2010 saw a rapid expansion of the environmental/pollutioninsurance marketplace in the face of daunting conditions. Why thisgrowth has occurred, and what it means to an agency, are importantto understand. The performance of this niche clearly illustratesthe efforts being made to find success in our evolving market, andagents that can correctly tap into it will see significant returnon their investment.

Related: Read “BP Spill creates coverage opportunities.”

In 1990, four companies offered dedicated environmentalinsurance products. In 2000 there were closer to 10. At the end of2010, there were at least 40 companies with environmentalpractices. One thousand percent growth over 20 years issignificant, but even more significant is the growth in the last 3years, from 20 to 40. Companies including XL (formerly ECS),Chartis (formerly AIG), Zurich, Markel, Liberty, Chubb and othershave been involved almost from the beginning. In the face of themost difficult market most can remember, why has environmental beensuch a draw for carriers? And what does this explosive growth meanfor the insurance agent?

At the root of the growth in environmental carriers is theunderlying shift in how insurance works. Carriers have longunderwritten to very small profit goals, recognizing investmentincome as the true driver of their profitability for theirinvestors. Equity market returns of 10 percent or greater were thenorm for many years. Carriers generated premium, reservedconservatively, putting that money into IBNR, and saw theinvestment income profits role in. This model served our industryvery well for many years and through many market cycles.

Related: Read “Awareness prompts growth for environmental insurance.”

Unfortunately, this underlying dynamic has changed. Theinvestment market is no longer able to return such generous resultsto its investors, and this is in turn is forcing companies to findtheir profits elsewhere. The only viable solution is to try tounderwrite accounts more profitably than before.

While this seems like a simple task, it is anything but. Due tothe difficult economic environment over the last 3 years, theinsurance industry is struggling to write as much premium as in thepast, not to mention at a greater profit. As whole sections of theeconomy lose value, the insurers that cover them generate less inpremium. With current unemployment figures hovering at just under10 percent, the industry that rates based on payroll has taken areal hit. Adding to this the anemic overall growth of the economy,and you end up with carriers fighting for more slices of a shrunkenpie.

Add to this the reduction of loss reserves atmany companies. Carriers traditionally bring reserves down as prioryear results have allowed, dropping those dollars right to theirbottom lines. Unfortunately, given the lack of investment returns,they are no longer filling that reserve pool back up asaggressively as they once did. The money that eventually came outand bolstered the bottom line is rapidly going away. If a companycan maintain strong underwriting profitability, this is not a hugeproblem. If, however, carriers have to fight for business and writerisks for less than they want to, this can quickly become asignificant long term issue.

The final piece of the puzzle is the dramatic influx of capitalinto the industry as a whole. While the insurance industry has beenstruggling, the promise of a decent enough return excites investorsinto the marketplace, especially compared with the return theequity markets have yielded. Over the last 5 years there has been asteady influx of money into the insurance industry, all of itseeking a home and a respectable ROI.

So how does this all lead to an increase in environmentalprograms over the last several years? The answer is simple. Whenenvironmental business was first written in the late '70s and early'80s, carriers had no idea how to price it. Coming off of horrificasbestos-related claims, carriers were very cautious in how theypriced these products. Over the intervening 30 years, it has beenshown that environmental exposures are not significantly morechallenging than many other casualty lines. While there are ofcourse exceptions in certain areas, the general consensus is thatenvironmental risks are more profitable than many other maturemarket segments.

This is where things get interesting. While this may be true, itis by no means universally true. Over the last 10 years carriershave blended coverages to sell under the heading “environmental.”Many of these combine CGL and products with site or contractorspollution. While the environmental component of the package may infact be profitable, there is ample evidence that casualty businessis, and will always be, casualty business. If you write toughproducts, you are going to have some real claims. If you write acombined CGL and contractors pollution policy for a tankinstallation contractor, you are more likely to see claims frompeople falling into holes than you are from pollution. So while“environmental” insurance has proven itself to be very profitableover the last 30 years, it is mutating into something differentwhere the genes of its more standard components may well bedominating the results.

Another challenge is the people. Environmental insurance has hada very short and squat pyramid; broad base but not much room at thetop. Over the last 10 years many talented men and women have risenin the ranks of environmental insurers. Many of them have beenlooking for the next step into senior management. Heading anenvironmental unit is often the crown jewel of someone's career.Many of these people are looking hard for the opportunity to jumptheir careers to the next level, and are aggressively reaching outto carriers without an environmental unit to try to create the jobthey seek. All of the above pieces have lined up over the lastseveral years. We have an influx of capital, we have carrierslooking for ways to write more business more profitably, we have amarket segment with a history of profitability and we have peoplewilling to lead these new divisions. Given all of the above, it's awonder we don't have even more markets focusing on environmentalaccounts.

What does this mean for an agent? Many may think choice isa good thing, and in many respects it is. Environmental insuranceis a class of business where individual underwriter appetite oftendictates what a carrier will write, or at least will try to writeaggressively. Having only one or two relationships leaves an agentat the mercy of one or two individuals. If, on the other hand, anagent can go to 40 different markets, he or she should never haveto worry about any single underwriter blocking the path tosuccess.

While on the surface this makes some sense, it is a verydangerous path for an agent to follow for a few reasons. Thecharacteristics of a good carrier relationship differ for manyagencies, but in general they include carrier stability andcommitment to the line, underwriter knowledge and responsiveness,solid claims handling system and track record and proven servicecapabilities. All of these components add up to not only successwriting an account, but long-term success in servicing andmaintaining the business. Compounding growth only comes throughhappy insureds renewing year after year. If claims are not beingpaid and endorsements not delivered, it makes every renewal a fightinstead of an affirmation.

Determine your partners
The environmentalmarketplace has grown quickly, and the development of many programshas been somewhat mixed. There are surface indications that agentscan review to determine if a market will be a good partner forthem.

The first is the commitment carriers have made to environmentalinsurance. Are they in this for the long haul or are they simplytrying to write some quick business? A gauge of this commitment istheir staffing situations. How many employees have they hired? Howmany offices or locations do they have? Are they making enough of acommitment for an agent to know that they can adequately servicethe business they are writing, and that they are in it for the longrun? We have seen markets enter this arena recently with two orthree employees, and we have seen others enter with 15. Clearly oneis making a bigger commitment than the other.

A similar issue is the claims handing staff. Has it hired atleast a few key claims people to handle environmental claims?Environmental claims are not the same as regular casualty claims,and people with experience in this area are critical for long termsuccess of a program.

The final key component is management and underwriting staffing.Is the person the insurer hired to put the program together anexperienced environmental and insurance professional? A seniorunderwriter making the move to management can be fraught withproblems, as the management role is so complex. Does the personcoming on board have the background to be successful? Also, who hasbeen hired as underwriters? Do they have experience and credibilityin the marketplace? Again, seasoned experienced underwriters and astructure to enable them to succeed are very important.

Agents need to partner with companies that are committed to theline of business. A company that hopes to be doing this in 10 yearsis far more likely to responsibly deal with the issues that willinevitably come up than one who is in it for short term premiumvolume. While the above do not guarantee commitment, they certainlyindicate it.

Once an agent is satisfied with this, the next importantcomponent is reviewing and understanding the coverage beingoffered. No two environmental policies are the same, and there ishuge diversity in the type of coverage being offered. Knowing whatyou're offering the client is crucial, certainly as crucial asknowing the carrier you are offering it from.

Given the above, an agent may find that thebest way to access environmental carriers is to go through aspecialty broker. In the current marketplace these brokerstypically pay the same commissions that direct carriers would, andgive the added advantage of having done a lot of the above leg workfor the agent. The same criteria need to be utilized to make thisselection as was used for the carrier review. Longevity,commitment, expertise, reputation are all import and easily judgeditems. Spending a few moments researching the web and talking toother agents and carriers can bring you excellent choices forpartners.

The environmental market is still growing fast. One of thepositive offshoots of so much competition is a huge increase inmarketing. All of these carriers, and the many brokers focusing onthe line of business, are marketing the coverage. This is leadingto an increased awareness at all levels. More job specs arerequiring pollution coverage, as are landlords, lenders andattorneys. This increase in exposure is a definite plus for agentsseeking new coverages to offer their clients.

Last year's BP oil spill has been yet another driver ofincreased interest. Many of the business impacted by the spill,from coastal property owners to people making their livings alongthe Gulf Coast, could have been protected by the rightenvironmental coverage. Many businesses have learned from thissituation, and other lesser-known ones in their own back yards, andare reaching out to their agents to discuss what coverage isavailable to them. Most insureds can talk about a similar businessor an associate they know that has had an environmental issue comeup. This increases the population buying these products fromhundreds in the early days to hundreds of thousands today.

The evolving insurance industry has challenged many but has alsocreated opportunities unlike any seen before. Agents wield a greatdeal of power in this market, being the gate keepers to theirclients. With so many agents and carriers scrambling to findbusiness, and in some cases willing to do almost anything for it,the potential fallout is huge. Inadequate coverage, carriers goneafter a year or two, and similar problems will force many agenciesand carriers to the sidelines. Those that take time to consider thechoices they are making, and the long term ramifications of them,will rise above their competition. This is already beginning tohappen, as some are seeing significant growth in new business andstrong renewal retention while others are falling fast. As theeconomy continues to improve, and with it the equity markets, thefrenzy of the last few years will fade, and competence andprofessionalism will prevail. A solid environmental strategy isonly one component, albeit an important one, of the thoughtfulagencies' strategy to continue to succeed in our newmarketplace.

Read Bill Pritchard's previous article “Awarenessprompts growth for environmental  insurance.”