Insurers and buyers fear rash E.C. decision on mandatory environmental coverage

The market needs more time to come to terms with the new regime and develop its response to the new liabilities, experts have told Commercial Risk Europe.

Under article 14 of the ELD’s reporting requirements, the Commission will report before 30 April 2010 on the effectiveness of the ELD. It will consider the effectiveness of remediation for environmental damages under the regime and the availability at reasonable costs, and the conditions, of insurance and other types of financial security, for Annex III-activities.

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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“There is a threat from the Commission who are saying that if insurers are not able to provide adequate coverage, or if they believe that risk managers are not interested in buying coverage, we (the Commission) believe that the risk is there so insurance should be provided and we can make financial guarantee mandatory for everyone,” explained Pierre Sonigo, General Secretary of FERMA, the Federation of European Risk Management Associations.

“We certainly don’t think this should happen, certainly not for the larger insured…we are fighting against mandatory enforcement because then we cannot control price, we can’t adapt the guarantee to the actual risk and we cannot do risk selection,” he said.

Carmen Bell, Policy Advisor, Non-life Insurance at the Comité Européen Des Assurances (CEA), believes that a mandatory financial guarantee scheme could be beneficial for some countries but that the decision should be left to the national states.

“However on an E.U. wide basis it is not going to be beneficial,” she said. “There is a very high lack of data and statistics in this field and without that data it is really impossible to accurately predict the future claims that will fall under this directive. And so implementing mandatory financial security, before you have this necessary data, is very dangerous to do,” she said.

The CEA believes that implementation of such a scheme at the present time would be an inappropriate risk – as it would force the insurance industry to predict claims without any data, Ms. Bell explained.

“This risks under predicting or over-predicting, and under-predicting is really important because that can lead to insufficient capacity to cover the claims,” she added.

The insurance industry is very reluctant to provide mandatory coverage for this risk because it does not want to provide coverage for everyone at a specific cost. Insurers want to be able to screen the kinds of risks they write, said Mr. Sonigo.

Transposition of the directive, which was due to be completed in 2007, was finally completed on an E.U. wide basis at the end of 2009. This delay has contributed to a lack of claims activity and government enforcement of the new regime, experts say.

So the Commission expected to be able to report on three years worth of data and market response, but, in reality, has had just a few months to draw conclusions from some countries.

As such, it is too early for the Commission to report with any confidence on the market’s answer for financial securities and, in particular, to make recommendations for mandatory financial guarantees, experts agreed.

“It is very, very early for anyone to be drawing firm conclusions about whether or not insurance, or any other financial security instruments, are going to be developed and how effective they have been in relation to remedying any financial damage. So I really expect, and I am sure the Commission can only conclude, that it is too early to make any firm conclusions on that and far too early to try to introduce any form of compulsory insurance,” said Phil Bell, Group Casualty Director at Royal Sun Alliance and Chairman of the CEA’s general liability steering group.

One source said that, whilst the report will be published as planned, it will conclude that there has not been enough time to fully consider the need for an E.U. wide mandatory scheme, because it has taken nation states so long to implement the Directive.

“I think they will report on the availability of environmental provisions, but whether they have enough data on mandatory enforcement I very much doubt it,” agreed Simon White, Environmental Branch Manager at XL Insurance Co. Ltd.

“It takes three or four years to get to know and see how it works so I think they will delay that decision until better data is available,” he added.