China’s Compulsory Environmental Insurance ‘Needs Stronger Incentives’

China’s recent move to tackle a ‘pollution crisis’ by making environmental insurance compulsory for heavy industry needs to be accompanied by adequate financial rewards if global insurance markets are to buy-in to the scheme, according to Willis.

“Stronger incentives and stricter enforcement are needed if we are to expect environmental insurers to bear the social responsibility of reducing pollution events in countries where pollution liability insurance is compulsory,” said Julien Combeau, executive director of the risk advisory and insurance broking group’s insurance practice.

In his latest blog, Combeau suggests that governments are transferring the review of potential environmental threats to insurers who are expected to support the resolution of pollution problems by assessing the risks and applying pressure on operators to improve. China is reportedly home to seven of the world’s top ten most polluted cities. 

But in order for insurers to commit to their part in mandatory environmental insurance schemes, thereby bearing an important social responsibility, Combeau argues that:

• Participating insurers must be sophisticated enough to provide required coverage at a sustainable price for both themselves and for the insured.
• There must be sufficient state support to provide insurers with the appropriate power to enforce risk management recommendations.

A step beyond the  global ‘polluter pays’ regulatory stance, China is among several countries which over the past five years have introduced forms of mandatory environmental financial assurance through insurance. Others include Argentina, Czech Republic, Greece, Hungary, Kazakhstan, Philippines, Portugal, Slovakia, Turkey, Turkmenistan and to some extent, Spain.

Combeau says that there are  several problems with mandatory environmental insurance schemes. They must overcome moral hazard exposures, have participating insurers mature enough to provide required coverage at a sustainable price for both themselves and for the insured, have sufficient manpower and engineering support to guarantee sufficient risk assessment and be in a position to enforce recommendations, which, in most of the countries where mandatory insurance is required, is not the case.

In addition, with these mandatory insurance requirements generally applicable only for the most hazardous classes of business, governments are generating an adverse selection which could cause insurance markets to shrink rather than to develop. Insurers could be more tempted to manage their own risks rather than those from their captive but dangerous customer base.

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