Concurrent session:Environmental liability

2006 CAS seminar on reinsurance

Peter Schultheiss, FCASZurich June 1 - 2, 2006

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Environmental liability

• Clean-up cost trends

• Major pricing considerations:

- EIL/CPL

- Storage tanks

- Cost cap

- Lender’s liability

• Emerging issues

Objectives for today’s discussion

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Environmental liability

““Evidently we’re leaking some oilEvidently we’re leaking some oil and we are going to be here and we are going to be here for a whilefor a while.”.”

Captain John HazelwoodCaptain John Hazelwood

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Environmental liability

• Flat to decreasing over the historical period

- Contractor competition

- Improving technologies

- Supported by internal analysis

• Updated standards can change the historical picture.

Clean-up cost trends

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Environmental liability

• Limited data

• Engineering analysis

• Government data

• Case law

• Other relevant factors

Pricing considerations

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Environmental liability

• Class• State• Exposure base:

- Revenue- Area

• Soil type• Groundwater depth• Proximity to open water• Materials - contents

• Containment• Storage methods• Monitoring• Loading/unloading• Age• History• Proximity to populated

areas

Pricing considerations – EIL/CPL

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Environmental liability

• State• Exposure base:

- Capacity• Tank construction • Age• Soil type• Groundwater depth• Materials – contents

• Containment• Connections• Monitoring• Loading/unloading• History• Overfill protection

Pricing considerations – storage tanks

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Environmental liability

• 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

Pricing considerations – cost cap

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Environmental liability

Pricing considerations – cost capTASK DESCRIPTION TOTAL

1.0 REMEDIAL INVESTIGATION  

1.1 Access negotiations $102,022

1.2 RI workplan $37,722

1.3 Grab groundwater sampling, C-zone $101,969

1.4 RI report preparation $32,000

  Subtotal for task 1.0 $290,122

2.0 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 cap3.0 OPERATIONS AND MAINTENANCE  

3.2a GW-TS (year 2001) $40,759

3.2b GW-TS (years 2002-2030) $2,319,898

3.2c Expanded downgradient area (years 2002-2030) $637,319

3.2d On-site pump and treat (years 2005-2015) $1,121,397

3.4a Reporting costs (year 2001) $16,682

3.4b Reporting costs (years 2002-2030) $660,056

  Subtotal for task 3.0 $6,266,079

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 $1,422,263

7.0 MISCELLANEOUS TASKS  

7.1a Project management, year 2001 $10,205

7.1b Project management, year 2002-2030 $403,790

7.3a Regulatory fees, year 2001 $3,300

7.3b Regulatory fees, year 2002-2030 $130,574

  Subtotal for task 6.0 $676,099

  GRAND TOTAL $11,277,361

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Environmental 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

Pricing considerations – Lender’s liability

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Environmental liability

• Natural resource damages

• Mold

• Changing government standards

Emerging issues

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Environmental liability

• 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?

Natural resource damages

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Environmental liability

Site Value $ Year

Grand Calumet River 56.3M (2004)

Lower Fox River 10.8M (2004)

Passaic River* 7.0M (2004)

Clinch River 3.8M (2003)

W. Va. site 0.5M (2003)

Chesapeake Bay 3.0M (2003)

Missouri River 0.1M (2002)

Cuyahoga National Park 0.8M (2002)

*NJDEP plans to recover additional amounts

Recent NRD settlements

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Environmental liability

Mold

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Environmental liability

• 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

Mold

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Environmental liability

• 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.

Mold

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Environmental liability

• 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

Mold - risks

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Environmental liability

• Clean-up cost trends

• Major pricing considerations:

- EIL/CPL

- Storage tanks

- Cost cap

- Lender’s liability

• Emerging issues

Objectives for today’s discussion