Toxic Releases from Floods Spell Higher Insurance Premiums

For industrial sites with CAT exposures, the environmental market is no longer soft terrain. Toxic release after storms is proving to cost companies millions.
By: | December 11, 2018 • 7 min read

Hurricanes used to be mostly a coastal phenomenon; high winds and storm surge were the primary hazards. But the last few major storms did most of their damage many miles inland and primarily from days of heavy rain.


The changing nature of natural catastrophes is starting to effect change in environmental liability. The segment has had ample capacity for years. Terms and conditions have not been restrictive. Now carriers say they are re-evaluating their books of business, and brokers say some placements and renewals are a little tougher.

Refineries and chemical plants on the Gulf Coast came through Hurricane Harvey in August 2017 relatively well. But a chemical plant well inland suffered a complete power loss, fire and toxic release. The company, its CEO and the plant manager are now under indictment.

In late August and early September 2018, heavy rains from Hurricane Florence caused overflows and failures of pits storing coal ash at power plants and animal waste at feeding facilities in the Carolinas.

The New Yorker ran an article “Could Smithfield Foods Have Prevented the ‘Rivers of Hog Waste’ in North Carolina After Florence?” in its September 30 issue.

“I was surprised to find hog waste featured in a general interest publication like The New Yorker,” said William McElroy, global head of environmental at Aspen Insurance.

“That shows there is a reasonable public concern about the pollution from industrial sites after a natural disaster.”

Beyond chemical plants, ash pits and waste lagoons, “I would add to that solid-waste facilities and fuel storage and distribution centers,” said McElroy. “In a flood, windstorm or earthquake, a release of major pollutants is always possible.”

There has long been public call for ash pits and hog lagoons to be phased out, but those industries have powerful lobbying efforts against regulatory and legislative restrictions. By contrast, the insurance sector is already taking action.

“There has certainly been an apparent abundance of capacity in environmental liability,” said Chris Smy, managing director and global environmental practice leader for Marsh.

“That is especially true of new entrants that can price aggressively, because they do not have to contend with the incurred but not reported losses that established carriers have. In every segment there will always be a market out of the brackets of other markets.”

“While it may appear that the market is not responding to the frequency of these events, there may be movement behind the scenes in terms of rates and attachment points that would not be evident to outside parties.”  — William McElroy, global head of environmental, Aspen Insurance

There is also the lagging effect of multi-year programs common in environmental liability. “We absolutely do see the capacity issue being addressed,” said Smy. “I am dealing with one right now.”

He explained that a “bifurcation” of the market is developing. “For the less-hazardous facilities and shorter terms, there is still ample capacity. For those with CAT exposure, the market is much more challenging.

“It is definitely reacting to these events, and we as brokers are having to work harder. We are having to layer programs rather than place with one carrier with a large limit. Carriers are re-evaluating, altering, and even declining.”

Greg Schilz, EVP, JLT Specialty

McElroy, at Aspen, concurred. “While it may appear that the market is not responding to the frequency of these events, there may be movement behind the scenes in terms of rates and attachment points that would not be evident to outside parties.

“Capacity has grown consistently for several years. In any market where there has been such an expansion, there could be a correction, and there are areas of environmental coverage that could benefit from some change.”

Colony Specialty does write some of these risks but stays away from hog lagoons, said Kelly Killimett, vice president and head of environmental.

“From a risk management standpoint, we are starting to see carriers being smarter with their capacity,” she noted. “Lowering limits might cost the purchaser more.”

That said, Killimett added, “Environmental liability is all over the place. We have more than 50 carriers. Each has its own form. Forms for a coal-fired power plant or concentrated animal feeding operation will vary significantly. For a car dealership [in contrast] there may only be on-site liability.”


That reveals the elusive nature of heavy flooding: A car dealership with a few hundred vehicles, each with a 30-gallon fuel tank, suddenly becomes a 10,000-gallon leak of gasoline and diesel oil that can float and spread for miles into residential and agricultural areas.

Still, “many operators don’t buy environmental insurance,” said Gregory Schilz, executive vice president for the environmental practice at JLT Specialty.

“I don’t want to say that we have reached a tipping point, but these natural catastrophes are starting to show not just severity but now regularity as well.”

Until recently, environmental liability was a matter of severity, not frequency. Now it is both, Schilz noted.

“Some markets have not quite caught up with that reality. But some insureds are starting to realize that they need coverage and that it is available.”

Some suggest frequency and severity are not such new phenomena. “In Hurricane Floyd in 1999, dozens of hog lagoons flooded,” noted Geoff Gisler, senior attorney with the Southern Environmental Law Center.

“There was a movement to buy out the feeding facilities.” But that effort petered out.

“There was a notion that Floyd was an unusual event,” Gisler said dryly.

“Then we had Hurricane Matthew two years ago and saw many of the same problems. And now Florence. These are not one-off events, and the risk of flooding is not just in flood plains. The ability of industry to sidestep responsibility for ensuring their waste does not contaminate neighboring property creates a new risk for facilities as storms increase in frequency.”

There are several lawsuits active in North Carolina, and there is criminal prosecution in Texas. On August 3 a grand jury in Harris County indicted French chemical company Arkema, its CEO and a plant manager. The grand jury concluded they were responsible for the release of a toxic cloud over Crosby during Hurricane Harvey.

“Companies don’t make decisions, people do,” Harris County District Attorney Kim Ogg said.

“Responsibility for pursuing profit over the health of innocent people rests with the leadership of Arkema. Indictments against corporations are rare. Those who poison our environment will be prosecuted when the evidence justifies it.”

“We can put together hundreds of millions in limits. The market is 40 years old, and a lot of engineering has been done. Things are getting more technical, and carriers are asking better questions.” — Greg Schilz, EVP, JLT Specialty

The indictment charges they all had a role in “recklessly” releasing chemicals into the air, placing residents and first responders at risk of serious bodily injury. The charge carries penalties of up to five years in prison for the persons and up to a $1 million fine for the corporation.

According to the U.S. Chemical Safety and Hazard Investigation Board (CSB) report, Arkema had multiple safety systems in place to ensure that organic peroxides were kept cold. However, CSB’s May 2018 documentary video of the incident shows primary and emergency generators and electrical equipment at or near ground level.

“All of these layers of protection failed during Hurricane Harvey because of flooding, which was a common mode of failure,” said the report. “None of Arkema’s safeguards used to address electrical power failure met company or industry standards for analyzing independent protection layers for Harvey-level flooding.


“The same floodwater that caused the facility to lose electrical power also compromised the backup emergency generators, the liquid nitrogen system and the refrigerated trailers used to temporarily store and cool the organic peroxide products. Companies need to ensure there are not common modes of failure in their layers of protection.”

Most underwriters offer support in that effort, and the market is healthy, said Schilz. “We can put together hundreds of millions in limits. The market is 40 years old, and a lot of engineering has been done. Things are getting more technical, and carriers are asking better questions.”

Some industries, notably energy, are becoming sophisticated about coverage as well. “We are doing more work in energy than ever,” said Schilz.

“There are lots of transactions, and often the new investors don’t know about the environmental liability. They are buying pollution cover just as a part of the deal. That can be less than half of one percent of the value of the transaction.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]