserves could come from a more familiar source rating agencies.

“We believe the risks from environmental liabilities remain squarely on rating agencies' radar screen,” Morgan Stanley said. “It may take several more months or even a year or so but at some point we expect to hear more noise about the surprisingly low survival 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Could Democrats Election Hike Pollution Claim Costs?

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