Growing Demand, Rate Hikes Seen In Environmental Risk Market

"We are seeing a lot of growth and demand, and a lot of business from the real estate side," said David Jung, vice president of Zurich Specialties in New York.

His company currently has some $400 million in annual gross written premiums from thousands of policies, Mr. Jung said.

Several weeks ago, Zurich also completed a transaction to buy renewal rights to environmental casualty business from Long Grove, Ill.-based Kemper Insurance Companies, previously one of the larger players in the marketplace. "So far, that transaction is going great. It's going to help us grow a lot this year."

"We are seeing a lot of demand from lenders, large- to medium-banks for the most part, for lender liability products. We are also seeing demands for remediation stop-loss, the product that covers cost overruns," he said.

And in the aftermath of high-profile frauds at Enron, WorldCom and other firms, corporations are becoming more receptive to disclosing and capping environmental liabilities, which has helped boost demand, Mr. Jung noted.

Additionally, Zurich is also seeing a very active brownfield redevelopment marketplace. "We are seeing incentives from federal and state governments, which continue to keep that market very active. Various tax incentives make it much more feasible to redevelop contaminated areas," he said.

Furthermore, in the area of remediation contractors, there seems to be a growing interest from owners of contaminated properties, Mr. Jung added.

"There seems to be an interest from these owners to hire contractors and say, 'Hey, give me a quote to clean up this site.' And a lot of owners are also saying they would like from contractors, policies to back their promises. So what's happening is, many contractors are coming to us for policies," he said.

Mr. Jung observed that the demand for traditional lines, such as underground tank coverage, is also still strong, describing Zurich as a market leader in this area.

Mr. Jung also reported the Zurich has seen "some strong growth" in the dealers-and-repair-shops liability policy area. The policy is "an environmental insurance policy designed for auto dealerships and auto repair shops, for environmental risks related to waste oil and painting facilities," he said.

Certain segments, such as underground tank coverage, are much more mature now. But new, emerging uncertainties will continue to drive demand in the future, Mr. Jung predicted.

"People are more concerned about the potential for bioterrorism, for example, and that is creating a new demand. And there is a concern for mold exposures. These new issues create new demands, and new uncertainties create vibrant market that is not mature."

Also helping the environmental risk market is the fact that it has gotten easier for companies to obtain coverage, according to Mr. Jung.

"The process is absolutely much easier than it used to be. Back in the 1980s, insurance carriers used to require Phase I site assessment reports even prior to underwriting in commercial real estate lending. But now, there is so much information available through the Internet and regulatory databases," he said.

"There has also been an expansion in the scope of coverage," he added. "In general, the coverage has broadened and the value insurers provide has increased a great deal."

William Hazelton, director of field operations at Chubb Environmental Solutions, a New York-based division of Chubb Financial Solutions, also commented that the demand is growing robustly. "There is always a need for environmental insurance products, whether they involve operational risks or transactions," Mr. Hazelton said.

He noted that brownfield redevelopments continue to be a very hot topic, "and in the post-Enron marketplace, the corporate philosophy is to more closely scrutinize balance sheets and their environmental liabilities."

And even with some players, most notably Kemper, calling it quits, it has become a more competitive marketplace just in the past six months.

Although rates haven't gone up as much compared to the overall property-casualty market, "we have been able to push rate on both our renewal and new books of business," he said.

According to Scott Britt, senior vice president at XL Environmental in Exton, Pa., many consumers, despite the hardening market for standard coverages, still see the value of purchasing environmental insurance to protect themselves from professional and transactional risks.

"Therefore, the environmental risk market continues to grow," said Mr. Britt.

He noted the North American environmental insurance market now has some $1.5 to $1.7 billion in gross written premiums.

"In 2002, XL had $350 million in gross written premiums and we have been seeing a 15-to-20 percent growth annually. We have been seeing an average rate increase of 15 percent for environmental lines coverage for 2002, which is still a lot less dramatic than p-c as a whole. For 2003, the rate increase will probably remain at 15 percent," Mr. Britt said.

He also concurred that the emphasis on corporate governance issues as well as brownfield redevelopments have helped fuel the growing demand.

"Enron-related disclosure issues are definitely a factor. Companies want to be more forthright in what they disclose in financial statements, including environmental liabilities."

"For brownfield developments, you are looking at old, contaminated sites–everything from military base closures and redevelopment to old manufacturing or petroleum-related sites redeveloped for beneficial use," Mr. Britt said.

Last year, XL conducted a study that found a 43 percent increase in contaminated lands being cleaned and redeveloped in the United States. The report, called "Land Reuse Report 2002," analyzed more than 240 square miles of redevelopment projects, larger than the city of Chicago.

"I think the environmental insurance community as a whole is promoting the importance of environmental insurance, and it's been gaining more acceptance," Mr. Britt said.

In this increasingly competitive field, one of the major new entrants is ACE Environmental Risk, which entered this marketplace last October.

"A number of established players have increased capacity, and ACE is a new entrant. From October 2002, we have been offering a suite of environmental liability products," said Karl Russek, vice president at ACE Environmental Risk in Philadelphia.

"Our main focus as a startup has been rounding out and strengthening existing relationships within ACE Casualty Risk. Opportunities such as brownfield and site redevelopments will continue to grow robustly," Mr. Russek said.

However, insurers continue to face challenges, including skittish reinsurers who want to see more technically competent underwriting in this marketplace.

"But markets have been getting better at understanding and underwriting risks. Some of the larger players have learned from their mistakes and losses," Mr. Russek noted.

Some insurers who get in halfway are quick to exit the market, he warned. "This is not a market where you can pick up market shares very quickly," he said. "As the industry gains additional loss history, carriers are gaining better and more complex understanding of how to write profitable business in the environmental risk market."

Mr. Russek also added that one of the most important tasks for insurers in this marketplace continues to be educating corporate customers. "Based on the information I have seen in the marketplace, it wouldn't surprise me if many large U.S. corporations are still extremely under-reserved for environmental liabilities," he said.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 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.