2003 Environmental Insurance Market A Year In Review
And
2004 Environmental Insurance Market Forecast

Environmental Insurance Market has another strong year of organic growth.
Environmental Insurance Specialty brokers have mixed results.

The material for this article was compiled from interviews of ERRA members.

The environmental practices of the major retail brokers had the poorest growth in history as they reach market saturation on their sales platforms and some became distracted with personnel changes. In contrast middle market independent agents and specialty wholesalers had a record growth year. This year should be a repeat for the big three retailers and a record year for wholesalers. Expert witnesses will have a banner year as the unintentionally uninsured mold claims reach the retail insurance agents as uninsured professional liability claims. Demand for mold related insurance products and fear of insurance agent professional liability will drive demand for environmental insurance and Professional Liability loss prevention training in the middle market.

Carrier Results
The environmental insurance market appears to have grown about 15% again this year. Typical of the past 10 years, net of rate increases environmental insurance out performed traditional property and casualty organic growth rates by a factor of five. Market penetration is still less than 10% in traditional target environmental insurance accounts and is less than one half of one percent for mold risks. The constraint on the market penetration is still the agency plant where the agents will not spend the time to become functional in this line of coverage. Various educational opportunities on environmental insurance are sponsored by ERRA, for information on these events please contact webmaster@erraonline.org

The biggest changes in the environmental insurance market this year were on the company side. The financial failure of Kemper forced the sale of their renewal book to Zurich. The Kemper book helped Zurich end the year with record results for the second year in a row.

Chubb was forced in mid-year to scramble to replace their environmental underwriting capability due to the departure of key personnel in this area. Chubb expects to have this capability rebuilt in 2004.

A new Bermuda based insurance company Quanta has entered the environmental market with a team of experienced underwriters and engineers in multiple offices across the country. Normally a start up environmental insurer would take years to establish itself as a factor in the marketplace. However with the experience base and skill set of the personnel already on board at Quanta we expect they will have a measurable impact on the environmental insurance market place in 2004.

By line of coverage there was softer demand for loss portfolio buyouts because of a slow economy with less merger and acquisition activity. This was more than made up for in stronger demand from the middle market mostly driven by demand for mold coverage. Forty percent of all of the new construction business at one of the major markets was driven by mold risks.

There is less availability of multi-year policies and the reinsurance market is still very tight.

Claims Results
Remediation cost overrun policies issued in the early days of this coverage line appear to have been under priced. Loss ratios in excess of 200% could develop. Secured creditors insurance is also developing poor loss ratios in some markets. The moral to the story is these coverages had been under priced at their introduction and buyers could have recouped much more in claims than their average premiums. Lucky for the insurance companies buyers also underestimated their risk and did not load up on these policies.

Claims in other lines of environmental insurance appear to be at stable levels.

A quick survey of the expert witnesses working in the litigated environmental claims area provide the following insight. Most mistakes appear to be arising in the application phase of the placement, which then shows up on the declarations page. Their advice is do not let the fine details of the placement take your eye off the fundamentals. Also if you do not know what coverage forms to purchase, find help from an expert in environmental insurance. Relying on an underwriter who may only have knowledge of their own line of coverage can result in coverage surprises when a claim arises. History shows buying an environmental policy is not like buying a GL policy and knowing everything there is to know about GL is not sufficient to serve the needs of the client in environmental insurance.

The Brokers
The environmental practices of the three major brokers continue to dominate the environmental insurance market place with one tenth of one percent of the licensed property and casualty agency force controlling more than 75% of all the environmental business written. The specialist environmental brokerage market is dominated by fewer than 200 individuals. Most prominent underwriters peg that number at fewer than 50 individuals. There are few lines of coverage with such dominance at the top, which supports the theory that without specialty personnel on the production team, very little environmental insurance will be sold in an insurance agency.

There were personnel changes in the environmental practices of the retail brokers that slowed the growth of their book of business. ERRA estimates that one environmental practice grew slightly but did not meet their production goals with their major market, three other practices were flat and all did not do as well on growth as they did in 2002. One environmental practice with hundreds of millions of dollars in premiums grew less than one percent in 2003 after achieving growth of over 45% in 2002.

Acordia and Palmer & Cay added experienced environmental insurance specialists to their ranks in 2003.

Last year reconfirms that without access to specialty resources in environmental insurance and risk management it is almost impossible to develop a significant book of environmental business. Outside of the major practices the majority of the business is produced through agents that write one account. Since there are more than 75 different manuscript environmental insurance policy forms on the market, the chances that an agent will get a one-off placement done right is small. Insurance agents professional liability underwriters seemed to have come to grips with this and implemented pollution exclusions on insurance agency professional liability policies in 2003. They also put in mold "related" claims exclusions, which we think at ERRA will be much worse on the agents.

The wholesale brokerage market continues to upgrade the services offered to retail agents. Significant gains were made in the area of on-line applications making access to environmental insurance fast and easy for the agents. The wholesale market is growing rapidly with a very bright picture ahead of them as thousands of brokers are forced by mold exclusions to deal with environmental insurance for the first time.

Some wholesalers are bringing on the personnel to duplicate the resource expertise offered in the environmental practices of the big four brokers. This will be a significant improvement over the ineffective market access focused value positions offered by wholesalers in the past.

What to expect in 2004
Buy the fourth quarter of 2004, the 10,000,000 mold exclusions delivered by retail insurance agents to commercial insurance buyers in the past 18 months will result in tens of thousands of unnecessarily uninsured claims. A small subset of these claims (still measured in the thousands) will reach insurance agents professional liability policies where they will denied under the new "mold related claims exclusions" on insurance agents professional liability policies. Leaving the agents "self insured" for their client's unintentionally uninsured mold related losses.

Based on what we know about mold claims in the economy and from interviews from mold specialist trial lawyers, insurance agents planning on self-insuring these new professional liability loss exposures can use these benchmarks. The annual average expected loss for unintentionally uninsured mold losses in the customer base is $4,000 per licensed P&C agent with a maximum expected loss in the $250,000 range. Maximum possible loss is $50,000,000. Expect payouts to begin in 2005 and to continue until loss control procedures can be implemented to avoid these claims. The good news for agency managers is it is relatively easy to implement loss control procedures that cost significantly less than $4000 per agent and will make the agency retroactively immune from professional liability claims. ERRA has developed a seminar series designed to prevent mold and pollution related professional liability losses and profitably produce environmental insurance for the agency. The agenda is on the ERRA site at http://www.erraonline.org/moldeoseminar.html. ERRA staff has a limited amount of time available to produce these seminars so if an agency wants to turn mold to gold instead of a money pit in 2005 they should contact ERRA at 608-798-2904 or contact us on the ERRA web site a www.erraonline.org.

This year should be a watershed year for expert witnesses specializing in environmental insurance and pollution exclusions. Mold exclusions are really pollution exclusions for the specific pollutant mold. For 20 years pollution exclusions have been litigated with each side winning about half of the argument. We can expect the same to happen with the new generation of mold exclusions, except now there will be hundreds of times more contested claims.

Expect to see more insurance products to cover mold losses developed. More insurance product availability turbo charges the insurance agents professional liability exposure for leaving their clients unintentionally uninsured for mold damages. The mold market needs to be continuously monitored for new solutions. The ERRA website does this in the members only section.

There will be more demand for environmental insurance on Brownfields with some state sponsored programs being developed. The US government is using more insurance to guarantee fixed cost remediations so there will be more contractors looking for this coverage.

Watch for the development of more expertise within the wholesale business to service the needs of retail agents

ERRA is forming a committee focusing in on Proof of Financial Responsibility issues as required under the environmental and mining laws. There are significant gaps in the efficacy of the current laws and environmental insurance can play a role in solving some of the performance gaps with some of the current mechanisms used for financial responsibility. If you would like to participate on this committee please contact David Dybdahl, CPCU, ARM at dybdahl@armr.net.

ERRA is planning an Environmental Insurance Forum for September. We are still in planning stages of the program and are welcoming suggestions on topics, speakers and sponsors.

Environmental Risk Resources Association

2003 Environmental Insurance Market A Year In Review And 2004 Environmental Insurance Market Forecast

Environmental Insurance Market has another strong year of organic growth. Environmental Insurance Specialty brokers have mixed results.

2003 Environmental Insurance Market A Year In Review
And
2004 Environmental Insurance Market Forecast

Environmental Insurance Market has another strong year of organic growth.
Environmental Insurance Specialty brokers have mixed results.