Insurers and reinsurers in the UK will suffer the consequences unless they do more to anticipate and reduce pollution risks.
The cost of cleaning up past contamination has long been a concern for UK insurers. But what about future disasters? What should insurers be doing to avoid potentially huge claims arising from sudden events caused by leaks, spillage and explosions that could contaminate the local population, the land, the air or the water supply?
They could do a great deal, but it seems that in practice they do very little. Many reinsurance underwriters appear to be convinced that cedants often have only a very limited idea of the extent of the risks of pollution relating to the sites and operations that they insure.
That is why the London market's Joint Pollution Working Group (JPWG) was formed. It represents key players among the UK's insurance and reinsurance market, plus other interested parties such as risk managers and brokers. Members include the IUA, the Association of British Insurers, the Association of Insurance and Risk Managers, the British Insurance and Investment Brokers' Association, the Loss Prevention Council, the Environment Agency and Lloyd's.
In 1998, the JPWG published recommendations for the underwriting of pollution risks, which were launched at a major conference supported by the Environment Minister, Michael Meacher. Last year, the IUA organised a follow-up seminar to inform insurers and brokers about pollution risks.
The recommendations made by the JPWG included advice about risk assessment procedures, information about technical factors which need to be understood to properly assess risk, and notes on the availability of technical guidance. Specimen questionnaires showed insurers the right questions to ask about business activity, substances, storage, safety measures, locations and site histories.
Unfortunately, the insurance industry is not following up. A general lack of awareness of the incidents that have occurred in the UK and elsewhere seems evident, but there is a more serious cause for concern: very little account seems to be taken of the real danger of a major event with catastrophic damage to human beings, animals, business activity and the environment. Should such a case occur, the damage to the insurance sector would be two-fold. In addition to the payment of crippling costs, the image of the industry could be badly affected.
The time has come for a serious shift in attitudes. Insurance companies can take measures to reduce the threat, and must introduce procedures that ensure pollution risks are automatically taken into account in underwriting decision-making. Sites and transport operations which, in terms of pollution risks, are poorly managed, should be subject to higher premiums. Underwriters should be asking for essential information on every risk, and setting their prices accordingly. Advice should be given on how to increase security and reduce the cost of insurance.
Insurers can play a key role in educating companies about pollution danger, and encouraging them to secure high safety standards. Society at large has come to see this as an important function of insurance, and this perception is a plus for the industry, since it encourages goodwill and increases confidence. But the clear, primary reason for each insurance company to deal much more actively with the menace of pollution risks is individual self-interest. Better prevention means fewer claims, and much less chance of exceptionally high ones.
As for reinsurance underwriters, they ought to be concerned that their companies may have to foot the bill when a major disaster does happen. Such an event would inevitably mean that the insurers concerned would make a huge claim on their reinsurance policies, probably for the major part of the losses.
Yet it is unlikely that the reinsurers on risk would have been adequately informed of the hazard when calculating the premiums. This not to suggest that reinsurers should withdraw cover for such risks. Rather, the time has come for them to have a much clearer picture of what is being insured and reinsured.
Insurers must begin to ask some simple questions. Does the factory or transport operation have procedures for dealing with an emergency?
Do the managers and staff of each site have an inventory of all the hazardous substances stored, and an understanding of what might happen if they came into contact with each other? Has there been a survey of other sites and activities in the area, so that there is an awareness of the potential danger of contamination, or indeed explosion, from one place to another?
What is known about danger to the local population, and has it been taken into account? Are containers and tanks built inside concrete structures to contain leaks, or is any contaminant likely to spread for miles around through contact with a local river or underground water?
These are fairly obvious questions when presented in this way. But how many underwriters could answer them in relation to the risks they insure or reinsure?