Multinationals on hook as mandatory environmental cover hits China

A guideline issued on 21 February by the Chinese Ministry of Environmental Protection (MEP) and the China Insurance Regulatory Commission (CIRC), the market supervisors, states that companies working in sectors where there is a high risk of pollution will now be required to buy Environmental Impairment Liability (EIL) insurance. The sectors include those related to the manufacture and use of heavy metal, including heavy non-ferrous metal mining, the heavy non-ferrous metallurgical industry, lead storage battery manufacturers and those that work with leather and related products, chemical materials and chemical products. But the list is not restricted to these sectors. Companies that work in other activities may be required to purchase EIL by local regulators. Other enterprises that present high risk of pollution can also be told to purchase the coverage.hideFurthermore, the Chinese government is pressing for other sectors—such as the petrochemical, hazardous chemical and hazardous waste operators—to do the same, although the guidelines appear to have fallen short of making EIL cover mandatory for this group. According to experts, the new rules are in response to public concern about significant environmental losses caused by companies in recent years. Since 2007 the Chinese government has been trying to create incentives for the purchase of environment liability insurance, but voluntary schemes have borne little fruit. Even those firms that are willing to purchase EIL can find it difficult as the market remains underdeveloped, experts said. The lack of an insurance secondary market in the country makes it hard for underwriters to diversify their risks, and as a result they are not keen on taking large exposures to environmental damage. Chinese insurance and commercial law firm AnJie Law pointed out that pollution incidents in China are often big and few insurance companies are prepared to provide capacity to develop the country’s EIL market. But the law firm said this situation could soon change due to the political weight of the bodies sponsoring these new guidelines. Both the MEP and CIRC carry huge clout in China’s corridors of power that will ‘hugely influence its (the guidelines) implementation’, said AnJie Law. It is now to be seen how the insurance market will react. “There are few local carriers that have already launched EIL products together with the wording filed by the CIRC,” said Mitchell Ma, the CEO of Willis China. “However, it is still a very niche market. Many local carriers do not have sufficient experience to underwrite EIL exposures.” He added: “The demand for EIL has indeed been increasing throughout the last few years. We believe one of the main factors driving this is new regulation as a result of government will, which reflects public opinion.” Non-compliance with the new mandatory EIL rules could have dire consequences, particularly for foreign groups. “Global companies with operations in China should comply with EIL risk regulation in China,” Mr Ma said. “Any record of a violation may interfere with the renewal of their licence in the future.” Brokers Marsh went into more detail in a note released immediately after the rules were made public. “Enterprises that are included in the targeted industries but do not join the insurance scheme will encounter restrictions and difficulties to the application of environmental protection and pollution prevention-related funds, their credit ratings in the banking system and the approval of their projects’ environmental impact assessments before and after construction,” it said. The tough approach aims to reverse a trend in China that has seen many companies take environmental exposures lightly, said Anjie Law. It noted that many companies tend not to purchase insurance unless it is mandatory. Things have been made worse by the fact that the implementation of pilot schemes to push the environmental protection agenda have been delegated to local governments not eager to confront big companies that provide large chunks of their tax revenues. Also, the performance of economic factors in China continues to be mostly determined by their contribution to GDP growth, rather than their sustainability agenda. Furthermore, punishments imposed on companies that are guilty of pollution have not been of sufficient size to make them change their ways, the law firm pointed out. Existing legislation has not helped either, as there is no provision in Chinese law that mandates compensation must be paid by polluters for damage caused to the environment. Similarly, there is no class action legislation in China, which makes it very difficult for victims of environmental damage to pursue compensation in the courts. The administrative punishments that have been implemented by the guidelines aim to reverse this situation. The development of the EIL market in China has suffered from an inadequacy in the products sold and a lack of knowledge about the risks that companies face, according to a paper by Congjun Liu, from China’s Hebei University, and Abdul Razak Bin Chik, from Malaysia’s University Utara Malaysia, published back in August 2012. The authors interviewed the professionals responsible for risk management at dozens of companies that were expected to purchase coverage in the province of Hebei, one of the Chinese regions where a scheme promoting environmental protection has been implemented on a pilot basis since 2007. They found that many businesses, especially of small and medium size, did not understand the risks to which they were exposed. More worrying for insurance buyers, perhaps, is the fact that many of those surveyed said that the products available in the market did not meet their needs. Risk managers told the researchers that the products offered by insurers did not cover some of their most important exposures. For example, most of the coverages sold in the market at that time only covered pollution accidents that took place on a company’s own site and facilities. Any accident that took place during the transportation or delivery of a hazardous product tended to be excluded. Another complaint referred to excessively high premiums. The authors believe that prices have remained high because few insurance companies offer the product and there still is little data to enable them to properly assess potential losses.

Multinationals on hook as mandatory environmental cover hits China

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