Environmental impairment liability products have been around for a long time but have only recently begun to make waves in Asia. We spoke to Allianz Global Corporate & Specialty’s Mr Arthur Lu about how pollution coverage has been trending in Asia, and how climate change has altered perceptions.
Environmental impairment liability (EIL) products have been around in the US and Europe markets since the 1980s but are only recently becoming more prominent in Asia.
“While the market for EIL products is not as big as in the west, we are seeing more enquiries in Asia and it is an emerging trend here,” said AGCS Global head of EIL Arthur Lu.
More governments across Asia have been seeing the need to protect the environment within their borders, with China, South Korea and Vietnam mandating EIL coverage to varying degrees. “We are starting to see some local governments implement measures to protect the people living in their countries against possible incidents or events, which is encouraging,” he said.
Mandated schemes
So far, three countries have mandated some kind of environmental protection insurance for industries within their borders. In South Korea, a mandatory pool scheme was introduced, covering a broad swath of industries and incidents. In China, the scheme is narrower, focusing only on a few industries.
Vietnam was the latest to introduce the mandate but has yet to set up any kind of mechanism. “Currently, it is left up to the free market and the challenge is that there are not yet any specific requirements for capacity or coverage. It is still in the very early stages of the process, so I think it is going to develop with time,” he said.
Rising demand
Outside of any compulsory government schemes, EIL generally operates via the free market. At that point, Mr Lu said that the demand varies by industry. “It is the risk managers and board of management who are looking at their company’s exposures and assessing whether it makes sense for them to be covered by a standalone pollution policy.”
The most common industries that seek EIL cover are construction, manufacturing (especially those that utilise a lot of chemicals, such as automobile parts and others) and real estate (especially in skyscrapers, which have closed environments, where janitorial chemicals could leak, or heat and humidity could cause mould to grow in the HVAC systems).
He also said that in Asia, most general liability policies will have an element of pollution coverage on a sudden accidental basis. Most clients, in his experience, feel that that is enough to cover their exposures.
“What we have been doing is try to educate the market through our brokers and explain why the general liability cover is not enough. There are a lot more situations where that policy would not respond, like business interruption on a first-party basis, clean-up costs, or gradual pollution,” he said.
However, he has noted that with the increased awareness in the importance of climate change and environmental protection, companies are more aware of their ESG impact. While the policy wordings of EIL programmes have generally remained unchanged in the past decade, the demand has seen an upwards trend.
“A lot of companies are realising that they need to do better. It forces a lot of industries to be better in terms of managing their water, waste and even emissions. These are factors we look at when we are underwriting, and we also see an increase in appetite for EIL cover due to this shifting mindset,” he said.
Typical coverage
An EIL product typically covers an unexpected accidental pollution act, which is basically defined as something that damages the environment. This could be something as obvious as a leakage from a waste disposal facility that leaks into a nearby body of water, or something more obscure such as a delivery truck full of milk toppling over on a busy highway.
EIL products would cover the cost of clean-up of the affected areas, and possibly any other litigation if the company is determined to have been negligent. In most cases, the land that is affected is public land, which means that the local authorities are the ones to determine the damages, said Mr Lu.
There have been more subtle cases of accidental pollution, however. He described a case in Europe, where a brewery had been discarding its wastewater into a nearby pond. While the water was uncontaminated, it had a sitting temperature two degrees Celsius higher than the temperature of the pond. Over time, the difference in temperature led to the formation of a specific type of algae, that was invasive to the pond’s ecology.
It is for such cases that EIL products are most valuable. Especially with the fragility of the environment in this current age of rapid climate change, companies could very easily find themselves unknowingly perpetrating an unseen pollution act. A