Growing focus on EIL in multinational programmes

European multinationals are increasingly adding environmental impairment liability (EIL) to their global programmes as demand grows for transfer solutions to help mitigate this growing area of risk, according to market experts. The move comes as more and more companies realise that specialist EIL cover is needed because traditional policies, typically general liability (GL), won’t offer full protection. But the message hasn’t got through to all risk managers just yet, experts say. All of this is against the backdrop of a hardening commercial insurance market. The general hardening has impacted EIL cover, but it seems things are not as bad for buyers in this line of business as some others. The brokers and insurers say that environmental liability and regulatory enforcement are growing across the EU and other parts of the world, bringing increased risks and uncertainty to businesses in the region and further afield. Glenn O’Halloran, head of environmental risks at Howden, says this is focusing the minds of risk managers and there is a trend towards European multinationals adding EIL cover to their global programmes. “Multinationals are continuing to add EIL to their global programmes, which is a trend observed across the market for a number of years. As environmental awareness grows globally and regulations are developed and implemented in jurisdictions where environmental enforcement was previously lacking, risk and exposures grow for multinationals,” he says. But the broker stressed that “great care” must be taken to ensure consistency of cover across both the master policy and underlying local policies when structuring global, or multinational, EIL programmes. Policy forms and market standard forms can “vary greatly” across different regions and quite often the “intent of cover can be lost”, he says. Christoph Mocklinghoff, environmental practice leader continental Europe, Marsh, agrees that EIL coverage is increasingly being put into multinational programmes. Buyers must take care, however, to work out where there are coverage overlaps, and crucially gaps, with other lines in the programme, he says. “The articulation between EIL and other lines – principally general liability but also D&O, property, construction, transportation and cyber – is crucial because EIL picks up risks under public law exposure in these lines that won’t be covered elsewhere,” he says. C-suite focus Dr Simon Johnson, director, environment at Aon’s Global Broking Centre, says climate change, ESG issues and growing regulations around the world mean the environment is now an important c-suite focus. This is clearly creating more interest in related liability and EIL coverages, not least among multinationals using global programmes, he says. “That interest is coming particularly from larger multinational companies where key stakeholders also have their own environmental performance targets, such as, for example, pension funds and other institutional investors, and they look to apply those same pressures and concerns onto those in which they invest and have a stake. This is creating more interest [in EIL], as is the gradual rise internationally in environmental regulation and, more importantly, the implementation and enforcement necessary for governments to demonstrate their commitment to the environment,” he says. According to Sylvie Monereau, product leader – environmental insurance for APAC and Eu-rope at AXA XL, building environmental cover in multinational programmes isn’t new. EIL insurers with the right capabilities have been offering such solutions for more than a decade, but there has been increased demand, she explains. “We are certainly seeing a rise in demand in that area and, today, all of our largest clients have a global programme; if they don’t, they’re looking to set one up… Across Europe, large multinational corporations are either covered, thinking about enhancing their existing coverage, or seeking coverage if they aren’t already covered,” she says. But this means there are still companies, including some big multinationals, in industries not considered most at risk, that aren’t properly covered, says Ms Monereau. “There is still a lot to do, with the broking community, to support risk managers and help their organisations understand their exposure to environmental risks, notably through risk engineering,” she says. Brokers and insurers have warned for a long time that many companies have relied too heavily on GL policies to cover environmental risks, which weren’t designed to properly cover the growing liability issues. This is certainly the case with certain aspects of the European Liability Directive that governs the EU. Howden’s Mr O’Halloran says that while an “overreliance” on GL cover for environmental exposures remains a concern, the problem appears to be improving over time as environmental issues climb the boardroom agenda. He says risk managers are putting more emphasis on fully understanding the environmental coverage they currently have. This has seen many identify gaps, and then propose solutions to the board and executive committee to “strengthen resilience” against environmental risks, the broker continues. EIL insurance is increasingly a “clear and obvious solution”, he adds. “Examples can be found in the M&A space,” says Mr O’Halloran. “Buyers are performing a deeper dive into a target’s existing environmental or GL insurance policies through insurance due diligence, recognising the gaps – such as forward-looking versus backwards-looking – and supplementing the target’s environmental insurance with a one-off transactional environmental insurance policy to transfer backwards-looking risks. Germany offers a good example, where an overreliance and misunderstanding of the cover offered by market-standard GL policies is beginning to be more fully understood,” he explains. Marsh’s Mr Mocklinghoff says it is rare today for big companies to rely purely on GL cover for environmental exposures. This problem still exists among SMEs, but even here the number of first-time EIL buyers across Europe is increasing year by year, he adds. Aon’s Dr Johnson agrees that more companies are taking out EIL cover rather than relying on GL. But he warns that there remains a blindspot over operational risks, which is where the market sees the most claims “In this case, it is a question of companies understanding, one, where EIL fills gaps in more traditional GL and property programmes; and two, the consequences of these gaps being uninsured. Historical pollution risk is important to cover, although cover is subject to having appropriate information about site use history and any known pollution conditions – land and groundwater contamination. But these covers can be crucial in land, property and business transactions, facilitating deals and adding value,” he says. Hard market Meanwhile, the EIL market in Europe is hardening like much of the rest of the commercial space. However, rates, terms and conditions haven’t deteriorated as badly as they have in some other lines. “There remains a core base of longstanding underwriters and carriers in the market, providing consistent coverage, premiums and servicing. In our experience, premium rates remain flat to +5% on renewing business, primarily driven upwards by hardening market conditions,” says Mr O’Halloran. In addition, there are signs of capacity reduction among some markets, he continues. “Whereas previously an insurer may put up €20m for a certain risk, now they’re pulling back to €10m. Certain pollutants are also coming under scrutiny, such as PFA [perfluoroalkyl and polyfluoroalkyl] substances, which are increasingly subject to a blanket exclusion,” says the broker. Aon’s Dr Johnson says EIL cover is generally available across all EU member states, usually through freedom-of-service structured polices with European and London market players competing for business. But he too says carriers are looking for rate increases as part of general market hardening. While conditions and coverage remain “relatively unchanged”, they are subject to changes in response to claims and events, he continues. “For example, increasing PFOS/PFAS exclusions and more recent concern over how the increased frequency of extreme weather events related to climate change might affect claims on EIL policies,” says Dr Johnson. AXA XL’s Ms Monereau says there are a “number of newcomers to the European EIL market” with “no shortage” of capacity. Therefore, pricing is “very much dependent” on client activity, risk management and loss history, she adds. The insurer explains that some markets in Europe are more mature than others. France, Spain and, to some extent, Benelux are among the more developed, but there remains room for progress in other countries, she says. “We are also seeing rising interest in added services such as 24/7 incident support, remediation, crisis and reputation management. At AXA XL, we have partnered with Cedre, an organisation that specialises in mitigating the impact of ecological incidents, to offer such services to our clients,” she says. Mr O’Halloran adds that as the environmental and ESG agenda grows among corporates operating in Europe, Howden is seeing more EIL uptake from “previously elusive buyers” in key territories such as France, Germany, Benelux and the Nordics. “It’s not just the traditional polluting industries either – such as industrials, chemicals and waste businesses – we’re seeing buyers from SMEs through to real estate owners and even hospitality,” he says. But the broker says there remains a “knowledge gap” among insurance risk managers and legal advisers surrounding the availability of cover for environmental risks. “We were recently approached by a corporate looking to insure historical pollution relating to a warehouse they own. The risk manager was convinced it wasn’t insurable, but was pleasantly surprised when we returned with a broad set of terms at a premium below their expectation,” he says. Mr O’Halloran adds that there is also ongoing innovation in the EIL market. This is most apparent in the M&A space, where certain insurers are now offering environmental insurance policies that are more closely aligned with other transactional insurance policies, such as warranties and indemnities and tax insurance, he says. “For example, certain insurers now write standalone policies wrapping around contractual liabilities, such as a breach of warranty or specific environmental covenant. This has driven uptake in mergers and acquisitions as corporates and private equity firms become accustomed to transferring risks to the insurance market,” the broker explains.

Growing focus on EIL in multinational programmes

Demand is on the rise as risks mount, writes Ben Norris

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