Environmental insurance market feeling the stress of social inflation

Environmental coverage is one of the most intriguing, challenging and complex corners of the specialty insurance market. As environmental underwriters, we deal with issues at the intersection of construction, manufacturing, transportation, science and the law. There is never a dull moment.

In this dynamic landscape, insurance market conditions are evolving, stressed by a multitude of factors, including economic growth, inflation, regulatory changes and the impact of social inflation. The market is experiencing a general uptick in premiums and prices, but it requires a nuanced and elevated approach to underwriting to address the unique risks faced by environmental contractors, consultants and manufacturers. In this commentary, I will explore the issues facing brokers, customers and underwriters at Axis.

The realities of social inflation

Social inflation is a phrase that underwriters and brokers have used for several years now to describe a key driver of the increase in the ultimate cost of insurance liability claims. Social inflation flows from increasing litigation, expanding definitions of liability, plaintiff-friendly legal decisions, and the increasing costs of settlements and compensatory jury verdicts. These factors have been accumulating for several years and are now coming to a head.

A study by the Insurance Information Institute (III) highlights how social inflation has been driving losses in commercial auto liability, an important component of typical environmental package policies. The III study shows that social inflation could be responsible for increasing losses by as much as 18-20 percent during the past 10 years. The results also indicate that social inflation, as a loss driver, may be outpacing inflation in the overall economy by 2 to 3 percent per year.

So-called nuclear verdicts are having an impact across all casualty and specialty insurance lines and we must underwrite for the social inflation challenge within environmental liability. It is especially acute when setting prices for excess lines since that is where a “nuclear verdict” can have an impact.

Environmental contractors and consultants

For many years, the heart of our Axis environmental portfolio has been environmental contractors and consultants. We offer a combined general liability/contractors’ pollution liability (CPL)/professional liability policy for these specialists in the environmental field. For all other general contractors or trade contractors, we look to round out their current insurance program with a CPL policy. With construction expecting sustained growth both in nominal and in inflation-adjusted terms in 2024, there are continued opportunities in this sector in the months and years ahead.

Whether customers are seeking CPL coverage or a combined general liability and CPL package, the market is offering steady capacity and stable pricing for risks with consistent exposures and a good loss history. Primary coverage is often easier to place than excess coverage since the rising tide of social inflation has a bigger impact on excess layers in an insurance program.

Issues with mould, fungus, lead and asbestos continue to be a leading source of claims activity. We continue to monitor the issues and regulations with per- and polyfluoroalkyl substances (commonly known as PFAS), which have been found to have contaminated soil and groundwater at thousands of locations across the US. While there are exceptions, PFAS is often excluded from coverage in product liability or site pollution policies.

Environmental risks in manufacturing

Virtually every industry that owns and operates a facility faces some environmental risk. The beauty of a combined coverage form is that customers can protect themselves from environmental liability for their products, contracting services, transportation, non-owned waste sites and their owned/operated sites. With most carriers willing to offer companion excess policies, customers are able to have a one-carrier solution for general liability and environmental to avoid possible gaps in coverage, and potentially to have more limit capacity available.

With the influx of business into the excess and surplus world from the standard market, this provides us with important opportunities to expand on coverages a customer may not have had before or even knew existed.

We continue to see a relatively stable market in terms of pricing, but the differentiators between carriers then become appetite, coverages offered and limit deployment. Like most casualty markets, the combined form market is being more cognisant of limit deployment.

Elevating relationships

One of the most satisfying aspects of our work in the environmental insurance industry is working with intelligent people who are passionate about solving problems. Our underwriters and broker partners deal with tough risks all day, every day.

To service the ultimate customer effectively, we must elevate our approach, grow professionally and consistently deliver solutions. We set high expectations for ourselves and align with brokers who do the same. Attributes we have come to view as essential in the environmental insurance industry include:

Manufacturers, environmental consultants and contractors are seeing an array of opportunities in this growing economy. They also face the unfamiliar world of environmental risk. But as underwriters and brokers, we can play a critical role in helping businesses and their leaders mitigate those environmental issues so they can create, build, expand and succeed.

Eric Paglieri is head of environmental for Axis. More information about Axis environmental coverages and underwriting is available at www.axiscapital.com/insurance/environmental