The Summit

Beacon Hill Associates A publication of Beacon Hill Associates
Cover Feature

2019 Environmental Insurance Outlook

Much like a ship at sea, the marketplace moves forward leaving a wake behind. This wake, coupled with the current position of the market, points to some interesting activity to watch out for.

In order to develop an understanding of where our market is heading, we first need to review significant developments from the prior term. Much like a ship at sea, the marketplace moves forward leaving a wake behind. 

This wake, coupled with the current position of the market, points to some interesting activity to watch out for.  Of course, new events will alter the direction of the market as well, but even some of these are predictable. Understanding our history remains one of the best ways to predict our future.

As a year, 2018 was significant in the environmental world. Several developing trends matured in a way that left us with a different market than we started with, and a number of new events occurred that added to the disruption.

Trends that have been developing for some time continued in 2018. Principal among those was the role of capital in our industry. Last year continued the influx of capital into the environmental space. 2018 saw several new carrier and MGA programs enter the marketplace, creating more pressure on existing relationships. Somewhat offsetting this was the merger of several environmental players. In the last several years Crum & Forester and Allied World, Liberty and Ironshore, and Axa and XL have all merged into new entities. In 2018 the results of these events were clearly felt for the first time, and the impact was underwhelming. While on paper these aggregations should have reduced the numbers of markets available, the net effect was negligible. The amount of capital deployed in the environmental sector has created a very difficult climate for carriers trying to maintain the profitability of their books.

Another meaningful trend in 2018 was the increase in frequency and severity of true environmental losses. For years the industry has been comfortable in the belief that true pollution coverage was very profitable. In certain classes, this is no longer true. 2018 saw stark reversals by some carriers in their positions on acceptable risk in response to these escalating problems. Leading the way seemed to be mold and legionella related losses for hospitality and habitational risks. For many years this coverage was available and affordable, with several very strong carriers providing excellent coverage. Significant claims have had a direct effect on that, and today finding quality coverage for these risks is far more difficult. Carriers are managing their exposure with limits caps, increased retentions, and exclusions for many of the most prevalent issues.

Another change in the market that was new in 2018 illustrates the sensitivity of the marketplace overall. Carriers began to see losses related to Polytetrafluoroethylene substances. These compounds were used for many years in the manufacture of teflons, fire suppression foams, and other products. Some companies are now actively excluding these constituents, which effectively changes the coverages being offered. This is a great example of carriers fine tuning their products to actually insure what they intend to insure; fortuitous events causing environmental damage.

On a more Macro level, the current administration in Washington has been working for two years to walk back many high level environmental regulations. While this will certainly have a significant long term impact on the regulations that define environmental coverage, we did not see it have an appreciable effect on the market in 2018.

There were many other factors that effected the 2018 marketplace and adjusted the trajectory of the industry. Ageing USTs, shortage of environmental underwriting talent, investment by some standard carriers in building environmental teams, and many more all moved the needle. As we enter 2019, we expect to see many of the trends of 2018 continue to impact the market.

Specifically, consolidations will continue to occur between major carriers. We also expect to see more broker consolidations, thinning the herd of specialty brokers who have the lion’s share of the expertise in the space. Unfortunately, much like 2018, we do not expect either to have a substantial impact on the availability of coverage, or the cost. It will, however, reduce the number of brokerage teams that really understand the products. When specialty brokers get rolled into large generalists, they tend to turn into who they were purchased by, and lose the hard core specialty focus that made them who they were. This should allow true specialty brokers to flourish.

Carriers will continue to respond to increasing claims by trimming their coverage. For many years, carriers have broadened coverage as a way to capture business in a competitive market. 2019 will be the year the tide turns, with companies being far more selective about what they are willing to do, and the terms they are offering. Tighter policies will require a higher level of expertise to navigate them, and to be sure expiring terms match new on key issues.

Additionally, a move towards technology solutions will increase. More markets are working to automate underwriting and processing of simpler, more commodity business. As this trend continues, the availability of coverage will become easier to access.

This creates a challenge, however, due to the unique nature of environmental products. Unlike standard commercial lines insurance, every policy is different, and there is no standardization. General titles for policies certainly describe their intent, but do not equate to anything more than passing similarity. For this reason, agents and brokers need to thoroughly understand the product they are purchasing to determine if it does what their client wants it to. They also need to have a solid understanding of the carrier offering the product. AM Best rating is not the only indicator of quality in this market.

While technology will make access to products easier, it will not do the homework for the agent. Selecting those carrier and broker partners the agent wants to place their business with will remain as important as ever.

Concerns will continue regarding the regulatory climate in Washington. As the current administration strips away protections for the environment, it would seem that the need for environmental coverages would be reduced. While true at a certain level, there are several reasons this will have a negligible effect on the environmental insurance industry.

The first is that state EPAs are the ones who dictate the levels of contamination allowable in a local jurisdiction, not the Federal EPA. Each state has the responsibility to be sure their regulations are at least as stringent as the Federal regulations, but has the freedom to make them more stringent. As Washington reduces protections, may states are not following suit, allowing their regulations to stand at current levels. Over time, some of this will be eroded by special interest groups and their lobbyists, but it’s hard to imagine that the wholesale dismantling of the EPA will continue past the current administration.

The final factor that will continue to drive the environmental market, and offset any concerns about changing regulations, is the continued growth in public awareness. Every day people are very familiar with the dangers of pollution conditions as high profile events continue to occur. Fuel releases, legionella outbreaks, and more are commonplace today, creating a public that is very sensitive to the issue. Businesses know that if they are responsible for an environmental event, they will be held accountable, both financially and reputationally.

These concerns are driving demand for coverage at all levels. General contractors are requiring their subs to carry it. Lenders are requiring commercial mortgage holders to buy it. Distributors are requiring their vendors to provide it, and final retail outlets are requiring it as well. As public awareness continues to grow, so will the tide of demand.

Finally, 2019 will be the year coverage becomes not a luxury but a requirement. Coverage is now clearly available and affordable, and there is no reason agents and brokers should not offer it to all of their clients. As claims trends continue to rise, the combination of demand and availability will necessitate every agent selling it, and every insured buying it. While it will not happen overnight, 2019 will be a significant step forward in the maturation of environmental insurance into a necessary coverage, right alongside CGL, Auto, and Workers Comp. We are not there yet, but all indicators point to that being our future destination.

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