Stricter enforcement of environmental rules and mandatory covers on the horizon, predicts insurer

At our European Renewals Forecast & Sanctions Risk Frontiers seminar in Brussels last month, fellow speaker and Ferma board member responsible for the Environmental Liability Directive (ELD), Carl Leeman, reiterated the federation’s stance against the introduction of mandatory financial provisions to cover environmental exposures in the EU brought about by the rules.

Ms Lindroth agreed that it is not the best way forward but seems a likely next step in many countries as they try to ensure companies pay for environmental damage.

Ms Lindroth told delegates that Environmental Impairment Liability (EIL) insurance remains a difficult sell to all but the largest global companies.

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Part of the reason is lack of awareness among companies of their environmental exposures due, in part, to a lack of regulatory enforcement and available data, she said.

“Legislation is very strict but enforcement is a problem, not only in developing countries but the EU,” said the insurer.

“On paper the legislation is strong but now the authorities need to start acting according to the legislation we have to ensure companies and operators are paying for damage when it does occur. With enforcement there will be more fines and penalties. That is what we predict both inside and outside of the EU,” she added.

Pointing to the ELD that enshrines the polluter pays principal in Europe, Ms Lindroth said companies across the region can eventually expect to see enforcement on a level currently seen in Poland.

“Most countries have around five ELD incidents but Poland has 400. They are acting according to the law and that is what you can expect in other EU countries,” she said.

She also predicts there will be more and more focus on mandatory financial security—which can take the form of insurance, bonds or guarantees—to cover ELD exposures and those of other legislation across the world.

A number of countries in Europe have introduced mandatory financial security for ELD risks but it is not an EU-wide initiative as yet. It is on the table at the EC however as it searches for ways to ensure that companies have finances in place to pay for environmental damage and clean-up costs.

“Outside of Europe there is China, Mexico, Argentina, Chile and South Korea where we are seeing similar developments and some sort of demand for financial security,” said Ms Lindroth.

Mr Leeman, who is chief risk officer at Katoen Natie and executive chairman at Ifrima, said Ferma is against the introduction of mandatory provisions because they will likely discourage companies from taking steps to prevent environmental damage as they rely on securities they have in place.

“Mandatory financial provisions are a big aim of the European community,” he said. “We at Ferma don’t agree with it because we think it will mean companies make less provisions to avoid environmental damages…So I hope we can successfully lobby against it,” he said.

In response Ms Lindroth said: “I do predict that is where we are going but I don’t necessarily think it’s the best way forward. I think a competitive insurance market where we can offer good risk solutions is the best way. In Germany and France where you have a longer habit of buying environmental insurance the authorities think the market is good enough and there is no need to make financial guarantees mandatory.”

Mandatory financial security would encourage a one-size-fits-all risk transfer solution, at the expense of appropriate risk evaluation, she added.

Ms Lindroth said the big challenge facing the environmental insurance market is a lack of information, data and knowledge.

“There are major gaps of knowledge amongst clients and brokers, but also many insurance companies that don’t understand environmental risks or environmental legislation. The reason for that is there is not sufficient public data to accurately be able to evaluate the risks and exposures,” she said.

“We have data from our own clients and the claims we are dealing with and so do our competitors, but it’s not official. So you see that someone is having a big environmental incident but the data does not become official so you don’t know the actual costs. Data exists but we as a market need to work together to make sure that we collect this data and make it public to clients so they can accurately measure their exposures,” she added.