5 Critical Risks Facing the Environmental Insurance Sector

These emerging risks are shaping the playing field for environmental underwriters and regulators.

By: Emily Spennato | August 21, 2019

When it comes to the human condition, we like to see change happen before our eyes or else we get impatient. Instant gratification is the reason for failed diets, credit card debt and Amazon Prime.

Those in the environmental insurance sector know that instant gratification doesn’t exist when it comes to the climate; change — for better or for worse — is gradual and usually not noticed until it’s already brought its after-effects.

“The environment is impacted by humans, by development, by overpopulation, by the appetite to consume, and pressure is being applied to our natural resources and in areas they are coming up short,” said Chris Smy, Marsh global environmental practice leader.

The pressure that he speaks of will come in the form of financial burdens placed on entities that contribute to the depletion of natural resources. To avoid environmental claims, businesses must be aware of harmful practices and the emergence of new or undetected risks.

Underwriters know that in a constantly changing environmental landscape, the margin of risk is never consistent and that critical risks are determining how claims are handled in the environmental sector.

Here are five critical risks that are changing environmental insurance policies today:

1) Mold

Although mold has been around for thousands of years, the environmental sector is seeing an influx of mold claims and a need for a more consistent solution to the complex cleanup process. An increased awareness of mold and its contribution to air quality and health problems emerged in the early 2000s.

From 2000-2001, mold claims in the United States jumped from virtually zero to 12,000.

Chris Smy, global environmental practice leader, Marsh

Mold consciousness increased in 2002 after a couple in Dripping Springs, Texas, were forced to move out of their 22-room mansion due to rampant, toxic black mold that made their whole family sick.

“As the economy has grown and commerce has accelerated what has been a long recovery run, we’re seeing more corporations acquiring and refurbishing properties,” said Smy of the mold awareness that changed how the sector handled legacy and water intrusion claims.

Mold claims are particularly prolific in areas of high moisture, which is usually in coastal cities prone to hurricanes.

After hurricane season, the southern-Atlantic U.S., on top of infrastructure damage leading to property claims, is also susceptible to water-intrusion, pollution and mold claims.

2) Erratic Weather

In May 2019, uninterrupted rainstorms hit the southeast U.S., resulting in major flash-flooding.

Mississippi’s water-level stayed above flood-risk for three months, which is the longest period the state has been at flood-risk since the Great Flood of 1927.

While the rest of the country has not been exposed to the same level of extremity, rainfall is undoubtedly increasing all over the country, according to data collections.

As the earth warms the oceans, higher temperatures can supercharge coastal storms.

“Science is beginning to conclude that when these storms hit a coastal area, there’s an increased risk that they stall,” said Smy.

But even if flooding doesn’t cause damage to infrastructure, there is a certain amount of pollution that comes with any natural catastrophe such as hurricanes, fires or earthquakes.

3) PFAS

Scientists have always known what it takes to make a product, but they are now becoming more aware of the dangers single ingredients can possess.

Perfluorooctanoic acids, also known as PFAS, are part of a large family of man-made chemicals with unique physical properties that make them water- and oil-repellent, extremely heat-resistant and have surfactant properties.

It is these qualities that had PFAS included in the DNA of seemingly harmless, everyday objects like pizza boxes and hamburger wrappers, in nonstick cookware, in water-resistant materials like jackets, tents and tarps, in spray-on stain resistant solutions and in aqueous firefighting foams.

Read More: The ‘Next Big Environmental Threat’ Is Already Here

However, PFAS are being linked to low immune systems, increased cholesterol, hypersensitivity and an increased risk of testicular, kidney, liver and pancreatic cancers.
As technology in business production becomes more advanced, so does knowledge of the production process.

Popular food-chains Sweetgreen and Chipotle were recently found to use disposable bowls that contain traces of PFAS and found themselves at the center of a scandal.

“It’s quite prolific,” said Smy of the chemical’s odorless and colorless presence in a wide variety of products.

Instead of being eliminated, alternatives to the chemical are just being replaced in smaller doses because of low monetary costs. Chemicals of the PFAS family have been used on the market since the 1940s, making it a constant presence and a threat that is difficult to eradicate.

In a 2016 study, Harvard researchers estimated that six million Americans got their drinking water from sources that contain an amount of PFAS that exceeds the Environmental Protection Agency health guidelines.

4) Fracking

Oil and fracking companies used to carry out their practices with much less subtlety than they do now.

Given away by the deep smell of sulfur and rusted cranes, oil companies had a hard time hiding their environmental threats. Along with the technology to harness effective drilling practices, there is now a heightened sense of environmental awareness that society lacked 30 years ago.

While non-sustainable entities are the first to be hit with financial burdens and regulations, a fracking-friendly society feels like it could be taking policies a step backward and in the wrong direction.

As the U.S. becomes almost completely energy independent thanks to government incentives that included a roll-back of fracking regulations, exportation is what’s keeping environmentalists on their toes; they still have lingering nightmares from the 2010 BP oil spill.

“With an oil boom in the United States, all that product is being transported, so we’ve seen a number of events from train derailment and pipelines,” said Smy. “Any time you have more product being moved, you’re going to have more risk.”

5) Overpopulation

According to the United Nations, the world population is expected to hit 11.2 billion by 2100.

Overpopulation is perhaps the most obvious and most distant, but likely the most dangerous.

With diseases eradicated, the lack of external threats and increased fertility and longevity, the population has more than tripled in the last 70 years, averagely increasing by 1 billion every 20 years.

Although unsettling, scientists predict the earth can only sustain around 10 billion. Overpopulation is a broad risk that can lead to more specific consequences such as soil depletion, water and food shortages and the increase in heat-trapping emissions.

“It goes without saying that as resources become scarce and further under pressure, then naturally society begins to value those resources differently.” said Smy. “I see the future being a continuation of where it is now, with some acceleration.”

When it comes to the population capacity, this may be the final bridge that we can’t afford to burn. &

Emily Spennato is a former staff writer with Risk & Insurance.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.