Among the most interesting developments in environmental liability coverage is that the recovering economy is turning businesses from window-shoppers into buyers.
According to Marsh's analysis of the environmental market, demand for environmental insurance across all U.S. industries increased in the first half of 2013, a qualitative assessment based on the broker's assessment of activity, placements and dialogue with insurance carriers.
Richard M. Sheldon, Willis North America environmental practice leader, concurs: “We are seeing many more submissions for environmental coverage related to merger-and-acquisition activity than we have in the year or two prior. There has been a growing desire to understand what's available in all areas of environmental cover, and particularly a greater demand for owner-controlled contractors' pollution liability (CPL) over the past year.”
Program manager Freberg Environmental Inc. also has seen “significant” growth in CPL policies, driven by EPA regulations applicable to contractors—particularly those dealing with lead paint.
“For $5,000, a midsized contracting firm can buy $1 million of coverage and be protected against any number of environmental or pollution exposures,” observes Stacy Brown, president and managing partner at Freberg Environmental. “As word gets out that inexpensive CPL is available, you'll have many more firms seeking this coverage.”
But while brokers and carriers may be increasing their policy counts, they are struggling to grow premium volume. The demand for environmental liability coverage is strengthening, but the policy limits being purchased and renewed are decreasing. Marsh reports a five-year trend of decreasing pollution legal liability (PLL) limits, representing a total drop of more than 25 percent.
Environmental rates had experienced free fall through the previous decade as the number of carriers offering the coverage doubled. During the past few years, rates have stabilized, but pricing still remains highly competitive, even for industries that routinely work with hazardous materials or need to clean up contaminated sites, such as manufacturing and chemicals, according to Marsh. Underwriters are trying to obtain single-digit renewal price increases, but their efforts are generally unsuccessful on “clean” accounts thanks to robust market capacity.
“There's actually overcapacity in the market,” says Marla Donovan, executive in the office of the chairman at Burns & Wilcox. “The ramifications of Deepwater Horizon and Superstorm Sandy haven't caused any major rate strengthening, and there have been no notable recent shocks to the system in environmental since then.”
“In the late 1990s, carriers would provide $100 or $200 million capacity themselves. Today it's more like $20 to $25 million per carrier, so you're involving more carriers to get the same level of coverage. That's not necessarily a bad thing, and is actually a beneficial risk management practice for tougher risks.”
Insurers also are underwriting long-term policies more closely. Some markets have pulled back from 10-year terms and are only providing five-year terms, Brown says. Nationwide, the gap in limits purchased among annual, multi-year, and long-term policies is shrinking (see graphic).
In a competitive environment, carriers are developing niche coverages for targeted groups.
Where carriers see an opportunity to write pollution for a particular line, they're making enhancements and striking deals with associations to target that business, Sheldon says.
“We also see more additions to coverage for things that aren't related to bodily injury or property damage—things like public relations, disaster response and other peripheral elements of a pollution loss,” he adds.
For example, XL Group launched seven new environmental products in 2013 and plans a similar rollout in 2014. Those products provide coverage for risk that goes beyond traditional pollution concerns—such as product recall for food manufacturers and restaurants and noise pollution for fixed based operators at airports.
Accounts experiencing large losses are finding carriers less aggressive, with 10% or greater renewal premium increases the norm. “We have seen more claims over the last couple of years than ever before, including decent-sized losses in mold and legionella, making subsequent renewals on accounts experiencing those claims more challenging,” Sheldon adds.
However, as insurers experience more claims they are also becoming more experienced in claims-handling in this often highly specialized market. Because environmental claims involve specialized services, regulatory compliance and other facets that drive up the price tag of recovery, insurers have learned the importance of taking an active role in the process.
“We've seen cases where environmental remediation companies come into a spill location and, if the insurer doesn't have boots on the ground, they can really be taken advantage of,” says Justin Russo, senior vice president of safety and loss prevention at Energi, a provider of specialized insurance programs to targeted sectors of the energy industry in the U.S. and Canada.
“There are certain areas where the cost of cleanup is driven dramatically higher because of the equipment brought in by municipalities,” adds Energi CEO Brian McCarthy. “Sometimes fire departments and other emergency services look at a cleanup event as a way to make a month's pay in a two-day period.”
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