|"A growing demand for coverage across the board, coupled with a slightly contracted market, will give agents who invest time understanding the class a chance to write a great deal of business."
Environmental growth opportunities
Well-prepared agents have a wide-open market to serve expanding client needs
By Dave Willis
Think environmental risks and big-name chemical, petroleum and manufacturing firms come to mind. But environmental exposures extend far beyond the large, industrial community. "Virtually all contractors, all manufacturers, as well as firms involved in mergers and acquisitions, divestitures, private equity, and real estate transactions have some degree of environmental exposure, whether they choose to insure it or not," explains Mary Busby, environmental underwriting manager at James River Insurance Company.
A number of factors are driving increased attention to environmental risks and ways to address them. "With an uptick in commercial real estate and manufacturing, we'll see a corresponding increase in site-specific environmental site liability coverage requests," Busby says. "Also, as private equity and M&A activity increases, we'll see more coverage requests due to increased exposures and/or contractual requirements."
As the credit market improves and financing increases, more lenders will require Phase I environmental site assessments to identify potential or existing environmental contamination liabilities, Busby adds. "Expect to see a greater call for coverage to be in place, naming the lender as an additional insured," she says.
Other issues are driving increased attention to environmental risks and exposures. "Sandy is one," explains David Brereton, program manager at Freberg Environmental Insurance. "Hurricanes and related events make people more aware of the need for certain pollution coverage relating to mold, above-ground storage tanks and other concerns." Hurricanes also drive greater interest in coverage for fire-water damage restoration contracting risks.
Craig Richardson, senior vice president at ACE Environmental Risk, says storms help focus clients on potential risks. "Property owners are confronting questions about how best to address water damage, prevent or remediate mold and microbial growth, and address bacterial threats from potentially contaminated flood waters," he explains.
Bill Pritchard Jr., ERM, president of Beacon Hill Associates, expects increased consumer awareness of environmental exposures to drive more business into the market. "This has been occurring for several years now," he says, "but with the heightened concerns brought on by increased domestic energy production, businesses are more likely now than ever before to need coverage. "
According to Lee Branson, vice president at Atlantic Specialty Lines, a couple of exposures are causing concern. "Legionella seems to be increasing," he notes. "We're seeing more instances in hospitals, hotels, apartment buildings and office buildings. And we're seeing more lawsuits." Buildings with pools, hot tubs and fountains—drinking fountains and those found in foyers—are especially at risk. "Hospitals are a concern because people may be more susceptible to bacteria and because many germs are already present," he adds.
Contracting can lead to increased cases of Legionella. "If you're doing a major renovation or adding a wing to a large building, water may end up sitting stagnant, particularly where they might just dead-end pipes rather than remove them," Branson notes.
Another potential site pollution risk facing apartment buildings and other older structures involves PCBs. "They're discovering caulking on older buildings that contains these PCBs," Branson explains. "During renovation or demolition, it needs to be disposed of properly."
Less common, but equally troublesome, he adds, is potential exposure that property owners face when a meth lab—perhaps run by former tenants—is abandoned. "A good site pollution policy will address all of these issues and protect the insured," he says.
Political, economic and regulatory issues may also affect the environmental insurance arena over the next year. "With a Democratic administration in place for the next four years, there's little chance the scope of EPA activity will lessen, meaning environmental regulation and enforcement should continue at a consistent level going forward," explains Pritchard. "This should lead to more work cleaning up and retrofitting industrial sites, as well as more contractors required to carry coverage."
At the same time, explains Richardson, "Global corporations can expect to continue to see additional increased environmental regulation, especially in several European Union countries."
State budget restrictions will affect the market, too. "Some states are fiscally challenged, due to the current economic climate," Richardson notes. "Budget restrictions result in their having to reallocate monies from funds that were initially set aside for addressing environmental issues." This practice severely impacted one state's underground storage tank fund, resulting in the need to shut down the fund in 2012, he adds.
William McElroy, senior vice president of environmental for Liberty International Underwriters, expects most underwriters to become increasingly selective in 2013. "After years of decline, environmental rates increased somewhat sporadically and very modestly over most of 2012," he explains.
"Still, in large segments of the environmental market, rates remain far too low to present an attractive underwriting opportunity," McElroy explains. He sees more carriers recognizing the inadequacy of their risk selection and pricing practices, which will continue the recent trend toward higher rates.
McElroy says publicly available data shows several carriers have had to address adverse loss development in the ongoing environmental businesses in recent years. "This has been substantial, relative to the size of the market, though rate movement has yet to rebound to the extent that would be justified by these adverse developments," he explains.
Pritchard sees some carrier contraction, too. "While many programs are thriving, as many or more have not been able to establish a significant presence," he explains. "We believe these carriers will begin to exit the market as their parent organizations become focused on better returns generated by rising rates on their casualty books." While it won't represent a significant volume of business, he expects a net loss in the number of environmental markets for the first time in many years.
Brereton agrees that the insurance market is shifting. "Rate softening has certainly stopped," he says. "We're seeing hardening in certain classes or pockets. For instance, any site pollution risk with a substantial tank exposure is seeing some hardening. In some classes and markets, such as those related to oil and gas, some carriers appear to want to take a pass."
At the same time, growth is occurring in what Cindy White, senior vice president at Freberg Environmental Insurance, calls "new energy-related business," including hazardous waste trucking, which has seen some increased activity with salt-water disposal haulers serving natural gas fracking operations.
"Agents and brokers should make sure clients know how to respond in the event of water damage that may lead to mold or bacterial conditions."
-Craig Richardson, Vice President, Ace Enviromental Risk
Opportunities for agents
Agents and brokers who understand these issues and changes can benefit. "Assuming another economic downturn can be avoided, an improving economy will generally increase the number of buyers of environmental coverage," McElroy notes.
"A growing demand for coverage across the board, coupled with a slightly contracted market, will give agents who invest time understanding the class a chance to write a great deal of new business," adds Pritchard.
Brereton also sees opportunities for agents and brokers to attract new business. "There are some new and emerging areas of coverage generating interest," he explains. "Lender liability is one. Also, people are interested in packaging pollution or environmental with other products such as GL and products pollution."
Busby encourages agents and brokers to not limit their target markets. "Because coverage often is required by contract, whether it's a purchase and sale agreement, a contract for services, or a financing document, almost any business can be an environmental prospect," she explains.
For more routine exposures, "off-the-shelf" products are available from many different markets at very competitive prices, Busby adds. "For more complex and larger risks, the field narrows," she explains. "That's where we can play a role, helping brokers analyze needs and rounding out coverages offered, to ensure that clients receive sound advice—whether or not they take it—while simultaneously protecting the broker or agent E&O position."
According to Busby, preparation drives success. "Meeting the needs of more complex environmental risks means having available the right policy and endorsement options along with the flexibility to combine them into a customized product," she explains. Her firm introduced a product just over a year ago that combines a number of coverage options into a single policy.
Brereton encourages agents who want to hold on to existing clients to consider multi-year policies. "As rates seem to be hardening, it may make sense to encourage clients to look at this," he says. "It's probably wise to lock in terms if you can."
Prepping clients for change also makes sense. "Agents should explain to clients what to expect in terms of rate increases at renewal time," explains White. "Many insureds have been accustomed to decreases each year, so agents should get with insureds well in advance and prepare them for at the very least flat renewal terms, and getting ahead of the game will really help smooth out the whole process for everyone."
Educating insureds on contract language can be another differentiator. "Find resources to help insureds understand the issues," explains White. "Too often we see claims relating to limitation of liability or lack thereof in a standard contract. If agents were more familiar with contract language and what should be included, and used that knowledge to help insureds, that would go a long way."
Loss control seminars are also very helpful. "It gets insureds on the right track," she adds. "We deal with a lot of smaller, one- or two-person operations, and they aren't as likely to pay close attention to loss control issues. Getting ahead of the game can help large and small firms improve their overall business, and agents can help them do that."
Education can lead to sales opportunities. "By familiarizing customers and prospects with environmental exposures, it's easier to introduce products," Branson explains. "They're more likely to realize they need some sort of site pollution policy and more receptive to the discussion."
Certain trends require special response. "For example, agents and brokers should make sure clients know how to respond in the event of water damage that may lead to mold or bacterial conditions," Richardson explains. "A robust risk management plan could include the use of a full-service pollution insurance carrier that provides pre-event engineering services, including strong water intrusion and mold prevention protocols, as well as post-event support, such as access to an emergency hotline and dedicated claims support."
In terms of regulatory challenges, agents and brokers should be sure that the pollution policies they offer are designed to meet the changing environmental landscape, he adds. "Policy language can often be tailored to adapt to new or revised regulations during the course of the policy period," Richardson notes.
Global regulatory challenges require specific response, too. "Many countries are actively developing and changing environmental regulations, and these changes can negatively impact global companies," Richardson explains. "Agents and brokers can address this issue by offering a global pollution product that can be tailored to adapt to local regulatory changes."
Branson also encourages agents to consider offering a prior existence endorsement. "An insured might not know a problem exists, but that endorsement can address it," he explains. "Without one, they could be left out in the cold."
Carrier performance is another important consideration. "Agents and brokers should find markets that get them what they need and quickly," says Brereton. "We've seen less interest in marketing to as many markets as possible, but rather focusing on those that have expertise and experience."
Busby adds, "It's imperative that generalist agents and brokers have a good relationship with a carrier that can guide and educate them regarding environmental liabilities. The partner should be able to tailor coverages to the specific needs of the client in such a way that it is easy to understand and easy to explain to the client." This serves client needs and helps protect agents and brokers against possible E&O claims.
Adds McElroy, "Brokers and agents will benefit from focusing their energy on markets with a proven track record of stability and performance in all aspects of the insurance transaction."
Agents need to combine product and client knowledge to take advantage of market opportunities. "The coverage can be very complex, and no two carriers' environmental forms are exactly the same," explains Pritchard. The same is true for insureds. "Agents need to have a good grasp of the exposures their clients may have. Nothing sells coverage like the ability to explain why it matters to an insured. Researching the client's business and having claims examples available is often the key to selling the coverage."
Richardson says agents and brokers should make it "standard practice" to offer some form of a pollution product to clients. "Unfortunately, due to pressing matters of daily business, coupled with financial restraints affecting all businesses, environmental coverage is often either overlooked completely or mistakenly assumed to be part of more general commercial insurance programs. This has the potential to be a costly mistake."
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.