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
- Lender’s liability
• Emerging issues
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Environmental liability
“Evidently we’re leaking some oil and we are going to be here for a
while.”
Captain John Hazelwood
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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.
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Environmental liability
Pricing considerations
• Limited data
• Engineering analysis
• Government data
• Case law
• Other relevant factors
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Environmental liability
Pricing considerations – EIL/CPL
• Class
• State
• Exposure base:
- Revenue
- Area
• Soil type
• Groundwater depth
• Proximity to open water
• Materials - contents
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•
•
•
•
•
•
Containment
Storage methods
Monitoring
Loading/unloading
Age
History
Proximity to populated
areas
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Environmental liability
Pricing considerations – storage tanks
• State
• Exposure base:
- Capacity
• Tank construction
• Age
• Soil type
• Groundwater depth
• Materials – contents
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•
•
•
•
•
Containment
Connections
Monitoring
Loading/unloading
History
Overfill protection
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Environmental liability
Pricing considerations – cost cap
• 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
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Environmental liability
Pricing considerations – cost cap
TASK
1.0
DESCRIPTION
TOTAL
REMEDIAL INVESTIGATION
1.1
Access negotiations
1.2
RI workplan
1.3
Grab groundwater sampling, C-zone
1.4
RI report preparation
$102,022
$37,722
$101,969
$32,000
Subtotal for task 1.0
2.0
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$290,122
INSTALLATION OF REMEDIATION SYSTEM
2.1
Design and specifications
$157,000
2.2
Construction of GW treatment system
$349,762
2.3
Construction of injection wells
$67,600
2.6
Construct: B-zone GW extraction wells
$75,072
2.9
Piping and electrical controls
$303,350
2.10
System start up
$34,282
2.12
Install B-zone GW monitoring wells
$43,520
2.14
Construction completion report
$52,965
2.15
Update of O&M manual
$33,020
2.16
Waste management and disposal
$16,837
Subtotal for task 2.0
$1,034,355
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Environmental liability
Pricing considerations – cost cap
3.0
OPERATIONS AND MAINTENANCE
3.2a
GW-TS (year 2001)
$40,759
3.2b
GW-TS (years 2002-2030)
3.2c
Expanded downgradient area (years 2002-2030)
3.2d
On-site pump and treat (years 2005-2015)
3.4a
Reporting costs (year 2001)
3.4b
Reporting costs (years 2002-2030)
$2,319,898
$637,319
$1,121,397
$16,682
$660,056
Subtotal for task 3.0
4.0
GW MONITORING AND REPORTING
4.1b
Total monitoring costs, years 2002-2008
$487,784
4.1c
Total monitoring costs, years 2009-2030
$341,605
Subtotal for task 4.0
7.0
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$6,266,079
$1,422,263
MISCELLANEOUS TASKS
7.1a
Project management, year 2001
7.1b
Project management, year 2002-2030
7.3a
Regulatory fees, year 2001
7.3b
Regulatory fees, year 2002-2030
$10,205
$403,790
$3,300
$130,574
Subtotal for task 6.0
$676,099
GRAND TOTAL
$11,277,361
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Environmental liability
Pricing considerations – Lender’s 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
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Environmental liability
Emerging issues
• Natural resource damages
• Mold
• Changing government standards
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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?
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Environmental liability
Recent NRD settlements
Site
Grand Calumet River
Lower Fox River
Passaic River*
Clinch River
W. Va. site
Chesapeake Bay
Missouri River
Cuyahoga National Park
Value $
56.3M
10.8M
7.0M
3.8M
0.5M
3.0M
0.1M
0.8M
Year
(2004)
(2004)
(2004)
(2003)
(2003)
(2003)
(2002)
(2002)
*NJDEP plans to recover additional amounts
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Environmental liability
Mold
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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
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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.
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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
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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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