Don’t panic over mandatory ELD prospect says ACE

Insurers have had ample time to prepare for the new regime and could step up to the plate should the European Commission decide to enforce mandatory cover, the expert added.

Mandatory financial provisions are one option for the E.C., which is due to report before April 30, 2010 on the effectiveness of the ELD.

If appropriate, on the basis of the report and an extended impact assessment including a cost-benefit analysis, the Commission may submit proposals for a system of harmonised mandatory financial security, states the E.U.

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ACE has responded to comments published last week in CRE (click here for story) from various market players who warned against an E.U.–wide mandatory scheme on the grounds that the market needs more time to come to terms with the new regime and develop its response to the new liabilities.

The regime has been around for a while now and there has been ample time to study it, so it should not come as a surprise to anyone, said Karl Russek, Senior Vice President, Environmental Risk for ACE Overseas General.

“There is already a robust and growing market for ELD coverage. It’s small by Property & Casualty standards, but, is has been there for five years plus and it is growing significantly year on year. The companies that are actively growing in this market are increasingly comfortable with their results so I don’t believe that’s as big a barrier as some might think,” he said.

And there is significant reinsurance protection available for those insurers with capabilities in this specialist area, Mr. Russek added.

ACE said that it knows of no major European risk that has come to the market in search of explicit ELD cover and not been able to find it, including large petrochemical and metallurgical risks.

And for these risks it is a very competitive market, said Mr. Russek.

So, whilst there is already a market in place for ELD risks, the insurance industry would develop further if a mandatory scheme was enforced and could meet the demands of such a system, he said.

The “ramp–up” will be a challenge for some markets, with a reasonable timeline, but it is very achievable, said Mr. Russek.

“Six to nine months would be reasonable. Companies need to be able to evaluate, price and work with reinsurers to build their capabilities, but, that can certainly be done in less than a year quite effectively. For those of us already in the market the time would be even shorter,” he argued.

Mr. Russek explained that there would be the need to build some infrastructure, depending on how long the threshold for exactly who requires mandatory coverage was set.

“But, frankly many insurers see this as a significant opportunity so I don’t think there would be any reluctance to build this if there was a clear time–frame put into place,” he said.

Some commentators have said that there is a lack of reliable data to price the risk appropriately because of delays in transposition of the directive and have expressed concerns that mandatory cover could lead to over–pricing of risks.

“We think it is quite the reverse,” said Mr. Russek. “Mandatory cover means a larger risk pool and as a result you generally get lower premiums and standardisation of terms and with an increased number of markets entering the fray the cover becomes more widely available,” he added.

“Whilst we are not looking at a situation where there is a tremendous amount of reliable actuarial loss cost data, global carriers have experience of writing these kinds of coverages around the world and the market will simply adapt as claims accrue,” he said.