Environmental Insurance Industry: Key Trend Overview

In the environmental insurance sector, there's a noticeable upward trend in business with environmental insurance providers, experiencing an annual growth rate exceeding 25%. This growth is fueled by various factors, including increased public awareness of environmental risks. This awareness is largely due to media attention on pollution incidents, legal cases involving PFAS (per- and polyfluoroalkyl substances), and rigorous enforcement by the Environmental Protection Agency (EPA).

Businesses are encountering more contractual requirements for environmental insurance coverage. This includes Contractors Pollution Liability (CPL), Owners Protective Professional Indemnity (OPPI), and Pollution Legal Liability (PLL), which is commonly known as site pollution coverage. Significant growth areas include renewable and alternative energy sectors, energy-related contracting, manufacturing, and distribution. Furthermore, most commercial and some residential contractors are showing greater interest in these insurance offerings.

Environmental insurance providers are broadening their scope, now offering combined General Liability (GL) and CPL policies to a wider range of market classes. This is a shift from the past when such combined policies were predominantly available to environmental contractors or consultants. However, the coal industry presents a challenge for insurers, with many withdrawing due to Environmental, Social, and Governance (ESG) concerns.

In the oil and gas sector, despite several significant losses leading to restrained interest in certain areas, insurance coverage remains accessible. This is primarily through brokers who have extensive market access and strong underwriting relationships.

In the environmental insurance sector, renewal pricing trends are showing variations based on specific lines of business and industry sectors. Pollution Legal Liability (PLL) and Contractors Pollution Liability (CPL) are experiencing relatively stable pricing. In contrast, primary layers and combined General Liability (GL) pollution policies are seeing a slight increase in rates, ranging from flat to a 5% increase. Excess layers are undergoing more significant rate hikes, between 5% and 15%, particularly for auto fleets exposed to pollution risks.

The market is witnessing an influx of new players, with several more poised to start operations in the fourth quarter of 2023 and beyond. At present, the U.S. market boasts over 40 environmental insurance divisions, offering a collective capacity surpassing $300 million. Additional capacity is available from London-based insurers, potentially elevating total coverage limits to around $500 million, though this varies depending on the operational nature and business class.

Three key segments within the environmental insurance market are experiencing notable expansion in underwriting appetite:

• Manufacturing and Distribution: Many environmental insurers are now providing unsupported excess over primary forms that include General Liability (GL) with sudden and accidental pollution coverage. Traditionally, the environmental insurance market offered a combined form specifically for chemical manufacturers and tank manufacturers, which included GL, Products Pollution, Pollution Legal Liability (PLL), and Transportation Pollution. This has now significantly expanded, with insurers offering competitive combined forms for a diverse range of operations.
• Construction: The construction insurance segment has seen substantial changes in recent years. Insurers are now offering a combined GL and Contractors Pollution Liability (CPL) form for most contracting classes. This also includes follow-form excess policies, which align with the underlying primary policy terms.
• London Market: The London environmental insurance market has welcomed a new entrant this year, providing highly competitive rates. Despite this addition, the market remains stable overall, both in terms of capacity and pricing. For new business, pricing is stable, and for renewals, carriers are mostly seeking adjustments in line with inflation.

These developments indicate a broadening of coverage options and increased competitiveness in the environmental insurance market, with a consistent approach to pricing and capacity management.

Limitations and Exclusions in Environmental Insurance

• PFAS Exclusions: Exclusions related to PFAS (per- and polyfluoroalkyl substances) are becoming increasingly common in environmental insurance policies, especially for risks associated with PFAS exposure. With over 6,400 lawsuits filed against manufacturers using PFAS in their products, insurers are cautious. However, coverage is still possible for insured parties who can demonstrate no exposure to PFAS.
• Handling Known PFAS Exposure: There are innovative strategies for managing known PFAS exposure in products. A limited number of insurers are offering multi-year product coverage specifically for historical PFAS exposure, although such coverage is costly. For instance, a carrier was noted to offer a three-year policy with a $5 million limit and $1 million retention, including a guaranteed one-year extension in the absence of claims. The premium for this was $1.2 million, with an additional $900,000 for the extra year.
• EPA Regulations on PFAS: The Environmental Protection Agency (EPA) is in the process of establishing acceptable PFAS levels. Once these standards are set, they will likely lead to mandatory cleanup operations, potentially increasing demand for environmental consulting and contracting services.
• Impact of Social Factors: The environmental insurance market is also being influenced by social dynamics. The EPA’s environmental justice initiative, which focuses on cleanup efforts in low-income and disadvantaged communities, is leading to increased fines and scrutiny for industries operating in these areas. Additionally, non-governmental organizations (NGOs), often backed by litigation funding, are increasingly filing lawsuits against alleged polluters. This trend underscores the growing interplay between environmental policy and social considerations in the insurance landscape.

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