the environmental liability insurance market and the...

The environmental liability insurance market and

the feasibility of a fund or risk-pooling scheme for industrial liabilities

Carmen Bell

Policy Advisor, Non-life Insurance

EC Workshop

Brussels, 7 November 2012

The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities

EC Workshop

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Insurance Europe work

Environmental liability insurance market

Challenges of covering offshore oil

The feasibility of a disaster fund

Future outlook

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Who?

What?

Why?

European insurance and reinsurance federation, founded in 1953

Represents around 95% of European insurance market by premium income

Committed to creation of favourable regulatory and supervisory framework for insurers at European and international level.


34 national associations

26 EU member states

6 non-EU markets

Croatia, Switzerland, Iceland, Norway, Turkey, Liechtenstein

2 associate members

Serbia, San Marino

3 partners

Russia, Ukraine, Kosovo

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Environmental Liability Taskforce Insurers, reinsurers, risk managers,

environmental experts

Extensive cooperation with EC Workshops, presentations, meetings

Publications Navigating the ELD (2009)

Working with EU institutions Expressed public support for EC October 2010 ELD report regarding infeasible evidence for need of ELD mandatory financial security

Issued comments on recent EP amendments to EC proposal for offshore oil safety

Meetings with policymakers

18 September 2012 “breakfast meeting” with EC and EP representatives


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Future outlook

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The EU-wide environmental liability has demonstrated steady growth since the introduction of the ELD


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Countries (eg LT, LV, RO) still experiencing difficulty with liability legislation and growth of products

Private markets in places like the UK still assesing potential for growth but function well upon demand

Places like DE have a long history of building insurance products for strict environmental legislation.

Pools (eg ES, FR, IT) are becoming stronger and currently cover numerous environmental risks

Smaller markets

Growth in private markets

Larger developed markets

While the market is developing, the following pose difficulties:

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Few statistics

No single enforcement

Legal clarity

Limited market

EC has had trouble gathering examples of ELD claims Lack of data available for predicting potential risks

Different defences implemented in EU Member States Different scopes of activities considered for strict liability

Lack of widespread definition on what constitutes “baseline” Vague definition for threshhold of damage severity

Environmental insurers have specialised expertise New insurance products being developed for new ELD risks


Insurance solutions give flexibility for environmental liability needs

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Susbstantial advances made in product development

Free market encourages freedom to contract with customers

Insurers are able to advise on risk exposure and negotiate cover needs with their insureds

Innovation

Different liability exposures prevent risks from being standardised

Different liability cultures introduce a variety of complex risk portfolios

Different execution of ELD by public authorities means risks are perceived at various levels

Member State differences

Allow a flexible political environment to stimulate competition

Encourage market demand

Focus on raising ELD awareness

Work toward an EU database for collection of relevant data

Alternatives



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Energy insurance market differs from other insurance markets


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Limited market

Difficult to cover

ELD challenges

International issues

Few specialised insurers in the world Global energy insurance market with approx 5B USD capacity

Offshore risks rare yet severe and highly complex Biodiversity in offshore marine waters difficult to quantify

Baseline condition of offshore environment not calculable Insurers unable to offer additional cover will limit policies

Third countries (non-EU) not bound by EU law International legislative frameworks already exist

“Unintended consequences” of mandating insurance cover

Insurers discouraged from covering offshore oil operations

Long-tail damage can last for decades, for which the ELD would require restoration back to “baseline condition”

Facing an inability to offer long-tail cover, alongside solvency requirements and investor obligations, insurers likely to leave the market

Greatest impact on SMEs

For those insurers remaining in the market, the cost of providing insurance for marine waters would rise significantly

SMEs unable to afford the increased cost of insurance may be forced to leave the market

Investor capital in insurance diminished

A sector handicapped by infeasible regulatory obligations is not attractive to investors

Volatile offshore oil market combined with strict insurance measures likely to discourage investors

Lack of investor capital leads to reduced underwriting capacity


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EC Workshop

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Questions: Is there a need for setting up a fund?

What is the objective of the current BioIS study?

What is meant by “fund”? How will “traditional damage” be considered in this study?

BioIS 2010 report on ELD effectiveness suggests that risk awareness by operators was the main problem.

A fund could lead to decreased awareness – less reason to seek out cover.

Decrease in demand for cover can lead to decrease in offers of insurance.

Is further consultation on this issue required?

YES!

Questionnaires may need to be designed differently and for different stakeholders (eg operators, insurers, reinsurers, federations).

Insurers can provide input that differs from operators not experienced in the area of providing financial security.

Operators will need to address their own feasibility to contribute to such a fund.

Some parts of current study questionnaire are difficult for insurance companies to answer due to competition reasons.

A real view of the feasibility of a fund more likely to arise from a longer consultation period.


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Consider the impact of a fund in relation to the insurance market

Moral Hazard

Operators may assume the fund will cover them, regardless of 100M EUR cap.

Facing budget constraints, operators may be reluctant to add to their costs (on top of a fund “levy”) by purchasing liability cover.

Fund could deter operators from seeking out newly developed insurance solutions.

Consider that fund must accomplish the same conditions and pre-requisites that are required for insurance industry.

Sufficiency of building capital for the cover of potentially large, severe events.

Ability to calculate potential risks and allocate the need for capital.

Efficient / quick distribution of funds so as ensure speedy cover of damage /losses.

Disruption of the insurance market

An improperly designed fund can interfere with the operation of strong environmental insurance pools (eg FR, ES, NL, IT).

The insurance industry is still in a position of continuing to build solutions.

Experienced personnel and necessary professional qualifications

A fund can affect insurance pricing, as less reliance on insurance may mean less capital gained by insurers for the cover of potentially severe environmental risks


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Fund?

Equitable distribution

of funds

Application of polluter-pays

principle

Vulnerability to multiple,

random events

Expense / efficiency of

fund management

Sufficient contributions by industry


Further consultation required to consider the potential impact


EC Workshop

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Remaining concerns to address

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What is the basis for introducing a100M EUR cap?

What will occur if operator goes insolvent, but returns to solvency in the future

Who will maintain the fund and how will the financial sector be involved?

Objective? Moral Hazard Remaining challenges

Improve risk management tools

What will the EC do to prevent “moral hazard” (ie where operators rely on fund in lieu of improving safety measures or purchasing insurance?)

An annual “fund levy” may strain operator budgets.

Greatest impact on SMEs, as insurers will be unable to offer products if overall demand for insurance lowers.

Environmental liability insurance market still “niche”, but steadily developing.

Fund can disrupt growth of markets already showing improvement.

If fund is set up on EU level, it could neglect specific Member State needs.

EU should invest in database to collect information about ELD risks.

Encourage offshore oil companies to implement more safety management and risk-adverse procedures (rather than mandate insurance).

Policymakers must work with stakeholders (ie insurers) to develop market-appropriate legislation.

For more information

[email protected]

www.insuranceeurope.eu

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