Biodiversity, PFAS and water sector risk

00:00 - Duncan Spencer
We can't ensure whether or not you're going to go to prison.

00:03 - David Barr
It will not be possible to remove all PAS from a site.

00:06 - Peter Carter
Almost certainly UK and water and sewage companies is perhaps uh an elevated sector specific um environmental liability risk.

00:18 - Paul Lucas
Hello everyone and welcome to the latest environmental insurance power panel here at insurance business. Now in this quarter's edition we'll be examining some high-profile regulation and rulings. brownfield exemptions and yes, you guessed it, a little pas too. Uh to walk us through it, we welcome back Duncan Spencer, Director at Edia Limited. Uh Peter Carter, Managing Director, Head of Captive and Insurance Management Solutions and Head of Climate Practice at Willis and David Barr, Head of International Environmental Liability at Mosaic Insurance. Uh so to get the ball rolling, uh new biodiversity net gain regulations took effect in August, adding a small site exemption and extending BNG duties uh to major infrastructure projects from November. So David, now that that framework is clearer, is it translating into real insurance demand or is the market still ahead of uptake?

01:03 - David Barr
I think these latest developments will no doubt help progress. I think the developmentally smaller sites if they are exempted but to be honest probably have little impact the insurance uptake um you know related to those because I suspect those type of sites were the insurance was not typically sought uh for those in in the BNG space making it mandatory for large infrastructure projects I think means the rules are now really clearer than ever um but the insurance demand I think from our uh perspective seems to be still trailing behind the sort of regulatory reality as it were developers know they need the 10% % biodiversity uplift maintained for, you know, a long period, 30 years. Um, but many haven't really yet connected to the environmental insurance market, you know, which does offer those products. So, I think demand will no doubt build. Uh, but um, you know, we're still seeing a sort of lag behind, I would say, at the moment.

02:00 - Paul Lucas
Okay. So, the expectation is that demand will build, Duncan, but are products in place for it?

02:05 - Duncan Spencer
I would say that they are, or at least the insurers are trying to create products for it. uh we we're in a phase of insurers demonstrating we have a an appetite for it. What we need as clients to confirm this is actually the bits that are that we're concerned about. You take the last summer and the changes in biodiversity across the whole of the UK because of the unprecedented droughts that we had. um you would think this would be something that actually people should be starting to be concerned about particularly because you have a 30-year liability profile, but products have been created. Uh I don't think demand is there yet, but that demand is only going to be increasing. So, so the adjustments probably don't make a change to the market right now, but this is a transition period that we're in uh and it's going to change as we go forward.

03:01 - Paul Lucas
Okay. So perhaps something to uh that that will grow in the future. Peter, would you agree?

03:07 - Peter Carter
Yeah, I would agree with that. I think BNG insurance um demand is sitting between statutory planning obligations and a still developing set of risk transfer products. Um the strongest near-term demand is probably for products around delivery, replacement unit, um professional liability and financing risks. So I think yeah it's emerging. It'll take time to really be um visible in terms of a uh insurance market with uh clearly defined premium volumes. I think

03:41 - Paul Lucas
well I said there would be a PAS question so I might as well throw it at you all early. Uh we have seen of course Parliament's environmental audit committee call for a PAS remediation fund and tight to restrictions. Duncan, from your perspective, would either of those shift the UK market away from what is of course today's exclusion approach to PAS?

04:02 - Duncan Spencer
Essentially, I think it would be helpful. Um the issue for PAS and insurers is it presents an unbounded liability. We don't know where the liability starts and where it'll stop. A remediation fund in it in itself probably doesn't change a great deal for insurers and we've seen legislation in forced in the past uh environmental protection act 1990 etc that that's tried to make responsible and try to understand how orphan sites should be managed and who remediates them. the remediation fund should help that process but without regulation to without understanding what PAS needs to be remediated how and where I don't think I don't think the fund would work because it again will have too many unbounded limitations but I also don't see how insurance will either be able to respond to it so again I think it's a move in the right direction although in isolation probably doesn't change a great deal

04:55 - Paul Lucas
okay Um, well, that's the that's the question I'll put to you then, Peter. Is it going to change anything or are we going to be waiting for quite a long time?

05:07 - Peter Carter
I don't think so. Certainly not for the next 24 months. I think the more likely outcome is you'll have a two-track approach. So broad exclusions will remain for the legacy risk whilst there'll be some narrow cover right backs um for well characterized monitored low legacy risk uh issues out there. So no in the in the in the short term.

05:32 - Paul Lucas
Okay. Well, I don't want to say that these guys are being negative, but they're certainly being cautious. David, are you any more upbeat?

05:38 - David Barr
Yeah, I'll try and add a slight air of optimism to proceedings. No, I think yeah, PAS certainly uh is one of the most discussed uh issues that uh we when we get involved with meetings, you know, it often comes up with clients and brokers. It's fair to say that it's very easy for underwriters to just reach to a blanket exclusion if there are any concerns. Uh but I do feel that um you know the environmental insurance market you know we do have the skill sets if anyone has you know to try and address this and provide some meaningful cover wherever we can and we do generally try and do that but it is often very difficult particularly when you're dealing with you know known contamination issues you know maybe not even specifically PAS but anything like that you know it is very difficult to determine the insurability of that but as I say I think we've got the as a market we do have the skill sets to try navigate through that. I think the proposed um remediation funds I think could help. I think you know funding clearly is one of the key barriers to getting any contaminated sites particularly PAS um you know brought to a state that is suitable for continued use or for redevelopment. So from that point of view it should uh help you know ease the perhaps even if it's just easing the burden of local authorities you know if they end up having to foot the bill for that. So it could help unlock that um uh the ability to get a site remediated and that remediation is inevitably going to be on a risk based um to a risk-based standard. You know it will not be possible to remove all PAS from a site almost certainly. So the residual contamination, you know, remaining could be something that is uh then deemed insurable by environment insurers and therefore unlock um perhaps the sale of that site to a future developer or future owner, future residents, whoever it may be because there will still be some concerns given the long-term uh persistence obviously of PAS compound. So I do think there's a there's an air of um optimism about this development, but it will take time clearly. um this isn't this isn't going to happen overnight, but I think there's a slight cause for some optimism here. Anyway,

07:50 - Paul Lucas
well, let's continue the theme around sort of regulation and rulings and so on. Of course, we did see the Manchester ship canal ruling, and I'd love it if one of you guys could perhaps uh explain it and save me from embarrassment, but uh we did see, of course, a wave of group litigation against water companies over sewage pollution. Uh, so what I'd like to know, I guess, Peter, is watering utilities now being treated as a distinct higher risk environmental liability category on the back of a ruling like that?

08:25 - Peter Carter
Yeah. Well, before sort of diving into a response, Paul, yeah, I'll give a little bit of context on the case. So, this was a case testing whether or not a utility company could rely on the Water Industry Act 1991 um that seemingly could limit uh prosecution for unwanted outfalls into the waterways even if there are you there's no evidence of negligence or deliberate misconduct. and the Manchester Ship Canal um company tried to sort of pressure test that and won the case um basically confirming that you could bring a nuisance or trespass claim for uh foul water discharges um even if it wasn't deliberate or an act of misconduct. Um so the um the polluter uh needs to compensate for effluent that goes into a privately owned water course. Um so as a result of that I think it probably is fair to say that UK and water and sewage companies is perhaps u an elevated sector specific um environmental liability risk you know given that uh given that precedent coming from the uh from the courts.

09:35 - Paul Lucas
Yeah. And of course, this has been a high-risk sector anyway, hasn't it, David?

09:40 - David Barr
Uh, yeah, absolutely. Um, you know, certainly in all the years, um, been involved with environmental insurance, it's always been a sector which has been, I suppose, marked out as one that, you know, does require, uh, probably an increased level of scrutiny by underwriters and, you know, pricing and coverage, you know, reflects that as well. So, um, need to put it in that context, but you know, it's obviously going to, I guess, increase further that level of scrutiny. I mean we are in a in a softening market. Um you know environmental market is no different to the wider in market where there is you know softening going on in in in most uh product lines. So you know it could be that this is a sector that starts to sort of buck that trend perhaps and we possibly may even see some rates leveling or increasing um you know on a sector by sector basis in the market you know as we as we move through this the sort of softening position at the moment. So this could be one of those that perhaps bucks that trend.

10:58 - Paul Lucas
Yeah. And Duncan, I've saved you the last on purpose because I know you've got you've got vast experience in this area. What do you make of it all?

11:05 - Duncan Spencer
I've been underwriting and broking uh water utilities for over 20 years. Um all the way through my career with them. Water utilities are actually probably the highest risk profile that that we see. But by definition of what they do is they allow pollution to enter water systems. What whether that's treated pollution or untreated pollution, whether it's around a storm, etc., etc. All of those things, it is what it is. It creates that. Um we have a an issue though with water companies. If you imagine the CEO of a water company uh that's just hit the news that they've had a pollution release onto a beach or in into a stream and they're being interviewed by the news. What that CEO probably doesn't want to be able to say is, "Oh, it's all right. It's all insured." what the CEO wants to do is say, "No, I'm taking personal responsibility for it and I'm going to be dealing with it." And that's where we're seeing some of these criminal proceedings come from against the water companies. What I do think the Manchester Ship Canal case does do is demonstrate that private individuals, whether they're companies or individuals or groups of individuals, can make these claims against pollution incidents in their own right. They don't have to wait for the regulator to step in or to demonstrate or protect them. actually these claims for nuisance can be uh can be can be driven in their own right and that's across all industries not just the water utilities

12:12 - Paul Lucas
okay well let's continue the sort of the water focused theme if we can I won't go as far as camp binface who wants all of these water executives to swim in the local canals but uh we have seen of course new criminal liability provisions that have targeted these executives who obstruct pollution investigations uh David from your perspective is that driving demand for personal liability protection against environmental cover for those water sector boards.

12:28 - David Barr
I wouldn't say we've had a large uh increase yet in um you know that those specific types of inquiries, but uh there's no doubt that directors, you know, they're going to want to understand their personal exposure. And I think there's an increasing awareness that a standard sort of DNO insurance cover isn't necessarily going to you know uh cater for all those their exposures and that the products weren't really designed for these sort of regulatory risks um when they were the wordings were um originally uh put together. So whilst you environmental insurance as with any insurance we can step in to you know provide cover for criminal fines and penalties uh but there is an opportunity here I think for environmental insurance market to sort of perhaps work a little bit closer with the DNO market to identify you know where there might be opportunities to um to plug some of those gaps um and to provide more sort of coherent programs for the directors. Um, so I suspect that we're going to see more conversations around this at renewal meetings with clients to sort of help them sort of navigate through and find uh cover for their personal exposures going forward.

13:38 - Paul Lucas
Yeah, things get pretty complicated though, don't they? When criminal activity is involved, Duncan?

13:44 - Duncan Spencer
Yes, absolutely. We can't ensure whether or not you're going to go to prison. What we can provide cover against is supporting the defense where of course that's appropriate. Environmental insurance policies already provide already include directors and officers as insureds and so technically the products are designed and created to provide that kind of cover. But I think the problem in understanding across the market has been a DNO broker interested in DNO products. the environmental insurance product is designed to protect the business. Oh, by the way, it also ensures the uh the DNOS's. So, I think Dave's correct that there has to be some kind of alignment. But, but I would be reticent to say, oh, DNO needs its own environmental product. What DNO has to understand is the environmental product is already there and can be used to support these types of liabilities where it's appropriate and to the extent that it can do.

14:49 - Paul Lucas
Is that a trigger then, Peter, for further inquiries?

14:53 - Peter Carter
Yeah, I think I think it's a trigger for our clients to ask for a review as to how the um side A DNO is interacting with the environmental covers, checking wordings rather than um leading to increased demand for personal liability protection. Sorry.

15:15 - Paul Lucas
Well, uh, one final question to throw all of you, if I can, and that is, of course, a proposed brownfield exemption under BNG could shrink the off-site biodiversity credit market by up to 48% according to some industry estimates. So, um, Duncan, do you think that could change how developers and insurers approach environmental risk on Brownfield sites specifically?

15:26 - Duncan Spencer
Yes, I do because it it's something that removes a frictional item to the development of Brownfield land, which is the correct thing. What I am concerned about is what happens in human nature. So a developer seeing oh we have a brownfield exemption for this site. Uh it's not understanding that that doesn't remove the risks associated with the development. So uh I think it assists it adjusts friction. It doesn't change the risk profile of a property. So, uh, my concern as always is making sure that developers understand the scopes of a what's insurable, but b also what their liabilities are when they go through one of the these developments and not to rely on planning as being the traffic light system for them. It planning doesn't define whether or not whether or not you have a liability here.

16:26 - Paul Lucas
Yeah, I see you nodding along, Peter. Looks like you agree.

16:29 - Peter Carter
Yeah, I think I think it won't stop developers from uh thinking about um these matters, but they're likely to refocus their environmental strategy on um more voluntary on-site enhancements. And then insurers will still need to assess the exposure, the coverage, the pricing and stay aware of um how these evolving voluntary commitments developers make uh impact uh impact their risk, right? Um so uh I don't think it's going to um create a dramatic change um just a shifting in emphasis, but developers will still be um doing good things, I'm sure, despite this uh easing.

17:03 - Paul Lucas
Not a dramatic change. then David but could it have an impact on buyers?

17:07 - David Barr
Yeah. So yeah look looking at it from more from the insurers' perspective rather than the developers um I think that you know whilst the exemptions um for the brownfield land and also the small sites exemption we talked about earlier. You know it could it's obviously could reduce the number of buyers for B&G insurance. The brownfield exemption might obviously accelerate the redevelopment of those that that land and so potentially bring more opportunities or and more requirements for um you know insurance solutions to help manage that uh that contaminated land exposure through and beyond the development phase. So it could be the net effect here could be some slight rebalancing maybe uh less opportunity in the sort of biodiversity credit market uh credit insurance market but more um more activity in the sort of more established sort of site pollution type coverages so it remains to be seen how it'll play out but we could see that effect I guess.

18:03 - Paul Lucas
Well, great insights from everyone. Of course, another terrific panel with this group. Remember, they will be back together again one more time before the year is out. But until then, keep it right here on Insurance Business TV.