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China's Compulsory Environmental Pollution Insurance Plan Could Kick-Start Environmental Liability Market in Asia

Source: BestWire

Posted on 07 Jun 2013 by Neilson

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Environmental insurance market in ChinaEnvironmental liability insurance growth in Asia has been hindered by an immature regulatory system, along with a lack of sufficient risk data for pricing, according to industry analysts. But a recently introduced pilot compulsory environmental pollution liability insurance plan in China could be a new regional market growth engine.

The penetration rate of environmental liability insurance in Asia is "still very low," compared with the United States and the European markets, said Adeline Chua, head of the casualty desk of Swiss Re in Beijing. The introduction of a legal and regulatory framework, and enforcement of risk prevention and management, as well as creating public and industry awareness are the most critical prerequisites to creating opportunities in Asia, she said.

As the regional emerging market leader, China, has recently made environmental pollution liability insurance compulsory for those industries that generate and discharge heavy metal pollutants. An industry consultant expects this move will help promote the business and increase premiums.

"If companies are not properly insured as requested, they would not be able to pass various approvals for operation and would have other disadvantages. This could encourage other companies with high environmental risk to adopt the ELI," said Hong Kong-based senior analyst Wenli Yuan with consultancy Celent. "The premium for the environment liability insurance will also be stimulated to grow fast.

"To capitalize on the growth opportunity, insurers needs to develop attractive products, apply risk-based pricing and improve pollution control management technologies and skills," said Yuan.

The country introduced the pilot ELI program in 2008, but it was not a compulsory plan and participation was low. For example, only 1% of the targeted enterprises in central China's Hubei province enrolled in the program, noted Yuan, claiming reasons for the low enrollment include "companies lacking of funds, insurance coverage was limited, industry-based pricing was not fair to companies that had better risk control in place, the claim amount was too low, which meant that the government would take the responsibility for largest claims."

Swiss Re sees different paces of ELI development in Asia. Chua said although there is no public data available to assess the current market volume in the region, the market potential remains essential. Australia and Japan are more comparable to Europe. Markets like China, Taiwan and South Korea also have some development, while some regional markets like India are "still at an early stage" of the development.

Chua said for example, in South Korea, the Ministry of Environment is preparing to enforce EL as a "statutory requirement" for various industry segments and has invited the insurance industry to discuss a suitable EL product, while other countries, like China and India, more effort by the various stakeholders would be needed.

New economies arising from Southeast Asia are expected to be the next attractive market. The 10 member countries of the Association of Southeast Asian Nations "present significant growth potential, however this is a long journey," said Chua. "It takes various stakeholders, such as the government, corporations and insurance companies to work together."

Aside from industrial accidents or pollution, natural disasters play a role in the market. "Natural catastrophe events do often release pollutants. For example, pipelines crack after earthquake, leakage of oil tanks after flooding, and so on," said Chua. "However, from the recent Tohoku event in Japan, we have not seen any liability or claim arising out of pollution or contamination caused by it.

"Japan has experienced serious environmental pollution in the 1960s, which was not due to natural disasters but more of industrialization. And since then, they have set strict regulations to protect the environment. So far, we observed that ELI has not been very popular," she said. "The reason is not only the need is low, but also the coverage is rather narrow while the cost of administrating and effecting an EL policy is rather high. Thus, we have not seen an increasing demand for ELI in Japan."

Insurers who are providing a specific product niche could still capture the potential opportunity in Japan, however. U.S.-based specialty lines insurer Ironshore Inc. earlier noted the Japanese specialty lines business is still "not" very developed at the moment, in contrast with the maturity of its overall insurance market. The company in April won regulatory approval to operate warranty and indemnity product through Lloyd's Japan, while targeting further expansion in Asia.

Insurance policy definitions of pollution are generally not limited to regulated hazardous or toxic substances, but also include broadly defined irritants, contaminants and pollutions.

Insurer Zurich noted in a paper nearly any enterprise can be at risk for environmental claims, which can be catastrophic in terms of the amount of damages awarded and the cost of defending against claims. It added the possible impact of such claims and/or associated litigation "could affect a company's balance sheet or a diminution of property or other asset values, or loss of reputation and the diversion of management's attention from the core business."