Opinion: Brokers’ environmental onus

Opinion: Brokers’ environmental onus | Insurance Business America

According to insurance broker Anthony Saunders, the time has come for his fellow brokers to realise that we each have a very important role to play in creating a sustainable environment. This is how brokers could and should be getting involved…

The time has come for insurance brokers to realise that we each have a very important role to play in creating a sustainable environment. Risk surveys can be designed to prompt the right questions to identify pollution risk, but what are we doing as a (insurance) community to protect our environment through the issuance of correct insurance?

In discussion, as soon as environmental insurance is raised, and without even costing the insurance, the common response is “Oh, no that’s just too expensive”.

Importantly, the cost of environmental insurance is not the stumbling block. It’s the costs of environmental security, the risk management procedures that need to be deployed in order to meet the “material” compliance requirements of the insurer.

For example, the Gulf of Mexico oil crisis is considered the worst case of man-made pollution ever. It has been the subject of many an argument that the spill could have been avoided if a robust enough “blow out preventer” would have been on hand if an environmental insurance policy had been in place, ergo dictating an essential risk management criteria.

Let’s not let then the cost of the unexpected being confused with the cost of insurance.

Imagine if environmental liability insurance was compulsory? It would not only be affordable, but increase awareness to risk and deployment of material strategies. 

By example, it is illegal to drive a car that is not insured for injury to third parties, yet the cost of insurance is fair and reasonable because the insurance is compulsory. As a result car manufacturers continue to improve safety features. Is our environment worth the risk?

It is on the subject of “risk” however that corporate social responsibility (the corporate mind) is challenged because it has difficulty perceiving the difference between those risks that we are certain can occur (such as the Japanese nuclear reactors being built to withstand up to 7.9 on the Richter magnitude scale) and those that we imagine could never happen, such as the 2011 Japanese earthquake exceeding all previous known seismic recordings, resulting in a massive tsunami and flooding critical generators used to cool atomic reactors, releasing toxic gas into the atmosphere and contaminated water into the ground water and ocean.

“Certainty versus uncertainty” translated in insurance terminology to “Foreseen vs Fortuitous”. Fortuitous events are insurable, and the robust methods that insurers apply to calculate a risk premium, are logical. Moreover, simply identifying the two “effs” can encourage more transparency in commercial contracts, and create demarcation between the commercial disputes and those that are fortuitous.

Let’s summarise the important points:

  1. Foreseen vs Fortuitous (the two effs distinguish between certainty and uncertainty)
  2. Self insurance invites reckless behaviour (imagine if we drove around in cars without any insurance in place to cover injury to the public)
  3. Risk Assessment may not identify environmental risk (the kind of risk associated with total environmental degradation beyond which advisers have not foreseen nor can they afford to self insure)
  4. Environmental insurance is commonly available (fortuitous events are insurable subject to an environmental security review and risk recommendation).

Is our environment (built or otherwise) worth the risk of being uninsured?

As insurance brokers, we each share an obligation to examine the contribution we make to determine what we collectively value as a society. How is this connection made? Climate change has resulted in world “100 year” phenomena events including massive floods, tsunamis, tornados, hurricanes, earthquakes and our need for resources has resulted in factual significant loss of environment. If insured, how would the story change?

The intrinsic values of insurance [upon which any adequate response to today’s environmental challenges must be built] can be championed effectively by insurance brokers who have arguably the greatest significance in the chain of true corporate social responsibility. For example, a service station owner may avoid having to report a leaking underground storage tank, if there was no professional indemnity insurance policy in place. When insured, we have an obligation to act responsibly and be accountable without fear.  

The ability to address environmental risk, no matter how insignificant it may appear to be, is the intrinsic role that insurance brokers must learn to play if we are to take up the ranks as contributors to enhancing environmental security. 

There are plenty of professionals out there calling themselves environmental experts, but how many of them have a licence to advise and insure pollution risks? For example, environmental risk managers identify Foreseen risks and must assume the Fortuitous is covered by the (environmental) insurance broker. The same may also apply to an environmental accountant whose practice is to account for the contributing factors that result in an existing or potential impact to the environment.    

Through correct insurance, we can educate our community and environmental advisers of the importance to respect the laws governing the protection and sustainability of our environment, simply by issuing policies that will respond to those laws.

Insurance advisers at all levels have a very important role to play, and becoming educated in understanding the inherent environmental risks associated with the many and varied professions that insurance brokers come across is essential to the profession.

Above, we have taken a robust view of the environmental risk sector. We confirm that such cover is available and suggest that risk managers learn to distinguish between the “effs” so that their clients are intimately aware of the Fortuitous risks associated with environmental liability that can be insured. In order to arrange environmental insurance, a key factor is to recognise that insurers need to understand the risks too.

And not just insurers but the community also needs to understand how our environment can be protected by encouraging them to raise the question of insurance! For example, if proposed commercialisation of coal seam gas extraction (commonly termed Fracking or F-ing) is generating so much community concern, why don’t we ask the simple question; “if insurance is arranged to cover the future liability associated with possible contamination of groundwater or loss of use of land, what would be the outcome?”

Study this course of logic…

A local government or council represents the community. ANY decision that a council may make that affects the community (its rate paying “constituents”) must take into consideration the risks (or costs) of having to deal with community concerns (in the case of F-ing) and the costs associated with addressing those concerns AND the potential costs associated with cancer scares and clusters and community class actions that may arise in the future?

In New Zealand, local papers reported (Simon Hartley, Otago Daily Times) that Councils will have to make the bottom line decision on what goes on in their “patch”.

Whether a council goes ahead or not, they must factor in the costs associated with the: 

  • Expected costs of having to deal with community education to prove that F-ing is safe now and into the future AND
  • Potential costs of having to address future liability (as in 50 years’ time) risk against:
    • Reported claims of cancer
    • Costs of cleaning up contaminated sites
    • Costs associated with devaluation of property
    • Costs associated with relocation and
    • Potential hospital fees

If scientists may argue that the practices are safe, can they also prove that the outcomes of their methods are insured?

What is real is that the general community is concerned. Is our environmental security worth the risk of being uninsured?

Sure, sure… the pundits are now getting the idea that insurance for environmental liabilities might just be the “ticket” to stop them in their tracks if they are prepared to admit that they are simply not certain about what might happen in 50 years’ time. [Forget the moratorium… all they rely upon is a scientific report].

It is our planet, our community, and if the general populous is really concerned we have to listen.

Our insurance sector is in need of a whole new breed of environmental insurance advisers who are adept in interpreting the fortuitous components of potential environmental liability.