New Federal Standards Will Most Certainly Change the Environmental Insurance Landscape. Are You Prepared?
Environmental insurance is one of the most undersold products in the industry.
While some companies — hazardous waste handlers and chemical manufacturers, for example — are mandated to purchase coverage in order to operate, most are not. However, as more companies become aware that their existing general liability, property and professional lines policies have exclusions for pollution, they are beginning to purchase environmental coverage to address that risk exposure.
As changes in environmental policy, regulations and incentives are set under the Biden administration, we expect to see an increase in first-time environmental insurance buyers.
Federal Policy Changes Could Trickle Down to the State Level
States have varying regulations related to environmental risk factors; however, we may see the federal government try to provide more unified standards guided by the Environmental Protection Agency.
Federal standards influence state-level standards and become a yardstick against which all industries are measured.
Environmental insurance providers must recognize when new standards are higher than what an industry was previously held accountable to. If a company finds itself out of compliance, that increases its risk exposure to third-party claimants.
Take perfluorooctane sulfonic acid (PFOS), for instance: A man-made chemical used in manufacturing — packaging and products — beginning in the 1950s.
In recent years, PFOS has been discovered in ground water and drinking water, including in the lake and wells near a small municipal airport in Wisconsin, where firefighters trained using foam that contained PFOS that ran off and contaminated the water.
PFOS is currently not regulated at the federal level, but there are initiatives in place to make it so — a change that might incentivize manufacturers of products containing the chemical, as well as industries or businesses that use those products, to obtain pollution coverage.
Environmental insurers must be aware of policyholders’ hazards and exposures. Mid-size to large manufacturing companies, for example, often have exposures related to air pollution, solvents and paints. Those companies should also have an environmental manager (one of the factors that makes them more attractive to insure) whose job it is to stay up-to-date on changes in environmental policy and ensure that the company meets the requirements.
As environmental regulations begin to take effect, insurers will be looking more closely at clients’ exposures and tailoring coverage to meet their needs as well as to protect the insurance companies’ risks for liability.
Tax Incentives Could Spur Environmental Industry Investments
The environmental industry tries to be resilient, looking at the long-term benefits of its investments. If incentives offered during one administration have a four- to eight-year shelf life, it often may not be worthwhile for companies to put in the upfront investment just to receive benefits for a limited time.
Alternative energy investments may be the exception. Over the last few decades, we’ve seen an increase in climate awareness, investment in renewables and fossil fuel brands reinventing themselves as energy companies.
Making these adjustments is costly, but such action can be spurred by tax code changes and incentives. Recall the rapid development of ethanol as a fuel source in the late ’90s and early 2000s: In the Midwest, especially, we saw a boom in construction of processing plants, not to mention the effect on the price of corn and farms.
That activity was subsidized by federal tax credits for ethanol development.
Biden campaigned with climate change and clean energy as key issues for his administration, so we can expect to see opportunities arise related to tax incentives for the creation and use of renewable energy sources such as solar and wind.
Prepare for Changes to Happen Quickly and Aggressively
Anytime one party controls the White House and both houses of Congress, it’s the best chance for that group to successfully push through its agenda.
That means changes are likely to take place quickly, be more aggressive (especially if an opposing agenda was in place during the previous administration) and even trickle down to the state level in some cases.
We can anticipate some things that are likely to happen during the Biden administration based on his campaign rhetoric, the prior roles held by his new appointees, and possible interest in pursuing “unfinished business” from the Obama administration.
Insurers must be aware of how these changes could affect the industries they cover and be prepared to respond as quickly as possible. &