While economy-related slowdowns in construction and merger-and-acquisition activity have adversely affected writers of environmental liability coverage in the short term, growth opportunities for the line are continuing to emerge–including the need to cover exposures created by new technologies, as well as initiatives in the “green” movement–those active in this market segment contend.

Those looking at the glass as half-empty cite the impact of a struggling economy and tight credit market on environmental liability insurance sales.

Indeed, questions about the financial certainty of some carriers in the marketplace are even being raised, according to Gregory E. Schilz, a managing director of Aon's Environmental Group. He noted that with many environmental liability policies written on five-to-10-year terms, rather than annually, some buyers have begun to question the long-term financial stability of carriers in this time of economic uncertainty.

Additionally, Mr. Schilz said that for many years, insurers sold a lot of environmental policies associated with the buying and selling of real estate, as well as to cover potential liabilities in mergers and acquisitions. However, he noted, such sales have fallen off as subprime woes led to a drop in real estate transactions, and M&A activity in general has been light in the ultra-tight credit market.

Construction spending, on the residential side in particular, has been affected by the economy, and that is impacting buyers' ability to purchase environmental liability coverage, agreed Rich Zarandona, senior vice president for professional liability, design and environmental at Arch Insurance, who said he has seen wrap-ups for new projects delayed due to funding issues.

Where there is no contractual requirement for environmental liability coverage, Mr. Zarandona explained, some contractors are opting to go without coverage to save money and assume the risk themselves. He noted that pollution coverage is still seen as “discretional spending” in many cases–thus in the current economy, some contractors are choosing to go bare.

However, those who see the glass as half-full say that as in any market, there are opportunities to offset elements that have fallen by the wayside.

For example, while larger M&A transactions have dried up along with access to credit, there are still a lot of smaller transactions with environmental exposures to cover, according to John O'Brien, president of AIG Environmental.

He also noted that even as M&A deals have fallen off, companies are more routinely buying environmental policies as part of their standard risk management operating procedure.

Mr. O'Brien said the decision-making process within companies is starting to progress to the point where organizations continue to buy this type of coverage because they realize its value from a risk management perspective, rather than buying it because it is required to secure a merger or acquisition.

This was not always the case, according to Mr. O'Brien, who recalled that when he first started working in the environmental liability market, he would give talks to small rooms with empty chairs, and the information he would share would be foreign to the attendees. Now, he said rooms are full, there are more speakers, and attendees are better educated about their potential exposure and insurance options.

Even so, Mr. O'Brien said insurers are only at the “tip of the iceberg” with respect to tapping potential buyers. The premium for environmental liability, he explained, pales in comparison to other lines of insurance, yet convincing more buyers to take up coverage remains a bigger challenge in the current marketplace than competing with other insurers.

Aon's Mr. Schilz agreed that shortfalls in policies sold in connection with real estate transactions and mergers and acquisitions are being made up by increased demand from standard clients with large portfolios of real estate, who are seeking coverage for their ongoing operations.

He also said that recently there has been an up-tick in real estate transactions and M&As–but rather than being a sure sign of a turnaround, he said it is likely part of a usual trend where there is a rush to close deals by year's-end.

Still, even with the troubles in real estate and the slowing M&A activity, Mr. Schilz said Aon is at least at the same level of policies written compared to last year–although the premium threshold is lower. If real estate and M&A activity pick up through 2009, he said, it could be a very big year for environmental liability.

New areas of technology, and an increased interest in environmentally-friendly alternatives to existing technologies, also present opportunities for insurers.

Nanotechnology was one potential growth area cited–given the uncertainty about the effects of exposure to nanoparticles–with insurers able to provide coverage, information and risk management in this area, according to Julie Dunai, the senior vice president heading up of Zurich North America Commercial's Environmental Business Unit.

Mr. Zarandona of Arch Insurance also cited nanotechnology, calling it “really an interesting new front for all insurance coverages, including environmental.”

He also mentioned initiatives to reduce greenhouse gas emissions and carbon footprints as areas where environmental insurers could get involved with coverage.

The green-building movement could also lead to environmental insurance opportunities, he noted, while also citing a possible resurgence in the use of nuclear power and other large-scale U.S.-based projects.

“I think here in the U.S., you're probably going to see some expansion of big infrastructure-type projects,” added Mr. Zarandona. “So I think the future need for environmental coverage for all of these issues and projects is going to be very significant.”

But to take advantage of areas like nanotechnology, and new technologies associated with a green movement, industry experts agree that insurers will need to demonstrate a high level of expertise. Mr. Zarandona cited underwriting expertise in these emerging areas as a challenge for the industry going forward.

He said Arch strives to bring people in who can demonstrate technical knowledge in a variety of areas. Mr. Zarandona, for example, noted that he has an undergraduate degree in chemistry, a Masters degree in engineering, and an MBA in finance.

“That's the kind of profile … we look for at Arch–people with extensive legal, financial or technical backgrounds,” he said. “I think the underwriting of many of the products in [environmental liability] is highly specialized, so it's going to require … a real strong technical, as well as insurance and financial background.”

Experts who spoke with National Underwriter also discussed the role a new presidential administration might play–particularly in encouraging a move towards environmentally-friendly technologies and policies.

Mr. Schilz said an Obama administration might also bring more vigilance in environmental regulation and enforcement. He mentioned more action on cleanups and remediation as examples of where President-Elect Barack Obama could take action, which he said might prompt real estate owners or contractors to purchase more environmental insurance products.

Mr. Zarandona said any environmental actions by a future President Obama could be a few years away, but concerns regarding the economy will likely take center stage during the early part of the new administration.

Ultimately, Mr. Zarandona said it remains to be seen what will happen with respect to changes in environmental policies, but he did add that coverage changes–such as expanding oil exploration, carbon market regulation, and building new infrastructure on land that may require an environmental cleanup–could spur new opportunities for environmental insurers.

Mr. O'Brien agreed that a commitment to building infrastructure–such as roads, sewers and bridges–could create coverage opportunities for insurers, but he disagreed with the notion that regulatory changes will drive coverage opportunities.

He said he does not think that the regulatory regime has driven the environmental liability market up to now, adding that he does not anticipate regulation having a big effect on the market over the next 10 years. He said providing companies with the ability to manage liabilities or eliminate potential risks is of greater value to clients than any worry about being sued by the Environmental Protection Agency.

Overseas, meanwhile, there is an expectation that tighter regulations will bring about more opportunities for environmental liability insurers.

Indeed, a new environmental liability directive from the European Union might breathe life into what has been a stagnant market in the United Kingdom, according to Romy Comiter, a senior manager in the London office of Smart Business and Advisory Consulting LLC.

Ms. Comiter said the directive will institute a principles-based, polluter-pays approach to curbing harmful emissions. The directive includes liability for non-owned property and damage to natural resources, she added.

She said each EU member state will implement the directive differently, and for the United Kingdom it is expected that compliance will lead to increased demand for environmental coverage, as well as more innovation in the marketplace.

Mr. Zarandona said possible regulations in other foreign markets–particularly emerging markets like China's–could also lead to coverage growth opportunities for insurers.

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