The crisis on Wall Street and the turbulence across world economies has generated a large and spreading wake that has touched even the environmental insurance industry. In times like this, the best move is often to avoid reaction, and instead take pause to survey the landscape, reconsider practices, and make thoughtful moves.

The Landscape
By late September, the rating agency A.M. Best was projecting Superior and Excellent strength for the major environmental insurance carriers commonly doing business in the United States (see table).

Collateral damage from the sub-prime mortgage debacle did impact some of these markets and resulted in ratings changes. It is worth noting that no market was downgraded below the all-important A rating. Above all, we must not lose sight that the major markets remain highly rated and with substantial reserves. The core business units continue to perform well from an underwriting perspective, and these markets continue to do quality underwriting to serve client needs. The present is no guarantee of the future; however, these rating should provide some degree of proper perspective.

At the same time, the recent unpleasantness of the past months has demonstrated that business and investment decisions outside of core underwriting can negatively impact well-run insurance units. More importantly it has undermined long-held confidences in supposed “safe harbors” held by many risk managers and professionals in the industry.

The Road Forward
A prime lesson should underscore the need to revisit basic principles of investment as with any financial vehicle that involves: 1) researching and knowing the business you’re investing your premium in, and 2) diversifying where you put your premium.

Those carriers who kept to the basic core business of underwriting performance and more conservative business investments were rewarded with stable ratings. Those companies that strayed and took hits are clearly moving back to the basics. We should maintain a critical eye going forward around how the broader businesses are managed.

Something we too often take for granted in our free-market society is choice. We are fortunate in the environmental industry to have superb choice among a number of carriers, and we are free to choose and explore. As the table above shows, there are eight carriers writing the core lines of environmental insurance, such as Pollution Legal Liability (PLL) and Contractor’s Pollution Liability (CPL). Sticking with one carrier is a strategy many clients pursue due to strength of relationship, desire for continuity in coverage and service quality. We are now seeing some of those clients question the strategy of having such concentration.

For new placements and renewals, this is a good time to test the market as part of a diversification strategy: With choice comes competition. For renewals, it could yield improved terms or pricing. For large limit renewals, it may provide an opportunity to evaluate the cost-benefit of having several carriers layered rather than having exposure to one carrier with high limits. For one-off transactional placements, it provides an opportunity to measure the broader market response, and spread multi-policy risk among several markets.

The interest remains robust for PLL and CPL. The appetite for cost-cap insurance will continue to be a challenge. We can expect continued underwriting discipline and scrutiny on placements as carriers seek to manage risk and deliver core underwriting profitability. Deal quality will be paramount going forward, especially being able to present and defend the business case to underwriters around environmental conditions that impact redevelopment plans.

At a more granular level, this is also the time to negotiate a number of possible protective provisions into policies to provide an exit should an adverse downgrade occur with a carrier in the future. For example, 100% minimum earned premium provisions can be eliminated on some policies. This would allow for a policy to be cancelled with return of pro-rate premium.

No question, there is opportunity in times of flux. Now is a good time to take stock of your environmental insurance strategy, consider the options, and seek the benefits.

Jim Vetter is a managing director with the Environmental Practice of Marsh USA.