Over the past decade, there have been numerous disruptions,including insolvency, exiting of capacity, reduction of policyterms, and elimination of products in the Environmental insurancemarket.

This has created opportunities for some carriers that neveroffered Environmental insurance tostep in and begin to offer coverage that they did not previouslyhave in their portfolio of products. Although in the short termthis may bode well for clients seeking Environmental insurance, inthe long run this may cause additional fluctuations in theEnvironmental insurance marketplace.

Future quality reductions

Before we can discuss why there may be future quality reductionsfor Environmental insurers, it might be helpful to review some ofthe criteria that rating agencies use to judge the quality of acarrier. Some of those factors include:

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  • Adequate capital — making sure there isenough money to absorb unexpected losses. This includes enoughmoney to satisfy regulators, policyholders and rating agencies. Inaddition, making sure the proper kind and amount of reinsurance isin place is also critical to ensuring that the company has adequatecapital.
  • Profitability — consistent profitabilityhelps to ensure that a carrier will be able to pay claims. Consistent profitability is critical for any company, but inparticular for the investment arm of insurance companies and therequired credit-worthiness required to continue to make theirinvestments.
  • Quality of management — the skill andexperience of underwriters to write profitable business isimportant for a good quality insurer.
  • Adequate reinsurance — this factor istied to adequate capital. It is important that the insurerpurchases the correct kind and amount of reinsurance coverage.

These are just a few of the factors that may contribute to thequality of an insurer. Other factors may include the credit ratingof the country that the insurer is domiciled in, the credit ratingof any company that the insurer is either tied to or a part of, andthe legal/regulatory environment of insurance carriers in general.Environmental insurers in particular have a few other factors whichmay contribute to their quality such as watching for and preparingfor emerging issues associated with environmental liability thatcould arise out of:

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  • New environmental regulations.
  • New technologies that may detect hazardous substances insmaller quantities.
  • Public access to environmental information that displays, forexample, the type and amount of hazardous materials facilities aredischarging.
  • More press about environmental hazards.
  • Court cases related to toxic tort claims on the rise.

Environmental insurers are reporting that the number of claimsthey see has increased steadily year over year, which means thatnew Environmental insurance insurers have to be well equipped tomanage the factors that may affect their quality rating.Oftentimes, new entrants in the Environmental insurance arena usethe resources of their standard lines underwriting divisions.Although these standard lines divisions are well versed in standardlines of coverage, they often do not have the experience orexpertise to determine whether or not a certain risk is a goodcandidate for environmental insurance. In addition, some of thesenew entrants do not have dedicated, in-house environmental claimsdepartments.

If the profitability of one of these new entrants' starts todecline, it is likely that they will implement controls into theirproducts, often either via more aggressive risk control activities,restrictive endorsements, higher deductibles, higher premiums, orthe elimination of some products all together. If these controlsbecome too expensive or restrictive in terms of coverage, this maycontribute to the erosion of their profitability and subsequentdecline in their quality.

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Environmental insurance policies are not all created equaland some of the differences in the policy forms may have a hugeimpact on the management of a client's risk. (Photo:iStock)

Effect on brokers and clients

How quickly an insurer may go from being a viable insurer to onethat is not financially stable and under government supervisionvaries.

If an insurer's surplus falls below a certain threshold, theinsured's state insurance department may step in and takepossession of the company and its operations, including payment ofclaims. If, in spite of all of the insurance departments' attemptsto bolster the carrier and the carrier still fails, they will gointo liquidation.

If a carrier goes into liquidation, this usually results in thecarrier's business terminating, which means that the insurer'scontracts will terminate as well. In that case, the state guaranteefund will take over management of claims against insurance policiesas well as claims from creditors.

Because Environmental insurance is a specialty line, if anEnvironmental insurer goes out of business, the broker will have toscramble to put another policy in place. Unlike standard insurancelines, Environmental insurance policies are not all created equaland some of the differences in the policy forms may have a hugeimpact on the management of a client's risk.Some of the substantive differences include policy triggers;exclusions in some of the forms for specific pollutants, such asmold or asbestos; policy terms addressing extended reportingperiods; cancellation provisions; who is an insured under thepolicy; and coverage extensions such as business interruption,transportation coverage, and non-owned disposal site coverage.

A broker's integrity in the eyes of their client will likelydeteriorate if they the quality of their carrier declines to thepoint that they have to seek coverage elsewhere. Clients expectthat their broker periodically evaluates their carriers andmaintains close contact with these carriers in order to evaluatetheir quality.

Related: 5 keys to navigating Environmentalclaims

The obvious impact to a client in the event of an insurer'squality deterioration is the likelihood that there will not besufficient funds to pay for their claims. What may not be soobvious is that very often, a client may use Environmentalinsurance as a tool to improve their cash flow so they can expandtheir business, upgrade their facilities, or other needs. If theirEnvironmental insurer fails, they may be compelled to apply thefunds that they were going to use for expansion, upgrading, oranother use for environmental risk management expenses.

Another effect on clients may be that, under certainenvironmental regulations, some types of activities require that anentity be able to show proof of financial responsibility. If theyare using Environmental insurance as their proof of this financialresponsibility, their operating permits may be compromised if theirEnvironmental insurance carrier fails.

Ways to ensure quality

There are a number of ways to ensure that the quality of aninsurance carrier is maintained in your clients' Environmentalinsurance programs.

Regularly discussing with carriers their underwriting appetiteand any changes that they might be making during the course of theyear is helpful. Brokers that are familiar with environmentalexposures will maintain an open dialogue with underwriters abouttheir risk appetite and subsequent claims.

In addition, it is prudent to make every attempt to negotiatewith underwriters so that a procedure is in place to address anyrating changes that might take place during the policy term andhave the ability to add coverage clauses to the policies already inplace that will address future rating issues.

Related: 8 steps to take when picking a consultant forEnvironmental coverage

Ursula Knowles is assistant vice president of informationdevelopment of Charlottesville, Va.-based Beacon Hill Associates Inc., a broker andprogram administrator specializing in Environmentalinsurance.