Over the past decade, there have been numerous disruptions, including insolvency, exiting of capacity, reduction of policy terms, and elimination of products in the Environmental insurance market.
This has created opportunities for some carriers that never offered Environmental insurance to step in and begin to offer coverage that they did not previously have in their portfolio of products. Although in the short term this may bode well for clients seeking Environmental insurance, in the long run this may cause additional fluctuations in the Environmental insurance marketplace.
|Future quality reductions
Before we can discuss why there may be future quality reductions for Environmental insurers, it might be helpful to review some of the criteria that rating agencies use to judge the quality of a carrier. Some of those factors include:
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- Adequate capital — making sure there is enough money to absorb unexpected losses. This includes enough money to satisfy regulators, policyholders and rating agencies. In addition, making sure the proper kind and amount of reinsurance is in place is also critical to ensuring that the company has adequate capital.
- Profitability — consistent profitability helps to ensure that a carrier will be able to pay claims. Consistent profitability is critical for any company, but in particular for the investment arm of insurance companies and the required credit-worthiness required to continue to make their investments.
- Quality of management — the skill and experience of underwriters to write profitable business is important for a good quality insurer.
- Adequate reinsurance — this factor is tied to adequate capital. It is important that the insurer purchases the correct kind and amount of reinsurance coverage.
These are just a few of the factors that may contribute to the quality of an insurer. Other factors may include the credit rating of the country that the insurer is domiciled in, the credit rating of any company that the insurer is either tied to or a part of, and the legal/regulatory environment of insurance carriers in general. Environmental insurers in particular have a few other factors which may contribute to their quality such as watching for and preparing for emerging issues associated with environmental liability that could arise out of:
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- New environmental regulations.
- New technologies that may detect hazardous substances in smaller quantities.
- Public access to environmental information that displays, for example, the type and amount of hazardous materials facilities are discharging.
- More press about environmental hazards.
- Court cases related to toxic tort claims on the rise.
Environmental insurers are reporting that the number of claims they see has increased steadily year over year, which means that new Environmental insurance insurers have to be well equipped to manage the factors that may affect their quality rating. Oftentimes, new entrants in the Environmental insurance arena use the resources of their standard lines underwriting divisions. Although these standard lines divisions are well versed in standard lines of coverage, they often do not have the experience or expertise to determine whether or not a certain risk is a good candidate for environmental insurance. In addition, some of these new entrants do not have dedicated, in-house environmental claims departments.
If the profitability of one of these new entrants' starts to decline, it is likely that they will implement controls into their products, often either via more aggressive risk control activities, restrictive endorsements, higher deductibles, higher premiums, or the elimination of some products all together. If these controls become too expensive or restrictive in terms of coverage, this may contribute to the erosion of their profitability and subsequent decline in their quality.
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Environmental insurance policies are not all created equal and some of the differences in the policy forms may have a huge impact on the management of a client's risk. (Photo: iStock)
|Effect on brokers and clients
How quickly an insurer may go from being a viable insurer to one that is not financially stable and under government supervision varies.
If an insurer's surplus falls below a certain threshold, the insured's state insurance department may step in and take possession of the company and its operations, including payment of claims. If, in spite of all of the insurance departments' attempts to bolster the carrier and the carrier still fails, they will go into liquidation.
If a carrier goes into liquidation, this usually results in the carrier's business terminating, which means that the insurer's contracts will terminate as well. In that case, the state guarantee fund will take over management of claims against insurance policies as well as claims from creditors.
Because Environmental insurance is a specialty line, if an Environmental insurer goes out of business, the broker will have to scramble to put another policy in place. Unlike standard insurance lines, Environmental insurance policies are not all created equal and some of the differences in the policy forms may have a huge impact on the management of a client's risk. Some of the substantive differences include policy triggers; exclusions in some of the forms for specific pollutants, such as mold or asbestos; policy terms addressing extended reporting periods; cancellation provisions; who is an insured under the policy; and coverage extensions such as business interruption, transportation coverage, and non-owned disposal site coverage.
A broker's integrity in the eyes of their client will likely deteriorate if they the quality of their carrier declines to the point that they have to seek coverage elsewhere. Clients expect that their broker periodically evaluates their carriers and maintains close contact with these carriers in order to evaluate their quality.
The obvious impact to a client in the event of an insurer's quality deterioration is the likelihood that there will not be sufficient funds to pay for their claims. What may not be so obvious is that very often, a client may use Environmental insurance as a tool to improve their cash flow so they can expand their business, upgrade their facilities, or other needs. If their Environmental insurer fails, they may be compelled to apply the funds that they were going to use for expansion, upgrading, or another use for environmental risk management expenses.
Another effect on clients may be that, under certain environmental regulations, some types of activities require that an entity be able to show proof of financial responsibility. If they are using Environmental insurance as their proof of this financial responsibility, their operating permits may be compromised if their Environmental insurance carrier fails.
|Ways to ensure quality
There are a number of ways to ensure that the quality of an insurance carrier is maintained in your clients' Environmental insurance programs.
Regularly discussing with carriers their underwriting appetite and any changes that they might be making during the course of the year is helpful. Brokers that are familiar with environmental exposures will maintain an open dialogue with underwriters about their risk appetite and subsequent claims.
In addition, it is prudent to make every attempt to negotiate with underwriters so that a procedure is in place to address any rating changes that might take place during the policy term and have the ability to add coverage clauses to the policies already in place that will address future rating issues.
Ursula Knowles is assistant vice president of information development of Charlottesville, Va.-based Beacon Hill Associates Inc., a broker and program administrator specializing in Environmental insurance.
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