When it comes to potential growth areas for the insurance industry, Cyber Liability, a relatively new coverage area, has been getting much of the recent attention.
But Environmental insurance—which is now many decades old—may also represent a very real chance for carriers and producers to significantly increase their premium volumes—if they can succeed in convincing a broad swath of commercial buyers that coverage is necessary, even for organizations that don’t consider themselves polluters.
For some select classes of business, the financial backstop of Pollution insurance has long been a mandatory buy. Under the 1976 Resource Conservation and Recovery Act, owners of landfills; underground storage tanks; and hazardous waste treatment, storage and disposal facilities must provide financial-responsibility assurances to cover remediation and third-party damages stemming from a pollution incident.
Many lenders on real estate deals—whether for acquisitions or new developments—also demand that borrowers secure insurance to protect against unforeseen site contamination. And construction-project owners will frequently insist their contractors acquire the coverage.
But these business types account for just a fraction of the actual Pollution risks that exist, according to market executives.
Insurers are starting to market the advantage of having Pollution coverage to dry cleaners, gas stations and industries such as glass manufacturers, producers of building materials and machinery manufacturers, notes Cleveland-based broker Bruce Kranz, senior vice president of Environmental risk at brokerage Hylant Group.
And American International Group (AIG), which has been writing the coverage for decades for “classic” Environmental clients, has identified several additional classes of at-risk organizations. These include health-care providers, higher-education institutions, municipalities and transporters of various types of cargo, notes Rich Wagner, AIG’s New York-based executive vice president and division head of Pollution underwriting for the United States and Canada.
“Examples of entities that are beginning to embrace Environmental as a coverage area they should consider [include] life sciences, pharmaceuticals, and communication and tech companies,” says Chris Smy, a managing director and the global Environmental practice leader at Marsh Inc. “There are very few organizations that don’t have the potential for Environmental loss.”
PUSHING PURCHASES: LOW PRICES, ABUNDANT CAPACITY
and carriers and brokers say they are succeeding in boosting the appetite for this coverage.
“We’re seeing more uptake” of Environmental cover by companies that haven’t historically secured the coverage, says Smy. (See the profile of Marsh for insight into how the brokerage is succeeding in convincing nontraditional Environmental clients that they need the coverage.)
“Demand for Environmental coverage is increasing,” adds Bob Newmarker, head of the Environmental practice at Zurich North America.
Certainly one factor helping to fuel demand is today’s pricing environment. Brokers characterize the current market as one in which fairly broad coverage is inexpensive—if not downright cheap.
With dozens of insurers competing for business—despite the low but largely acceptable returns Environmental brings—rates fell 25-35 percent over the past several years, Hylant’s Kranz estimates (although they have stabilized over the last 12 months).
The drop in rates marketwide in recent years was “drastic,” agrees John C. Gibson, senior vice president and Environmental product-line manager at the Chubb Group of Insurance Cos.
William McElroy, a senior vice president with Liberty International Underwriters (LIU), a unit of Liberty Mutual Group, says that for Site coverage throughout the market, he “can’t make a great deal of sense of the pricing [drop] in the last couple of years. (Site coverage consists of first- and third-party Pollution insurance for a piece of property.)
“We’re very selective” with Environmental risk, McElroy adds, noting that LIU isn’t deeply entrenched in this sector simply because it hasn’t been considered profitable enough. Rates for the Contractors’ coverage “have been adequate or acceptable,” he says. “But I wouldn’t go so far as to brag about it.”
On the capacity front, executives estimate that, depending on the risk, buyers can easily cobble together towers with $200 million of limits, with some markets individually offering up to $50 million of limits and more willing to write as much as $25 million. Many insurers, however, offer maximum limits of only $1 million or $2 million.
THE SANDY & DEEPWATER EFFECT
In addition to these low rates, recent catastrophes—both natural and man-made—have generated more interest in the coverage among discretionary buyers by helping to raise awareness of the potential Environmental exposures many types of organizationss face.
Superstorm Sandy, for example, underscored a risk that many businesses had not considered. The storm damaged fuel tanks and spilled their contents into the environment, creating the need for pollution cleanup as well as potential third-party liabilities for tank owners.
Sandy made “people aware of the losses that could stem from these types of events that release contaminants into the environment,” says Rich Sheldon, the Environmental practice leader at Willis North America.
Adds Marsh’s Smy: “Sandy is an example of how what would otherwise be somewhat benign operations that have very little potential to impact the environment nevertheless had [Environmental-related] loss: be that because of water ingress creating mold conditions; fuel oil that was in the flood water; breached tanks; or Superfund sites overflowing and causing pollution [damage].”
And after the Deepwater Horizon oil-rig spill in the Gulf of Mexico in 2010, many Environmental insurers beefed up their policies with Contingent Business Interruption (CBI) coverage. CBI covers the profits a business loses when a covered peril forces it to close, even though the peril did not directly damage the policyholder’s operations.
“Deepwater Horizon is another example where organizations that didn’t necessarily perceive they had a Pollution risk suddenly were exposed, [such as] a hotel on the Gulf of Mexico that had Business Interruption losses because people just didn’t want to travel there anymore because they perceived that there’d be oil on the beach or an odor,” says Smy, who adds Marsh’s clients are increasingly aware of the potential of “somebody else’s operations to create a Pollution loss that they would not otherwise have realized.”
while environmental coverage is definitely gaining some traction with discretionary buyers, much of the potential market remains untapped as many insureds remain unaware of the balance-sheet protections they’d gain for a relatively low premium.
Environmental insurers have penetrated just 20-30 percent of the U.S. market of potential buyers, estimates Mary Ann Susavidge, the chief underwriting officer for the North American P&C Environmental unit at XL Group.
“Unfortunately, it is often overlooked in risk-management programs,” adds Veronica Benzinger, managing director and chief broking officer in the Environmental Services Group at Aon Risk Solutions.
The businesses that do not purchase Environmental pass on it for a variety of reasons. One contributing factor is the economy: Many potential insurance buyers consider the coverage a purchase they can afford to skip when faced with pinched budgets.
And even risk managers who know their organizations have an Environmental risk hold off on buying the coverage simply because they have not had any incidents.
For example, says Aon’s Benzinger: “Pharmaceuticals don’t buy it because they feel they have a handle on the risk and can control it through engineering” and loss control.
Similarly, “health-care organizations may never have had a loss before and are on a tight budget,” she says. “It may be penny-wise and pound-foolish in the long run, but it’s a fact of life.”
Other businesses with Environmental risks do not even realize they have the exposure, according to New York-based broker Catherine O’Leary, vice president of the Environmental division at Frenkel & Co. Inc.
“Not everybody does have a large exposure,” she says. But even among businesses that few would consider at risk, a substantial, unanticipated exposure could develop, she warns.
For example, she says, consider a Manhattan advertising agency that is remodeling its leased space. After a contractor tears out a wall, it discovers asbestos insulation and walks off the job. The interrupted project not only could close down the office, it also could expose the agency to bodily-injury claims from the contractor’s personnel if the office-leasing agreement holds the agency liable for project-related losses.
Carrier and broker executives are hopeful that Environmental coverage will evolve into part of the risk-manager stable of mainstay coverages, as have Employment Practices Liability and Directors & Officers. As Aon’s Benzinger points out, “It has been said that any business that has a waste stream has an Environmental exposure that should be addressed.”
Bill Montanez, director of risk management at Oak Brook, Ill.-based Ace Hardware Corp., is one risk manager who already sees a lot of value in making this discretionary purchase.
Ace is “a very conservative company,” Montanez notes. “At the end of the day, I don’t want to be delivering any surprises to the CEO and shareholders.”