Insurers Tout Environmental Field

Other environmental insurers expressed similar views.

"There are clearly still many areas of environmental risk that have not been penetrated from an insurance point of view, so we still see a lot of opportunity," declared William McElroy, president of Princeton, N.J.-based Kemper Environmental.

Still, Michael J. Murphy, president of Chubb Environmental Solutions, a New York-based division of Chubb Financial Solutions, cautioned that the environmental insurance policy remains "tough to evaluate and underwrite."

The general consensus among environmental insurers is that there is some hardening in the market, but not on a par with other property-casualty lines.

Kenneth Berger, executive vice president of Zurich Specialties in New York, said that in the traditional lines of coverage, such as for underground storage tanks and environmental impairment liability, he is seeing rate increases of 10 percent.

Mr. McElroy said he is also seeing prices rise (or "what I like to characterize as price improvement," he stated) in the commercial automobile risk of environmental services companies underwritten by Kemper, as well as in some "contracting operations."

Ken Cornell, executive vice president with AIG Environmental in New York, noted that in the past 10 to 15 years, the scope of coverage of environmental insurance products greatly expanded even while competition among insurers kept prices down.

But now "most environmental insurers are realizing, depending on the particular product, that some increase in prices is probably in order," he said.

Mr. Corbett added that in some segments–such as "stop-loss, in which historically there have been losses for most of the carriers"–more attention is being focused on "underwriting fundamentals," including larger buffers and third-party review.

"But in general liability covers I would say there is a lot of stability," Mr. Corbett said.

Chubb's Mr. Murphy believes there is "less capacity overall" in the environmental insurance market.

He attributed this to fewer "quality programs" due to "technical incompetencies in underwriting," which have resulted in losses and the reinsurance community's "significant" loss of confidence.

He stressed that, in particular, "sophisticated reinsurers" that have been in the business for a long time "want to see technically competent underwriting."

Kemper's Mr. McElroy concurred that there is "an overall contraction in capacity in the market" from both the aggregate and reinsurance standpoints.

He noted that the terms under which reinsurance is currently available are not what they had been even a year ago.

But AIG's Mr. Cornell pointed out that "with reinsurers it's all about the track record that you have with them."

He said that a company that enjoys a good relationship with its reinsurers is able to expand its capacity.

But for carriers with different, less-than-positive results, or for those who dont have a track record with reinsurers, capacity may be static "or even contracting," Mr. Cornell suggested.

He added, however, that the demand for environmental insurance continues to grow.

Mr. McElroy noted that "it's a much more mature business than it was 10 years ago." Not only are there more buyers of environmental insurance, he explained, the available coverage is much more "sensitive to customer need."

Zurich's Mr. Berger believes that it has "never been easier" or more cost-effective for companies to obtain environmental coverage.

Because many insurance company "markets rely on their own internal engineers and on environmental due-diligence" from service providers, he noted, the need for a customer-funded engineering site review in connection with the insurance application is "no longer necessary."

In fact, most business can be "quoted from an application that contains appropriate technical information" submitted by a customer, Mr. Berger said.

He also believes that many standard environmental liability coverages offer more value now than even five years ago.

Mr. Berger attributed this to the fact that such coverages now generally include "a first-party cleanup component." This contrasts with, for example, environmental impairment liability policies as originally developed, which was as "a third-party bodily-injury and property-damage cover," he said.

All of the insurers reported having quite a diversified client base.

Mr. Cornell of AIG suggested that "there is a greater awareness nowthat environmental risks can be damaging to a business if they are not insured properly," he noted

ECS' Mr. Corbett cited two factors that "are driving purchases."

The first emanates from "transactional situations," such as the transfer of land or assets, he said. Nowadays, lenders and the legal community understand better "that part of the transactioninvolves taking care of historic environmental exposures," Mr. Corbett said.

The second driver "that seems to be continuing in spite of the soft economy is the conversion of brownfields, primarily in urban areas," he stated. Because every brownfield transaction by definition has an "environmental attribute," a financial guarantee around the environmental issues is a necessity, Mr. Corbett observed.

In short, insurers "can continue to discover ways in which our clients can use insurance [for] a better financial or business outcome," Mr. Cornell stated.

Mr. Corbett tempered his optimism about the environmental insurance market with a warning about "a couple of dark clouds."

The first cloud is that many clients who "buy program coverage for ongoing operations" will have "to look at their total insurance costs" as their "non-elective" coverages such as general liability and workers compensation increase in price.

This could mean less money available for environmental insurance, Mr. Corbett suggested. He added that the "relatively soft economy" exacerbates the situation.

Zurich's Mr. Berger noted that this financial squeeze seems of particular concern to the "middle market," which he identified as customers with revenues of $10 million to $100 million who "have been involved in a regulatory environmental liability exposure."

The second dark cloud that bears watching, Mr. Corbett said, is "the reinsurance community's reaction to environmental coverages."

He said there is evidence that reinsurers are becoming more selective and reticent about providing coverage, which could mean more tightening as insurance company treaties come up for renewal.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 25, 2002. Copyright 2002 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.