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Concurrent session: Environmental liability

2006 CAS seminar on reinsurance. Concurrent session: Environmental liability. Peter Schultheiss, FCAS Zurich June 1 - 2, 2006. Environmental liability. Objectives for today’s discussion. Clean-up cost trends Major pricing considerations: EIL/CPL Storage tanks Cost cap

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Concurrent session: Environmental liability

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  1. 2006 CAS seminar on reinsurance Concurrent session:Environmental liability Peter Schultheiss, FCAS Zurich June 1 - 2, 2006

  2. Environmental liability Objectives for today’s discussion • Clean-up cost trends • Major pricing considerations: • EIL/CPL • Storage tanks • Cost cap • Lender’s liability • Emerging issues

  3. Environmental liability “Evidently we’re leaking some oiland we are going to be here for a while.” Captain John Hazelwood

  4. Environmental liability Clean-up cost trends • Flat to decreasing over the historical period • Contractor competition • Improving technologies • Supported by internal analysis • Updated standards can change the historical picture.

  5. Environmental liability Pricing considerations • Limited data • Engineering analysis • Government data • Case law • Other relevant factors

  6. Class State Exposure base: Revenue Area Soil type Groundwater depth Proximity to open water Materials - contents Containment Storage methods Monitoring Loading/unloading Age History Proximity to populated areas Environmental liability Pricing considerations – EIL/CPL

  7. State Exposure base: Capacity Tank construction Age Soil type Groundwater depth Materials – contents Containment Connections Monitoring Loading/unloading History Overfill protection Environmental liability Pricing considerations – storage tanks

  8. Environmental liability • Places a ceiling on the cost of a remediation project • Scope of work • Engineering firm analyses cost estimates • Identifies potential cost over runs • Identifies alternative clean-up approaches • Provides probabilities of additional cost • Multi-year projects: inflation vs. discounting • Law revisions • Place a distribution around engineering estimates Pricing considerations – cost cap

  9. Environmental liability Pricing considerations – cost cap

  10. Environmental liability Pricing considerations – cost cap

  11. Environmental liability • Covers the lesser of the cost of clean-up or loan balance pay-off • Claims reported near inception or expiration • Default rates • Loan to value ratio • Debt coverage ratio • Loan type • Interest only • Balloon • Declining balance Pricing considerations – Lender’s liability

  12. Environmental liability Emerging issues • Natural resource damages • Mold • Changing government standards

  13. Environmental liability Natural resource damages • Does the site or surrounding area have landmark, cultural, scenic or historic designation/value? • Is the site or surrounding area under the control of Indian tribe authority? • Are there sensitive habitats, estuaries, rivers, wetlands, endangered species? • Is sediments an issue for clean-up? • What is the recreational use and proximity to population? • What is the regional water supply/demand picture?

  14. Environmental liability Recent NRD settlements Site Value $ Year Grand Calumet River 56.3M (2004) Lower Fox River 10.8M (2004) Passaic River* 7.0M (2004) Clinch River 3.8M (2003) W. Va. site 0.5M (2003) Chesapeake Bay 3.0M (2003) Missouri River 0.1M (2002) Cuyahoga National Park 0.8M (2002) *NJDEP plans to recover additional amounts

  15. Environmental liability Mold

  16. Environmental liability Mold • Human health affected by: • Release of volatile organic compounds • Release of toxin-containing spores • Health effects • Common (e.g., cold and flu symptoms) • Severe (e.g., impaired brain function, cancer), but generally only in the case of people with suppressed immune systems • Causation: none proven

  17. Environmental liability Mold • Actuarial data difficult to evaluate - claims are coded as “water damage.” • Most available claims statistics relate to Homeowners’ claims. • The vast majority of claims are small. Average mold claim per the Policy Holders of America is $12,000. • 85 percent of claims are less than $50,000.

  18. Environmental liability Mold - risks • Change in regulatory authority • Causation between bodily injury and existence of mold is discovered • Improper building management/maintenance results in third party damages • Poor construction practices introduce mold-enhanced environment

  19. Environmental liability Objectives for today’s discussion • Clean-up cost trends • Major pricing considerations: • EIL/CPL • Storage tanks • Cost cap • Lender’s liability • Emerging issues

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