What Agents Need To Know About The Growing Environmental Insurance Market

In the face of the most difficult market most can remember, why has environmental been such a draw for carriers? And what does this explosive growth mean for the insurance agent?

While there are exceptions in certain areas, the general consensus is that environmental risks are more profitable than many other mature market segments.

When environmental business was first written in the late 1970s and early 1980s, carriers had no idea how to price it. Coming off of horrific asbestos-related claims, carriers were very cautious in how they priced these products.

But over the intervening 30 years, it has been shown that environmental exposures are not significantly more challenging than many other casualty lines.

This is where things get interesting. While this may be true, it is by no means universally true. Over the last 10 years, carriers have blended coverages to sell under the heading "environmental." Many of these combine commercial general liability and products with site or contractors pollution.

While the environmental component of the package may in fact be profitable, there is ample evidence that casualty business is, and will always be, casualty business. If you write tough products, you are going to have some real claims. If you write a combined CGL and contractors pollution policy for a tank installation contractor, you are more likely to see claims from people falling into holes than you are from pollution.

So while "environmental" insurance has proven itself to be very profitable over the last 30 years, it is mutating into something different where the genes of its more standard components may well be dominating the results.

Another challenge is the people.

Environmental insurance has had a very short and squat pyramid—a broad base but not much room at the top. Over the last 10 years many talented men and women have risen in the ranks of environmental insurers. Many of them have been looking for the next step into senior management.

Heading an environmental unit is often the crown jewel of someone's career. Many of these people are looking hard for the opportunity to jump their careers to the next level and are aggressively reaching out to carriers without an environmental unit to try to create the job they seek.

All of the above pieces have lined up over the last several years. We have carriers looking for ways to write more business more profitably. We have a market segment with a history of profitability. And we have people willing to lead these new divisions. Given all of the above, it's a wonder we don't have even more markets focusing on environmental accounts.

What does this mean for an agent?

Many may think choice is a good thing, and in many respects it is.

Environmental insurance is a class of business where individual underwriter appetite often dictates what a carrier will write, or at least will try to write aggressively. Having only one or two relationships leaves an agent at the mercy of one or two individuals.

If, on the other hand, an agent can go to 40 different markets, he or she should never have to worry about any single underwriter blocking the path to success.

While on the surface this makes some sense, it is a very dangerous path for an agent to follow for a few reasons.

CHOOSING PARTNERS: COMMITMENT & COVERAGE

The environmental marketplace has grown quickly, and the development of many programs has been somewhat mixed. There are surface indications that agents can review to determine if a market will be a good partner for them.

The first is the commitment carriers have made to environmental insurance. Are they in this for the long haul, or are they simply trying to write some quick business?

A gauge of this commitment is their staffing situations. How many employees have they hired? How many offices or locations do they have?

We have seen markets enter this arena recently with two or three employees, and we have seen others enter with 15. Clearly, one is making a bigger commitment than the other.

A similar issue is the claims-handing staff. Has it hired at least a few key claims people to handle environmental claims? Environmental claims are not the same as regular casualty claims, and people with experience in this area are critical for long-term success of a program.

The final key component is management and underwriting staffing. Is the person the insurer hired to put the program together an experienced environmental and insurance professional? A senior underwriter making the move to management can be fraught with problems, as the management role is so complex.

Does the person coming on board have the background to be successful? Also, who has been hired as underwriters? Do they have experience and credibility in the marketplace? Again, seasoned, experienced underwriters and a structure to enable them to succeed are very important.

Once an agent is satisfied with the commitment level, the next important component is reviewing and understanding the coverage being offered. No two environmental policies are the same, and there is huge diversity in the type of coverage being offered. Knowing what you're offering the client is crucial—certainly as crucial as knowing the carrier you are offering it from. (See related textbox, "The Coverages.)

Given the above, an agent may find that the best way to access environmental carriers is to go through a specialty broker. In the current marketplace these brokers typically pay the same commissions that direct carriers would and give the added advantage of having done a lot of the above legwork for the agent.

The same criteria need to be utilized to make this selection as was used for the carrier review. Longevity, commitment, expertise, reputation are all import and easily judged items. Spending a few moments researching the Web and talking to other agents and carriers can bring you excellent choices for partners.

AWARENESS INCREASES

The environmental market is still growing fast. One of the positive offshoots of so much competition is a huge increase in marketing. All of these carriers, and the many brokers focusing on the line of business, are marketing the coverage. This is leading to an increased awareness at all levels.

More job specs are requiring pollution coverage, as are landlords, lenders and attorneys. This increase in exposure is a definite plus for agents seeking new coverages to offer their clients.

Last year's BP oil spill has been yet another driver of increased interest. Many of the business impacted by the spill—from coastal property owners to people making their livings along the Gulf Coast—could have been protected by the right environmental coverage. Many businesses have learned from this situation, and other lesser-known ones in their own backyards, and are reaching out to their agents to discuss what coverage is available to them.

Most insureds can talk about a similar business or an associate they know that has had an environmental issue come up. This increases the population buying these products from hundreds in the early days to hundreds of thousands today.

The evolving insurance industry has challenged many but has also created opportunities unlike any seen before. Agents wield a great deal of power in this market, being the gatekeepers to their clients. With so many agents and carriers scrambling to find business, and in some cases willing to do almost anything for it, the potential fallout is huge.

Inadequate coverage, carriers gone from the business after a year or two, and similar problems will force many agencies and carriers to the sidelines. Those that take time to consider the choices they are making, and the long-term ramifications of them, will rise above their competition.

This is already beginning to happen, as some are seeing significant growth in new business and strong renewal retention, while others are falling fast. As the economy continues to improve, and with it the equity markets, the frenzy of the last few years will fade, and competence and professionalism will prevail. A solid environmental strategy is only one component, albeit an important one, of the thoughtful agencies' strategy to continue to succeed in our new marketplace.

This article was originally published in the February edition of American Agent & Broker magazine, a Summit Business Media publication and a sister publication of National Underwriter.