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

Transcription

1 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

2 EC Workshop The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities Insurance Europe work Environmental liability insurance market Challenges of covering offshore oil The feasibility of a disaster fund Future outlook 2

3 Insurance Europe work Who? European insurance and reinsurance federation, founded in 1953 What? Represents around 95% of European insurance market by premium income Why? Committed to creation of favourable regulatory and supervisory framework for insurers at European and international level. 3

4 Insurance Europe work 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 4

5 Insurance Europe work 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 5

6 EC Workshop The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities Insurance Europe work Environmental liability insurance market Challenges of covering offshore oil The feasibility of a disaster fund Future outlook 6

7 Environmental liability insurance market The EU-wide environmental liability has demonstrated steady growth since the introduction of the ELD Smaller markets Growth in private markets 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 Larger developed markets 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 7

8 Environmental liability insurance market While the market is developing, the following pose difficulties: Few statistics EC has had trouble gathering examples of ELD claims Lack of data available for predicting potential risks No single enforcement Different defences implemented in EU Member States Different scopes of activities considered for strict liability Legal clarity Lack of widespread definition on what constitutes baseline Vague definition for threshhold of damage severity Limited market Environmental insurers have specialised expertise New insurance products being developed for new ELD risks 8

9 Environmental liability insurance market Insurance solutions give flexibility for environmental liability needs Innovation 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 Member State differences 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 Alternatives 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 9

10 EC Workshop The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities Insurance Europe work Environmental liability insurance market Challenges of covering offshore oil The feasibility of a disaster fund Future outlook 10

11 Challenges of covering offshore oil Energy insurance market differs from other insurance markets Limited market Few specialised insurers in the world Global energy insurance market with approx 5B USD capacity Difficult to cover Offshore risks rare yet severe and highly complex Biodiversity in offshore marine waters difficult to quantify ELD challenges Baseline condition of offshore environment not calculable Insurers unable to offer additional cover will limit policies International issues Third countries (non-eu) not bound by EU law International legislative frameworks already exist 11

12 Challenges of covering offshore oil 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 12

13 EC Workshop The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities Insurance Europe work Environmental liability insurance market Challenges of covering offshore oil The feasibility of a disaster fund Future outlook 13

14 The feasibility of a disaster fund 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. 14

15 The feasibility of a disaster fund 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 15

16 The feasibility of a disaster fund Further consultation required to consider the potential impact Equitable distribution of funds Sufficient contributions by industry Fund? Application of polluter-pays principle Expense / efficiency of fund management Vulnerability to multiple, random events 16

17 EC Workshop The environmental liability insurance market and the feasibility of a fund or risk-pooling scheme for industrial liabilities Insurance Europe work Environmental liability insurance market Challenges of covering offshore oil The feasibility of a disaster fund Future outlook 17

18 Future outlook Remaining concerns to address Objective? Moral Hazard Remaining challenges Improve risk management tools 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? 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 riskadverse procedures (rather than mandate insurance). Policymakers must work with stakeholders (ie insurers) to develop market-appropriate legislation. 18

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