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Insurers Push Coverage Against Environmental Damage

Cameron Dueck – Updated on Apr 05, 2008 – SCMP

Insurance companies have begun selling environmental insurance policies on the mainland, marking what could be the start of a trend towards more responsible corporate behaviour and broader government requirements for industrial companies to buy pollution liability coverage.

Environmental insurance forces companies to clean up their act because a company must improve its environmental security before it buys coverage, and thereby a system of requiring such insurance raises pollution standards.

Insurers will not cover a company which is not already showing an attempt to reduce the risk of environmental damage.

“The petrochemical, oil and gas companies clearly have exposure, as well as the manufacturing sector. We’ve also placed policies in the real estate sector in partnership with banks, the high-end commercial or residential projects,” said Jim Finnamore, regional environmental practice leader at insurance broker Marsh. Insurers and brokers declined to provide the names of policy buyers.

Foreign companies such as ACE Group, AIG and Chubb Group are leading the push along with state-owned People’s Insurance Co of China (PICC).

“We have sold a few policies, but I’d say that by the end of the year we expect our business in this area to be much more significant,” said Karl Russek, who heads ACE Group’s international environmental risk business.

ACE is the largest shareholder in Hutai Insurance, which last month became the first local firm to gain approval from the China Insurance Regulatory Commission to offer environmental coverage on the mainland. The company is offering coverage for both first-party clean-up and third-party claims with limits up to US$25 million.

“The early customers have been multinationals that have large consumer brands which are globally sensitive or have financing tied to environmental requirements,” Mr Russek said.

The State Environmental Protection Administration (Sepa) in February introduced a “green insurance system” requiring industrial companies to buy insurance against potential environmental damage. That CIRC-backed plan will try to provide closer monitoring of companies and help victims obtain compensation, particularly if the polluting firm was unable to make amends or if it declared bankruptcy.

Sepa said it would introduce the programme on a test basis in several regions with the goal of having a nationwide system in place by 2015. Insurers predict the pilot will be launched within months in one of the heavily industrialised southeastern provinces.

“The regulators are actively soliciting from the insurance industry for suggestions on how the programme should be structured,” Mr Russek said.

The extra cost of buying yet another form of liability insurance may keep local companies from signing up until they are forced to do so.

“We’ve developed a product for hi-tech companies, which has been approved by CIRC and we’re now discussing that product with some clients,” said Shao Yunzhou, director of liability insurance product development at PICC. “But at the moment a lot of companies can’t afford the high premiums, so we’re now researching other options, like low-limit coverage.”

China’s system of mandatory environmental insurance is expected to be similar to that of countries such the United States and Germany. While mainland industrials may not operate as cleanly as their counterparts in Europe, the key thing that insurers need in order to start underwriting is clear and consistently enforced rules.

“Provided there is a standard, we can underwrite to that standard,” Mr Russek said. “While it’s clear there’s not the same history of regulation in China as there is in some places, one should not doubt the seriousness with which Sepa is approaching this.”

The agency has introduced a green securities policy to force firms to undergo environmental inspections before raising capital and a green credit policy to limit bank lending to energy-intensive and polluting industries.

While the agency has been spinning its wheels in trying to launch these policies its success rate could change after Beijing last month elevated the status of Sepa to ministry level, creating the Ministry of Environmental Protection.

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