Finite risk products can play a role in environmental coverages, but carriers are proceeding with caution to make sure they pass regulatory scrutiny.
State and federal regulators have forced numerous restatements by insurance carriers whose use of such products did not provide enough risk transfer to merit the favorable accounting that is entailed.
David Bennink, who heads up Chicago-based Aon's environmental unit, stressed the word "blended" must be used in describing such products in the environmental realm.
"The concept of a blended finite risk is that you are prefunding for a known liability, which on its own would be a finite risk product. But a blended finite risk product incorporates a risk-transfer element as well," he said.
For example, in a real estate transfer, the purchaser may set aside $10 million for the known remediation cost as part of the deal. But he could also pay a $2 million premium for any excess costs up to $20 million, which has the necessary element of risk transfer.
"This way both buyer and seller have the certainty that the funds will be used for the remediation," Mr. Bennink said.
Blended finite products can also cover what are termed closure-post closure financial responsibilities for firms operating storage or disposal facilities.
In addition, they can be used to fund cleanup obligations under Superfund and similar state laws.
"These programs are particularly effective when a group of potentially responsible parties want an exit strategy from a site," Mr. Bennink said.
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