Mandatory EIL regimes could backfire warns broker as China introduces scheme

Julien Combeau, Executive Director of Willis' Environmental Practice, explained this week that if mandatory insurance is not supported by authority-backed prevention measures, insurers are likely to withdraw cover and government steps taken to improve risk management practices and ensure polluters pay are likely to backfire. "For China and anywhere else in the world, if mandatory insurance is not implemented with authority-driven incentives to enhance pollution prevention and control, along with strong enforcement and sanctions, it is probable that we will see insurers pulling out of coverage areas or walking away from markets, rather than seeing them leverage industries on behalf of governments," he wrote on WillisWire. "If this is the case, these provisions could prove themselves to be more counterproductive than beneficial to society, with not only pollution problems remaining but also unprotected populations and ecosystems," he continued.hide"Stronger incentives and stricter enforcement are needed if we are to expect environmental insurers to bear the social responsibility of reducing pollution events in countries where pollution liability insurance is compulsory," added the broker. China is now amongst the list of countries that have introduced forms of mandatory environmental financial assurance over the last five years. Other countries include Argentina, Czech Republic, Greece, Hungary, Kazakhstan, Philippines, Portugal, Slovakia, Turkey, Turkmenistan and to some extent, Spain. On 21 February, 2013, the Chinese Ministry of Environmental Protection (MEP) and the China Insurance Regulatory Commission (CIRC) jointly announced the Guiding Opinions on Pilot Scheme for Compulsory Environmental Pollution Liability Insurance. For the first time it requires compulsory purchase of environmental pollution liability insurance for companies with high environmental risks operating in China. The move came ahead of the forecasted 2015 implementation date. Activities that fall under the regime are non-ferrous metal mining and smelting, lead battery manufacturing, leather and related products manufacturing and chemical materials and products manufacturing. In addition, the Guiding Opinions 'encourage' other high environmental risk enterprises to purchase environmental pollution liability insurance. Companies that fail to purchase cover as required may be at a disadvantage when applying to the MEP for environmental protection approvals, noted Clyde & Co. The MEP may also suspend acceptance of the enterprises' applications for special funds for environmental protection. Information regarding failure to purchase environmental pollution liability insurance may be shared with banks and could be used as a basis to rate and manage clients. The MEP may also work with other authorities to give priority to enterprises that have purchased environmental pollution liability insurance in order to facilitate bank loans and allocate certain funds, explained the law firm. The acceleration of the mandatory scheme is a response to what many view as a pollution crisis in China. Smog over Beijing, concerns over the safety of drinking water in Shanghai, the quality of degradation of underground water resources across the country and reports that data concerning soil pollution is to be kept under wraps by the state characterise the issues facing the country. Only this week a study led by researchers at the University of Washington linked air pollution to 1.2 million deaths in China in 2010. Mr Combeau explained that one of the rationales behind mandatory environmental insurance regimes is a widely held belief amongst powers that be that they achieve the same social efficiency as imposing operating permits or penalties and sanctions. The authorities believe that by transferring the review of operating controls and potential environmental threats to insurance, specialty underwriters will assess the risks and apply pressure on operators to improve pollution risk prevention and protection. Mr Combeau points out that controlling the supervision of environmental insurance by enforcing authorities is a lot easier and cheaper than carrying out a full compliance gap analysis against operating permits. This can be done more extensively and more often, therefore improving the scale of the supervisory work. Authorities can then choose to suspend licensing of those companies that are not insured because they do not meet the insurability criteria. A further attraction of mandatory insurance is that post pollution governments are better assured that the responsible party is solvent and that taxpayers' money will not have to be used to pay for pollution liabilities. "Under such regimes, environmental insurers are bearing an important social responsibility, acting almost as non-administrative policy organisations by supporting the resolution of pollution problems at country scale," said Mr Combeau. But in order for insurers to perform this role Mr Combeau suggests that mandatory environmental insurance schemes must overcome moral hazard exposures and have participating insurers of sufficient maturity to provide required coverage at a sustainable price as well as having sufficient manpower and engineering support to guarantee sufficient risk assessment and enforce recommendations. In most of the countries where mandatory insurance is required, this is not the case, he warned. Furthermore, he argues that with these mandatory insurance requirements generally applicable only for the most hazardous classes of business, governments are generating an adverse selection that 'could cause insurance markets to shrink rather than to develop'. "Insurers could be more tempted to manage their own risks rather than those from their captive but dangerous customer base," said the broker.

Mandatory EIL regimes could backfire warns broker as China introduces scheme

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