The August 2011 edition of Benchmarking Trends analyzes environmental insurance, specifically policy term purchasing trends and historical aggregate limits for pollution legal liability (PLL) and contractors pollution liability (CPL) risk.

Environmental

Pollution Legal Liability

Policy Term Purchasing Trends

Purchasing Trends Monitor

Since 2009, companies have purchased short-term pollution legal liability (PLL) and contractors pollution liability (CPL, excluding project) policies in increasing numbers, rather than securing long-term policies, as was the historical norm. Short-term policies are defined as policies with terms of three years or less; long-term policies are typically greater than three years. In the second half of 2009, 68 percent of PLL policies purchased were short-term. By the first half of 2011, that number grew to 76 percent.

This trend is more pronounced among purchasers of CPL (excluding project) policies. Eighty-six percent of contractors pollution liability policies purchased in the second half of 2009 were short-term; by the first half of 2010, that increased to 97 percent. The trend continued throughout 2010 and into the first half of 2011.



Contractors Pollution Liability

Policy Term Purchasing Trends

There are a number of reasons to explain this trend. For example, there was a decrease in 2009 and 2010 of client mergers, acquisitions, sales, and divestitures, all of which typically require longer term policy periods so that all involved parties can adequately address any environmental liabilities that have been apportioned via the transaction.



Other reasons include:

• There are a number of new entrants in the environmental insurance marketplace, most of which are approaching underwriting with caution. Writing annual or short-term policies is one way to minimize losses with respect to a new environmental book of business.
• Reinsurers typically have more stringent agreements in place with new environmental insurers as a means to minimize their exposures to environmental liabilities.
• Some environmental insurers prefer short-term policy periods that permit them to reevaluate their books of business more consistently. Short-term policies allow insurers more freedom to act in the event a portfolio is adversely affected by an emerging environmental issue, including new regulations, advances in technology that can detect previously undetected hazards, or potential tort claims resulting from public outcry.
• Underwriters frequently refine their policy forms to address emerging issues. Insureds may prefer short-term policies to take advantage of these frequent policy wording changes. Although long-term programs potentially offer insureds premium relief, over time they may not address all of the additional liabilities that may emerge.

Limits Purchased Monitor

For the 12 months ending with the second quarter of 2011, PLL total aggregate limits averaged $9 million for annual term and $13 million for both multiyear and long-term policies. Multiyear is defined as being between one and three years; long term is defined as a policy period greater than three years. Median PLL limits equaled $5 million for annual-term policies, and $10 million for multiyear and long-term policies.

During the same period, CPL limits averaged $8 million for annual and multiyear policies, and $10 million for specific project policies. Median CPL limits purchased for annual term policies were $5 million; multiyear and specific project policies equaled $10 million.

The amount of PLL policy limits purchased is based on an insured's environmental exposures associated with site operations, transportation, and disposal activities. They are an indication of the value of the worst-case scenario with respect to bodily injury, property damage, and cleanup costs stemming from operations at specific locations.

CPL policy limits are based on an insured's (contractor's) activities and contractor annual revenues for practice policies and project revenues for project-specific policies. CPL policy limits are an indication of the value of the worst-case environmental scenario with respect to bodily injury, property damage, and cleanup costs related to contractor activities.

Environmental policy limits do not reinstate annually and can be eroded by various types of pollution conditions affecting insureds' operations. The limits data presented may help insureds determine the general range of environmental policy limits needed, and whether their existing coverage is adequate.

About Marsh Insights: Benchmarking Trends

Marsh Insights: Benchmarking Trends is a monthly newsletter covering purchasing behavior and pricing trends for four groups of coverages: property, casualty, financial and professional (FINPRO), and environmental. Each month we will highlight a key trend or dynamic piece of data for a select coverage and analyze its potential effect on the insurance marketplace. The real-time data for Benchmarking Trends comes from Marsh's Global Benchmarking Portal.

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