While environmental liability underwriters feel they have a much deeper understanding of the exposures they are assuming thanks to more scientific risk assessments, the vast majority of commercial insurance buyers are still taking a pass on the coverage even though rates have fallen to historically low levels for all but the most problematic accounts, players in the field complain.

Whether a high-profile event such as the BP oil spill in the Gulf will awaken more buyers to the need for such coverage remains to be seen, according to these market participants, who warn that many risk managers are underestimating their pollution liabilities.

“Pricing is extremely soft and competition is steep,” reports Gina Jones, director of environmental programs at insurance wholesaler Burns & Wilcox.

Policies that were $100,000 about a decade ago are now offered at the bargain basement price of $2,500, and “each one of us are scrapping for them,” Ms. Jones added.

The reduction in premium is due in part to the industry's better understanding of the enormous exposures environmental liabilities can present, but there's no doubt that rates have been driven down by more competition and lack of demand, these players say.

“Never has there been more capacity in the market than right now,” according to Rod Taylor, managing direct of Aon Risk Services. Indeed, despite the fairly soft demand, “there are lots of new entrants into the market.”

Part of the problem is macroeconomic, according to William McElroy, senior vice president of environmental at Liberty International Underwriters.

“Demand is contracting in response to economic conditions,” he said. “Less actual business is happening.”

For many environmental liability providers, placements are generated from mergers and acquisitions and new construction, noted John Beauchamp, head of the environmental liability focus group at specialty insurer, Beazley.

A construction company building on a site once occupied by a gas station with tanks underground will be looking for coverage, for instance, he pointed out.

However, the contracting economy has had its impact here as well, as the recession and credit crunch have affected the frequency of M&As and severely cut back on the amount of construction going on, thus grinding the sale of associated environmental liability policies–which are in many cases mandated in order to complete an M&A transaction or get a construction project off the ground–to a halt.

About 30 percent of Aon's business is generated by such transactional accounts, which have remained flat for two years–actually an accomplishment considering the overall market conditions, Mr. Taylor said.

“The market is stagnant,” said Mr. Beauchamp. “These accounts will come back to us when the economy improves.”

There are many more carriers these days waiting for such a recovery, softening the market further. Ms. Jones said this time last year there were 25 markets, up from the year before. Now there are 32.

Looking for new niches to make up for premium drops in a soft market and a shrinking economy, more standard property and casualty carriers have started their own environmental groups, with experts acquired from other companies leading them, she observed.

Mr. Taylor, who said he has been contacted by headhunters, thinks these new entrants are “working behind the times” considering the current market status.

In addition, experts said they would expect some dropouts as the market strengthens, or a big loss shines a spotlight on companies that did not write their risks properly.

There is a hope in this market that the BP oil spill will raise awareness among risk managers about the need for environmental liability coverage to fill out a commercial insurance program.

Mr. Taylor said he estimates 80 percent of risk managers do not purchase environmental liability coverage outside of the insurance they are forced by regulation to buy–such as for fuel tanks and landfills.

Less than 10 percent of all environmental claims are covered by insurance, according to Ms. Jones. This, Mr. Taylor added, even as the cost remains relatively inexpensive for moderate risks.

“It is a low-frequency, high-severity line,” said Mr. Beauchamp of Beazley. He added that given “the financial consequences–even for an event you had nothing to do with–one would figure companies would be more sensitive.”

However, he suggested that the expense of adding environmental liability coverage to a standard program might be difficult to justify to a risk manager's superiors, particularly given the cost-consciousness in this tough economic environment.

Still, whether driven by cost or a lack of long-term vision, the choice of many risk managers with potential pollution exposures to pass on this coverage continues to baffle insurers.

“I don't know why risk managers don't consider [environmental] coverage more of a necessity,” Mr. Taylor said. “They haven't filled the gap. They still don't purchase it.”

Since the BP oil spill, Ms. Jones said Burns & Wilcox has received calls from businesses threatened by the oil's landfall, but “we can't insure it now,” she said. “It is a known condition.”

Since the spill, some insurers, such as LIU, have written coverage for those taking part in the clean-up effort, said Mr. McElroy, who added he did not think the BP catastrophe would have much of an effect on the market. Much of the loss will be covered by self-insurance set aside by the companies involved in the oil-drilling venture, he noted. Absent a loss of payment by the private sector, “a risk that was acceptable before is still acceptable now,” he reasoned.

The line is driven, maybe more than any other, by science, according to Mr. Taylor. The technical data, and the technical backgrounds of those involved in evaluating environmental risks, is integral in understanding processes for remediation, he explained.

“Every site is looked at on a more intelligent, scientific basis,” Mr. Taylor said. The availability of such data, he added, is one big reason why insurers have grown from shying away from environmental risk to embracing it.

New trends and liabilities in the environmental market are continuously emerging as well.

For example, the political landscape has not yet introduced many new environmental regulations but it has led to an emphasis on enforcement, Mr. Beauchamp explained.

Manufacturers of alternative fuel also create new challenges and/or new markets for underwriters, Ms. Jones noted.

Nanotechnology and genetically modified organisms may create additional risks and generate new policies in this niche as well, Mr. McElroy suggested.

Some old problems, such as mold, are resurfacing. A common dangerous chemical present at many sites is chlorine, but again, risk managers have passed on coverage despite the serious health problems an accident could cause.

Global warming may be another hot topic, but not in terms of more environmental liability insurance sales–at least not yet.

“I don't think it's a huge boost,” Mr. Taylor theorized. “It is not an excluded peril. There is no such thing as climate change insurance.”

Coverage is “experimental at best,” Mr. McElroy added.

“There has been legal activity attempting to assign liability for the consequences of climate change, but it hasn't successfully been assigned,” he said.

How carbon emissions might be classified as a pollutant could also affect the market for environmental liability coverage, and the “potential impact is enormous,” Ms. Jones predicted.

For now, however, a bigger challenge may be selling the coverage to the corner paint storeowner, who doesn't realize his risk, Ms. Jones suggested.

It may be quite some time before market conditions change, according to Mr. McElroy, who doesn't see that happening until into 2011.

“Thereafter something has to happen–something has to break loose,” he said, raising the possibility of a significant environmental event, or even a smaller event triggering a lot of loss activity.

Special Reports /

Environmental Liability Market Still Has Plenty Of Room For Growth

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