Environmental insurance taking off as new risks influence financial success

Environmental insurance

By EHUD ZION WALDOKS
AON suits 248.88 (photo credit: )
AON suits 248.88
(photo credit: )
Where there is risk, there's insurance. Where there are new categories of risk to be considered, insurance companies will follow. So it is with environmental risk in recent years. Environmental regulations have proliferated quickly, with 17,000 rules in force around the world, according to Peter C. Breitstone, chief executive officer and managing principal of Aon's Environmental Services. Israel is not excluded from this number, having passed 130 environmental laws in recent years. Aon is the world's largest risk management company, with a thriving practice in Israel, as well. Speaking to the The Jerusalem Post during a recent visit to Israel to deliver a seminar, Breitstone explained that with the increase in environmental regulations, the corresponding level of risk has gone up for companies looking to do business in the modern arena. "There's greater concern for environmental issues among customers [and] among public interest groups," Breitstone told the Post. "With the advent of global instant communication through mediums like Facebook and Twitter, companies are becoming more and more concerned that if they don't treat environmental problems, it will get out and harm their reputation." "A business is like an iceberg. It used to be that 80% of assets were fixed and 20% were in market caps. Today, it's the reverse. Seventy percent are intangibles, like brand and reputation," he said, adding that "with fixed assets, you could buy insurance. Insurance doesn't cover intangibles. Instead, companies need to undertake risk management." Breitstone lectures frequently about environmental issues and the damage from climate change, as well as insurance and risk factors. Sometimes "perception is greater than the actual risk," he said. Environmental risk insurance policies can help protect companies from significant loss due to natural disasters. In 2008, global environmental premiums were estimated at $2.34 billion, according to Breitstone's presentation. That number is expected to grow to $3.26 billion by 2012. Environmental insurance is becoming big business worldwide. In Europe, for example, new environmental liability directives have passed recently which now make companies civilly liable for damage to habitats and biodiversity. In addition, companies are required to restore biodiversity. Environmental protection has never gone so far, said Dr. Simon Johnson, Aon director and practice leader environment EMEA (Europe, Middle East and Africa). That understanding is gradually gathering steam in Israel, as well. Breitstone pointed to a new Israeli banking regulation set to go into effect next year which mandates that all banks have to consider environmental risk, in addition to the other types of risk they had calculated until now like credit, market, operational, legal and liquidity risks. According to Oren Lazarovich, senior account executive at Aon Israel, more and more companies have been bringing up environmental risk in their meetings with the company. "With the spread of environmental regulations comes the potential for being sued. More and more companies, and especially CEOs, are concerned about being sued, and being sued personally," he said. Reflecting this growing environmental awareness, Aon Israel has opened six new accounts with companies in the last year and a half, Ilan Beck, chairman of Aon Israel, said. Environmental risk is slightly different than other types of risk because it demands much more cooperation and up front honesty from the client, Lazarovich said. "We need to know all about the historical exposure. We need to look at all of the reports. [While companies may not produce many external environmental reports], they almost all have internal ones," he said. Furthermore, companies can become liable retroactively if regulations change, or even if the company is meeting current regulations but it turns out the damage was more than estimated, according to Lazarovich. Breitstone illustrated the point with a short anecdote. "There was a paper mill near a river which used PCBs. They used to emulsify them and dump them in the river, as was permissible at the time. Now, they have to clean up all the damage their dumping has caused. Had they had environmental insurance, they would have been protected. The insurance protects against regulatory change as well," he recounted. Companies like Aon, Breitstone explained, carry out benchmark assessments and help companies figure out how to meet standards and manage their risk. For example, they assess the potential for contamination on company land, as well as offer an estimate for how much a cleanup would cost, and the likelihood of such a cleanup. When environmental risk policies were first created ten years ago, some of them were very broad and very cheap, Breitstone recalled. "So early adapters got broader coverage," Breitstone said. These days, the issues are complex, and the policies have become equally sophisticated.