The big story of 2016 that no one predicted was AIG's sudden and stunning exit from the pollution legal liability marketplace (i. e., environmental site liability) without warning. This caused shockwaves in the industry. AIG, the "inventor" of pollution legal liability, had written some of the toughest risks and created unique solutions, then called it quits after more than 30 years of leadership in this area.
While AIG still had tremendous market share even after five years of unprecedented growth of insurer entries into the industry, its exit was shocking yet somewhat of nonevent for 80% of the risks. AIG's talent was quickly absorbed across the environmental industry. The real questions remain: If AIG couldn't be profitable in this space after collecting 30 years of actuarial data, what carrier might be next? And more importantly, when will the "musical chairs" stop and rates start to rise?
With all the headwinds in 2016, including a significant rise in claims across the industry with volumes of indoor air quality claims for mold, Legionella, and vapor intrusion, the market adapted extremely well. AIG's exit will continue to play out in 2017, with the shakeout of the industry and with regard to whether current rates can produce profits and be sustainable. We predict profitability will be, in effect, postponed because there are simply too many players and thus, increased capacity.
We don't anticipate dramatic rate increases. Therefore, we are confident that there will be continued growth with a soft market in 2017 for most classes or risks, except higher risks such as petrochemical, oil and gas, power and utility, and mining. There will also be some measured constraints for certain higher real estate risks such as hospitality, and indoor air quality, with the potential for higher retentions and coverage limitations.
The market today
- Highly competitive
- About 40 insurers
- More than $600 million and relentless growth. There are more new players, including some limited London market participation after decades of no interest. All signs point to more growth.
- Capacity varies by line and by industry segment. Tougher classes, such as energy, risks from downstream to upstream, and power and utility risks, may have significantly less capacity as the U.S. Environmental Protection Agency (EPA) increases its scrutiny of these industries' effect on air and water quality.
- The #1 trend to watch is the skyrocketing number of claims. Claim frequency and severity continue to rise double digit year over year for insurers. All types of claims are occurring, but there is significant growth in indoor air quality issues, such as mold and Legionella in hospitality and real estate settings, as well as vapor intrusion claims (i.e., vapors from historical contaminants in the soil and groundwater entering buildings). There has also been a substantial increase in business interruption and extra expense claims.
- Transactional risks 10-year term policies for pollution legal liability are still available in the market for transactions, but only from certain insurers. There is more movement to align environmental insurance policies with representations and warranties coverage, which may include some limited environmental risk.
- "Excess of indemnity" deals, i.e., coverage written to backstop an environmental indemnity in the event it fails, are becoming more common.
- One-year policy terms are becoming the norm for difficult risks, such as day-to-day operations of energy, mining, petrochemical, power, and utility firms. These one-year terms will create volatility for these classes of business and increase the risk of gaps in coverage depending on timing of a loss.
- There is more global awareness of environmental liability, and the laws in other countries are becoming more stringent and more like those in the U.S. This is resulting in companies buying more global policies.
- With a booming construction marketplace, the demand for contractors' pollution liability continues, making the marketplace highly competitive. Prices continue to drop with no floor.
- The marketplace is saturated with opportunities from a new and diverse set of prospective policyholders, as well as the replacement of policyholders from AIG's exit. This translates into slower turnaround times for quotes.
- Coverage for complex mergers and acquisitions, contaminated properties, and Brownfield projects require more time in the market to carefully customize policies. Losses on policies written for redevelopments have caused insurers to become tougher on insurance terms regarding contamination. Policies can include many restrictions along with a push for short terms.
- Water quality: Lead in water, i.e., the Flint, Michigan water crises, and other high-profile industrial spills, show the vulnerability of water supplies and the significant financial and reputational consequences. Expect environmental justice cases to continue rising and our cities’ water treatment systems to be scrutinized.
- Environmental terrorism: This form of terrorism, including nuclear, chemical, radiological, and bioterrorism, is on the front burner for municipalities and other public entities.
- Emerging threats: Legionella has been a significant problem for some cities. Also, new bacteria, viruses, and brain-eating amoebas are causing stirs between what can be covered on environmental policies versus casualty coverages.
- Product pollution liability risks: These risks are coming into the forefront, especially higher risks that have big consequences if a product fails and causes personal injury to consumers or results in lawsuits. Marketplace and capacity are more limited. We expect to see a bigger push toward claims-made coverage for tougher chemical classes of product pollution.
- EPA — new targets: Emerging chemicals and lower detection levels are creating new risks from perfluorooctanoic acid (PFOA) coating used in Teflon and carpeting, etc., to pharmaceuticals. Liability continues to become more stringent as science and technology advance.
Forecast for 2017
Rates will be fairly stable, but will vary by coverage line. We expect:
- Pollution legal liability: 5% decrease to 5% increase
- Contractors' pollution: Flat to 10% decrease
- Combined general liability and pollution: Flat to 5% increase
Demand is growing 30% year over year, while the market remains stable and highly competitive.