Analysis: Environmental claims rising

Source:, April 17, 2017
Environmental liability claims above $1bn are becoming more commonplace but coverage for the peril is still lagging.
According to Allianz Global Corporate & Specialty (AGCS), environmental damage can now cost insurers an average of €2.3m per claim.
According to Matt O’Malley, president of North America environmental at XL Catlin, the insurance penetration rate for environmental cover in the US, which is the largest environmental insurance market, is roughly 10%.
“Penetration for middle markets is much lower compared to Fortune 1000 companies, so there is definitely a growth opportunity for insurers there,” he said.
The shift in environmental claims was recently highlighted by a wide-reaching scandal in Europe and beyond, in which nearly every diesel-powered vehicle on the continent emitted more pollutants in real world driving scenarios than had been indicated during testing.
Whether through emission cheating devices or the creative interpretation of data results, such a scandal highlights how complex liability losses can become. Volkswagen’s involvement in the scandal ended up bringing numerous other automakers into the fold, including General Motors, Fiat Chrysler, Renault and Mitsubishi.
Losses to Volkswagen alone have been estimated at $21bn, according to Reuters.
In the US, electric company Duke Energy recently sued 30 of its former insurance companies including Allianz, Allstate, and Berkshire Hathaway for roughly $1bn in clean-up fees after it was discovered that coal ash which the company had disposed of over a period of decades was seeping into nearby groundwater.
According to O’Malley, mould has become increasingly problematic – particularly so in the hospitality sector – and led to some unexpected claims as high as seven figures.
Mid-stream energy, or the transportation of oil and other energy sources to their destination, has also become an issue on the US, as any pipe breach could cost thousands in a matter of minutes due to the sheer volume of oil or gas being pumped through an ageing system.
While O’Malley has not seen a rise in the total number of claims or claims inflation in the US as of yet, the individual limits being purchased by client are increasing.
“One broker has managed to get a tower between $350m and $400m together,” he said, a sizeable increase on the standard limits sought of circa $200m.
Environmental claims in Asia are expected to increase as the coverage becomes more widely purchased, AGCS has predicted.
Chinese authorities granted non-governmental organisations the ability to launch public interest litigation over violations of environmental law for the first time in 2014.
In Africa, mining operations have led to considerable issues with contamination, as governments step up efforts to combat pollution from ongoing operations.
One case currently ongoing in South Africa could set a legal precedent for all mining companies in the country after a trio of mining directors were arrested for leaving a polluted site in their wake.
They could face possible fines of more than $7m.
As governments gradually take steps to hold firms who pollute accountable, and the general public becomes increasingly concerned about environmental issues, insurers could have a potential business opportunity in a broader range of regions.
According to AGCS, environmental damage had the second highest average liability losses from 2011 to 2016, behind only to vandalism and terrorism, excluding financial lines.
Still, environmental damage only accounted for 10% of the value of all claims in the Americas, while not accounting for much in any other region, highlighting the relative novelty of the risk in emerging and established markets alike.
As far as individual lines of business, most industries carry some contamination risk.
Cargo trains can cause substantial damage if they derail, but if they do so while carrying hazardous materials near waterways, then the contamination risk is immense.
Such cargo trains routinely travel alongside the Hudson River in New York, where a single accident could lead to a large-scale environmental disaster.
In that space, rail insurers are usually not even insured enough for the immediate aftermath of a large-scale disaster, much less the clean-up costs, and are not required by law to carry insurance at all, although most do.
The amount of oil shipped by rail has also increased more than 40 times, according to the Insurance Information Institute, as the amount of oil from shale deposits has overwhelmed the pipeline delivery system.
Likewise, power plants, cargo ships, car manufacturers, and even retailers all have some form of contamination exposure.

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