Alternative Fuel Sources, Green Solutions Create New Opportunities For P&C Insurers

Writers of environmental liability insurance see both threats and opportunities ahead as carriers conduct business under an Obama administration expected to put more emphasis on heading off climate change.

While this increased focus could lead to more claims activity, experts predict carriers could also see new insurable risks as the nation explores alternative fuel solutions and green construction, generating growth in a market already described as vibrant and competitive.

Risk managers and their carriers should brace for more rigorous enforcement with respect to environmental regulations from this administration compared to the previous one, said M. Claire Juliana, an assistant general counsel in the Environmental Business Unit for the Commercial Markets Division of Zurich.

This could lead to increased environmental litigation and higher costs for businesses, as well as more insurance claims, she explained.

"We're anticipating more activity on the claims side," Ms. Juliana said, noting that challenges associated with this increased activity may be exacerbated by challenges stemming from the economic crisis.

Chris Smy, a managing director of Marsh Inc. and global practice leader of the brokerage firm's Environmental Practice, agreed there is a "general awareness" that the country is heading into a time when regulators are likely to be more active in the environmental arena.

For the prior eight years, under the Republican administration of President George W. Bush, Mr. Smy said, the Environmental Protection Agency and even many individual states had not been very aggressive in the way of enforcement. Thus, insurers are now spending time thinking about what climate risk means for them, he added.

But echoing Ms. Juliana, Mr. Smy said these concerns are balanced with the reality that during a recession, the environment tends not to be front of mind.

"As the [financial] market recovers," he said, "it will be interesting to see what happens" on the environmental front.

However, opportunities exist for insurers as well. Ms. Juliana said that with President Barack Obama's commitment to climate change legislation, insurers can expect to see opportunities associated with alternative energy industries such as wind and solar power, as well as from green building and other types of sustainable construction.

Rodney Taylor, a managing director of Aon Environmental Services Group, said money has been earmarked for environmental cleanups for military bases and other Superfund-type sites, and insurers could find opportunities there as well.

In addition, Mr. Taylor noted the U.S. Supreme Court ruled in April 2007 that carbon dioxide is a pollutant, and so as this gas becomes regulated, there will be opportunities to sell insurance protection.

Insuring "green" buildings is another area where professionals see opportunities as well as risks.

Coverage opportunities include insuring the guarantees made by engineers, consultants and other environmental experts who assess and certify a building as "green," according to Gina Jones, director of specialty programs in the Denver office of Burns & Wilcox.

If an engineer tells builders what they have to do to qualify as a "green" construction, and the information turns out to be false, their professional liability insurer is on the hook, she said.

For underwriting purposes, Ms. Jones said insurers will look at the resumes and qualifications of the professionals and make sure they have the appropriate training to make certain promises regarding environmental assessments.

Changing the engineering of a building to make it "green," however, also means the risk is changing, Mr. Smy cautioned.

For example, he explained, if a building is made "tighter" to reduce energy waste, that could also lead to indoor air quality issues. "There are risks that need to be addressed in a different way from an insurance standpoint," he said.

Cap and trade, if it should become a reality in the United States as a way for polluters to bring their environmental regulatory compliance mandates to market, could offer further opportunities, as insurers could guarantee the validity of purchased carbon credits, suggested Mr. Taylor.

State Of The Market

Looking at a snapshot of the environmental insurance market today, the spiraling economy has, of course, impacted certain areas of coverage. But in general, the market remains healthy and competitive, experts said.

Mr. Taylor called the market a "mixed bag," citing the effects of the recession and events within the marketplace. He said the market has seen ups and downs, but Aon has sold more insurance so far in 2009 than it did during the same time period in 2008.

Overall premium volume remains high, he said, with a larger volume of smaller transactions making up for larger transactions that have fallen off.

All of the experts queried for this story talked about how competitive the marketplace is, and all said there are no signs of that trend turning around. New entrants continue to come into the market–even in areas associated with construction where business has fallen off, observers told National Underwriter.

Mr. Taylor said competitors are looking at every risk and offering a wide variety of coverages. He said a lot of competition is also coming from specialty markets, where a company will write, for example, only country clubs and golf courses, or only pesticide applicators.

Other new entrants come in with significant capacity and offer substantial limits, Mr. Taylor added.

Ms. Jones commented how there were so few carriers writing business when the environmental liability market was in its infancy about 30 years ago. "Now they're coming out of the woodwork," she said.

Given the competitiveness in the marketplace, Mr. Taylor said he is surprised Aon has not seen any decline in premium volume up to now.

While many have been predicting the onset of a hard market in property and casualty as a whole, writers in this space say they are not seeing any significant shift. However, Ms. Jones noted that environmental insurance tends to be one of the last markets to go soft, and one of the last to harden again.

Meanwhile, despite the heavy competition, Mr. Smy said there is still solid underwriting being done. There are changes occurring, though, due to two major markets in the niche–AIG and XL–experiencing recent problems.

Regarding coverages sold in the marketplace, site pollution liability policies remain one of the predominant offerings, according to Ms. Juliana. These policies protect against liability for pollution events that are at and beyond the boundaries of specified scheduled locations.

Over the last four or five years, insuring contractors liability in construction has been a popular coverage, Mr. Smy said, although he noted that market has quieted down some because of the economy and steep decline in residential and commercial development.

Explaining the demand for this coverage, Ms. Jones said almost all contractors deal with pollution risks. She said someone installing sprinklers, for example, faces the possibility of mold resulting from water damages. Painters could also deal with mold problems if seals are not adequate.

If a crew is digging in a road and hits a pipeline that leads to pollution, liability issues could arise, she added.

Ms. Jones and Mr. Smy both cited another type of coverage that is gaining popularity in the environmental field–a combined policy that covers pollution risks and general liability.

Pollution is not a required coverage in most cases, Ms. Jones explained, unless a contractor requires it. For insurers writing site pollution policies, it is typically "hit or miss" regarding if they would renew coverage. Adding the coverage to a general liability policy, however, creates a renewable book of business, she noted.

For the insureds, they appreciate the ability to wrap up coverage neatly into one policy, according to Ms. Jones.

AIG debuted this product with its Environmental and General Liability Exposures (EAGLE) Program, Mr. Smy said, adding that others have since released their own versions under different names.

Looking forward, Ms. Juliana said new challenges and opportunities are always emerging. Over the last seven-to-10 years, she noted, mold was considered a big "emerging issue," with some in the media labeling it as the "next asbestos."

The next challenge could be just over the horizon, she added, as issues like climate change and nanotechnology, among others, continue to evolve and present insurers with risks as well as rewards.

But for this year at least, all roads seem to lead to Washington, with new regulatory demands perhaps the biggest factor determining how the environmental liability market will evolve over the next several years, these experts say.