Will Dems Boost Toxic Waste Site Claims?

The New York-based firm said over the past three years the EPA, under the Bush Administration, has been less proactive in cleaning up existing toxic-waste sites and in identifying new sites for remediation. Meanwhile, the government agency's cleanup budget has slipped and the trust fund used to fuel much of the cleanup activity has gone dry.

More specifically, Morgan Stanley said, toxic site cleanups have fallen by half since 2000. From 2001 to 2003, the EPA declared an average of 43 sites cleaned each year, down 50 percent from the average spanning 1997 to 2000.

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

The investment firm also noted that the EPA has been underfunded by between $1.3 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 it's 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 research report. "Yes?the 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 the slowed activity level at the government agency may pick up again under certain circumstances. Most significantly, the EPA could be reenergized and its toxic-site cleanups could rise back to pre-2001 levels, following a change of the administration after the 2004 presidential election or by political pressures 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 rise again, many insurers may be poorly equipped to handle such a change. Morgan Stanley noted previous industry figures which said environmental liabilities could be underfunded by as much as $25 billion?more even than the asbestos shortfalls.

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 appraised, 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 insurer's 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.'"

However, one motivation that could force insurers to up their environmental reserves is the election of a new administration in the November presidential election, while another catalyst could come from a more familiar source: rating agencies.

"We believe the risks from environmental liabilities remain squarely on rating agencies' radar screen," the investment firm stated. "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." And if environmental concerns become a priority for A.M. Best or the other rating agencies, the onus will be squarely on insurers to defend their low, single-digit survival ratio.