ENVIRONMENTAL RISKS AND INSURANCE

 Of all liability claims those related to the impairment of the environment are empirically the
most costly.

 Risks arising from human interaction with the environment are very diverse and often
catastrophic. The risks range from natural disasters induced by such phenomena as global
warming to pollution

ENVIRONMENTAL RISKS

 Both the poor and the rich impair the environment albeit in different ways.

 In poor communities the environment is impaired for purposes of survival.

 Poor people turn to the environment for such things as food, energy, and sources of income.
Impairment takes forms such as deforestation, desertification etc.

 Among rich societies the environment is impaired to support the excesses of the rich.
Impairment takes forms like carbon emissions, industrial waste etc.

ENVIRONMENTAL RISKS and Insurability

 For risk to be insurable certain pre-conditions must be e.g. losses must be predictable ex
ante; risk must be measurable financially; and losses must be idiosyncratic and not covariate
etc.

 Environmental risks hardly conform to above criteria.

 Insurers need accurate information on likelihood of insured event occurring and magnitude
of potential damage. For environmental risks often this information is lacking.

 Environmental risks are notorious for producing claims which are not clearly delineated e.g.
nearly 30 yrs after Bhopal disaster its effects are still being felt.

 Some losses which qualify as environmental damage are difficult to quantify e.g. how does
one quantify damage to air, water, flora and fauna (i.e. the eco-system)?

 Further problem is that conventionally insurance places huge importance on concept of

causation. But environmental losses can take years to develop making the determination of
‘cause’ very difficult.

 Predictability of future losses is very important. For liability risks this depends critically on
the legal environment. Environmental risks are prone to legal uncertainty-no guarantee that
acts which are legally permissible today will not create liability in future.
Modern Insurance approach to E/risks

 Integrated risk management through differentiation-most liability policies exclude risks such
as pollution. This approach enables focused risk assessment and loss prevention on site
specific-basis. As a result cover is tailored to insured’s needs and is usually provided on a
long term basis.

 Increased market capacity through insurance pools-current conventional market capacity for
environmental risks is limited. This approach is used in France, Italy, Spain and the
Netherlands.

 Different products for different needs-such new products include EIL, On-Site Clean-up cover,
Contractors’ Pollution Liability and Transportation Coverage policies.

 Alternative RiskTransfer-captives, finite risk products etc.