Buyers, insurers and brokers still grappling with ELD’s complexities

Some leading insurers have developed products to cover the new risk. But, the situation across Europe is mixed as the insurance sector has faced, and continues to face, difficulties to meet the demands of the Directive, experts say. And, insurance buyers themselves are under-prepared for the new regime, say the experts. There is a lack of awareness amongst operators and a misconception that existing insurance coverage, particularly general liability policies, are sufficient for the new regime, they add. “Whilst there are some problems concerning offer of coverage there is also no real demand for this type of coverage,” said Pierre Sonigo, General Secretary of FERMA, the Federation of European Risk Management Associations.hide“We have just launched a survey amongst our members and it was quite interesting to see that people are either not interested or ready to buy specific coverage. I think it is because the risk is not very well perceived. Corporations have not done the risk assessment, which requires work to be carried out jointly by insurance buyers and by directors of environment. These are often separate people and often do not talk to each other. I also feel that brokers and insurers are not very comfortable in promoting the product to their clients,” he explained. Carmen Bell, Policy Advisor, Non-life Insurance at the Comite Europeen Des Assurances (CEA), said that it has had problems raising awareness amongst operators about the ELD, despite working closely with the European Commission on this issue. But, there is only so much that the CEA can do and business operators must take it upon themselves to learn about the Directive, she added. A major area of misunderstanding amongst buyers is a belief that their liabilities from the ELD are covered under general liability policies or existing stand alone environmental insurance liability products. This coverage is often not sufficient and the message needs to be communicated, commentators urged. “Some risk managers believe they are covered through their general liability policy, which I think is wrong. There is a misconception on how well their environmental policies are covering them, either through their general liability policies or their existing stand alone policies,” said Mr. Sonigo. EDUCATION TARGET “It is a problem of education and we really need to make people understand what is at stake because basically they don’t believe so much in those new risks,” he added. Under general and public liability policies there is unlikely to be cover for statutory liabilities introduced by the ELD. For example, regulatory remediation costs that are imposed under the regime do not constitute damages, that would be paid out under public or general liability policies. “It is becoming more widely recognised that if you really want protection you need to have a specialist wording. That can be added onto the back of your general liability policy or a specialist wording on a stand-alone basis. But, it needs to work on a fundamentally different basis to general liability policies. That is slowly being understood and brokers are waking up to the fact that they need to advise clients that a general liability policy doesn’t offer buyers the coverage that they think it does,” said Simon White, Environmental Branch Manager at XL Insurance Co. Ltd. There appears to be a lack of awareness amongst risk managers and insurance buyers on environmental insurance in general. But, it appears to be more of a problem in SME companies. “Most SME companies are unlikely to have fully dedicated insurance buyers, and usually rely more on their brokers. Therefore it is really important for the SME brokers to start discussing these issues with the clients. Generally speaking many SMEs probably feel the general liability form is adequate and don’t realise the limitations of the form until it is too late,” he explained. A number of market commentators have suggested that one reason why demand has not taken off, despite the arrival of the new rules, is because of the lack of major losses to fall under the Directive so far. “But don’t assume that no news is good news as this conclusion fails to appreciate how this regime is going to work,” warned Aiden Thompson, Head of Environment and Climate Change at the international law firm Barlow Lyde & Gilbert L.L.P. “The new regulation asks the operator to be proactive when incurring liabilities, so regulators may never find out about works carried out by operators under this regime,” he added. A lack of claims activity and resulting data is also causing problems for the insurance market as it develops products for the ELD. Differences and delays in transposition of the Directive amongst member states and the new compensatory remediation costs imposed under the regime, are also causing headaches. “The market is developing, but one thing that insurers are trying to get is more statistics and data on ELD cases. But, this has proven to be difficult as either the cases are not being reported by the businesses themselves or they are just not occurring on a wide basis. This has been our biggest problem. Until those claims start happening it is quite difficult for the insurance industry to start seeing the impact and what kinds of products they can continue to develop in order to address all the ELD liabilities,” said Ms. Bell of the CEA. “In a nutshell the lack of data makes the risk difficult to underwrite and difficult to price. Coupled with the fact that there is not a strong demand from buyers it is probably not a priority area for many insurers,” said Phil Bell, Group Casualty Director at Royal Sun Alliance and Chairman of the CEA’s general liability steering group. Several companies, such as AXA Corporate Solutions and XL, have launched dedicated ELD products aimed at covering traditional clean up costs as well has remediation costs and, in some cases, first party business interruption. France and Germany is quite advanced in this market because sudden and accidental pollution coverage was excluded from Commercial General Liability Policies at the end of the 1980s and the market was therefore prepared for stand-alone coverages. Sylvie Monereau, Financial Lines Environmental Expert Underwriter at AXA Corporate Solutions, said that the U.K. market is quite different to France and Germany because it is more of a niche market where products are based upon historical coverages—mainly for liabilities inherited through mergers and acquisitions of companies and sites. The U.K. market did not have operational coverages and the market here is currently shifting to an operational approach, she said. “In the U.K., Spain, Italy and the Benelux, our clients currently want information. They want to understand the requirements of the ELD and are investigating solutions. They want quotes and want to know what capacity is available,” said Ms. Monereau. Ms. Monereau said that the German market is ‘well educated’ because it has a model wording that was produced by the German insurance association, the GDV, and which all companies buy through UHV (Umwelthaftplichtversicherung) and USV (Umweltschadenversicherung) policies. This year will prove to be interesting for those in the environmental insurance market because the ELD has been transposed differently within the E.U. countries, some stricter than others. COMPULSORY GUARANTEES Nine countries have opted for compulsory financial security guarantees. In Greece, Hungary, Romania, Portugal and Spain it will be enforced in 2010. Bulgaria, Czech Republic, Slovakia and Slovenia are set to move to a mandantory system over the next few years. Problems have occurred in Portugal, where the mandatory system is already in place but there is a lack of local insurers offering coverage, several commentators said. Companies that do not have guarantees can be fined and can even have their license to operate revoked. “Insurers thought that they could continue the discussion with the government and that maybe the law could be delayed but this has not happened. Therefore the brokers are desperate to sort out the problem and most insurers in Portugal do not offer the coverage,” explained Ms. Monereau. In Eastern Europe the problem is even worse because there is both a lack of knowledge and capacity for the line of business, despite the sudden requirement for coverage, she added.

Buyers, insurers and brokers still grappling with ELD’s complexities

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