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.