Conference on the Implementation of Coastal Facilities Sea Pollution Liability Insurance in the EU and Turkey

Carmen Bell, CEAPolicy Advisor Non-life Insurance

Istanbul, 19 October 2010

About the CEA33 national member associations:

27 EU Member States

+ 6 non-EU markets

Croatia, Switzerland, Iceland, Norway, Turkey,

Liechtenstein

2 observersRussia, Ukraine

2

CEA Environmental Taskforce Cooperation with the Commission Education and promotion of best

practices (publications and workshops)

CEA White Paper on the

Insurability of Environmental Liability (2007)

The Environmental Liability Directive:

Enhancing Sustainable

Insurance Solutions (2008)

Source CEA

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1Environmental Liability Directive

EC ELD Article 14 Report

Challenges for Insurance

EU Action on Oil Pollution

2013/14 EC ELD Review

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Environmental Liability Directive

DIRECTIVE 2004/35/CE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

of 21 April 2004on environmental liability with regard to the prevention

and remedying of environmental damage

ELD Stakeholders

European Commission

European Parliament

Risk managers(eg FERMA)

Council of Ministers

DG Environment

European Institutions

Member State Authorities

Environmental agenciesMinistries of environment

Insurance industry stakeholders

Brokers

National insurance associations

Insurance companies

Other stakeholders

Industry(operators)

Alternative financial security providersNGO’s

Objective of the ELD

ELD, Paragraph 3

“…namely to establish a common framework for the prevention and remedying of environmental damage at a reasonable cost to society”.

European Commission (EC)

“…establishes a framework based on the ‘polluter pays’ principle, according to which the polluter pays when environmental damage occurs. This principle is already set out in the Treaty establishing the European Community” (Article 174(2) TEC, since amended by Article 143 Lisbon Treaty). http://ec.europa.eu/environment/legal/liability/in

dex.htm

Basic Principles of the ELD

Financial securities

Prevention

Polluter pays

principle

Remediation

EC report on ELD effectiveness and related

financial security issues

Basic Principles of the ELD

Operators are financially liable for remediation of environmental damage, or imminent threat of such damage, that is caused by their activities.

Goal is to encourage measures and practices that minimise risks of environmental damage so that exposure to financial liabilities is reduced.

Basic Principles of the ELD

“Competent Authorities”, Article 11 Designated by Member States File administrative ELD claims Assess significance of damage Determine preventive and remedial

measures Require operators to supply

information and carry out measures

Basic Principles of the ELD

“Environmental Damage”, Article 2Protected habitats/species (biodiversity)Water (groundwater and surfacewater)Land damage (soil)Natural resources

Basic Principles of the ELD

Remedial Measures (Annex II)

Primary remediation Complementary remediation Compensatory remediation Interim losses Preventive measures

Basic Principles of the ELD

Strict Liability for…potentially hazardous activities as defined in Annex III (ie waste management, genetically-modified organisms (GMOs))

Fault-based liability for…all other professional activities

Two Types of Liability

These activities include, among others: industrial and agricultural activities requiring permits under the 1996 Integrated Pollution Prevention and Control Directive; waste management operations;the release of pollutants into water or into the air;the production, storage, use and release of dangerous chemicals, and the transport, use and release of genetically modified organisms (GMOs).

Annex III Activities

What about martime safety?

Duplication with international liability legislation that is effective in the EU (for example on nuclear activities and maritime safety) has been avoided, and so have overlaps with the civil liability regimes that exist in Member States. The latter means that so-called "traditional damage" - personal injury and damage to goods and property - even if it is caused by "risky and potentially risky" activities covered by the Environmental Liability Directive, will be dealt with under national civil liability legislation. The Environmental Liability Directive only deals with damage to the wider environment.*

*EC Memo/07/157, 27 April 2007, Questions and Answers – Environmental Liability Directive

Annex III Activities

Member States may allow the operator not to bear the cost of remedial actions taken pursuant to this Directive where he

demonstrates that he was not at fault or negligent and that the environmental damage was caused by:

(a) an emission or event expressly authorised by, and fully in accordance with the conditions of, an authorisation given under

applicable national laws and regulations.

Permit Defence(Article 8, 4(a))

Defences to liability

Member States may allow the operator not to bear the cost of remedial actions taken pursuant to this Directive where he demonstrates that he was not at fault or negligent and that the environmental damage

was caused by :

(b) an emission or activity or any manner of using a product in the course of an activity which the operator demonstrates was not

considered likely to cause environmental damage according to the state of scientific and technical knowledge at the time when the

emission was released or the activity took place

State of the Art Defence(Article 8, 4(b))

Defences to liability

Source CEA

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1Environmental Liability Directive

EC ELD Article 14 Report

Challenges for Insurance

EU Action on Oil Pollution

2013/14 EC ELD Review

4

5

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EC ELD Article 14 Report

On 12 October 2010, the EC adopted a report pursuant to Article 14 of the ELD, which discussed the following:

effectiveness of the ELD in terms of actual remediation of environmental damages and availability at reasonable costs and on conditions of insurance and other types of financial security for the activities covered by Annex III.

In relation to financial security, the report examined: a gradual approach; a ceiling for the financial guarantee; and the exclusion of low-risk activities.

Transposition deadline: 30 April 2007

As of 7 June 2010 the ELD has been transposed completely by all 27 EU Member States with one exception (Salzburg, Austria)

ELD Transposition

Scope for Strict Liability

For the scope of activities covered by strict liability, several Member States exempted the spreading of sewage sludge from waste management operations (Bulgaria, France, Latvia, Malta, Portugal, Romania, Slovakia, Slovenia and UK).

A number of Member States included further activities not mentioned in Annex III in the scope of strict liability (Belgium, Denmark, Finland, Greece, Hungary, Latvia, Lithuania, Netherlands and Sweden).

ELD Transposition

As reported by EC, 12 October 2010

ELD Transposition

Strict liability beyond Annex III-activities (enlarged scope):Comprehensive: Denmark, Finland (for damage to land and water) Hungary, Lithuania, SwedenSpecific (by activities): Belgium (varies by region/federal state), LatviaOptional extension: Greece, Netherlands

Scope of strict liability identical with ELD: Austria, Bulgaria, Cyprus, Czech Republic, Estonia, France, Ireland, Italy, Malta, Poland, Romania, Slovakia, Slovenia, Spain, United Kingdom

Liability Schemes

As reported by EC, 12 October 2010

DefencesBoth permit and state of the art defence incorporated:

Belgium (regions), Cyprus, Czech Republic, Estonia (except GMOs), Greece, Italy, Latvia (except GMOs), Malta, Portugal, Slovakia, Spain, United Kingdom (except GMOs in Scotland, Wales)

Both permit and state of the art defence not applicable: Austria, Belgium (federal level), Bulgaria, Germany, Hungary, Ireland (change planned), Netherlands (applicable only after check of reason), Poland, Romania, Slovenia

State of the art defence only: FrancePermit defence only: Denmark, Finland, LithuaniaMitigation ground: Sweden

ELD Transposition

As reported by EC, 10 October 2010

Multi-party allocation

Joint and several liability:Austria, Belgium, Cyprus, Czech Republic, Denmark, Germany, Greece, Hungary, Ireland, Italy, Latvia, Netherlands, Portugal, Romania, Spain, Sweden, United Kingdom

Proportional liability:Denmark, Finland, France, Slovakia, Slovenia

ELD Transposition

As reported by EC, 12 October 2010

Firstly, with respect to the effectiveness of the ELD, the report holds that there is “insufficient data to draw reliable conclusions on the

effectiveness of the Directive in terms of actual remediation of environmental damage” (p 5).

ELD Effectiveness?

EC ELD Article 14 Report

Secondly, with respect to mandatory financial security the report notes that “it is premature for the Commission to propose mandatory financial security at EU level” (p 8). The report states divergent

implementation rules, the lack of mandatory approaches present for evaluation and the still growing market of financial security products as

the basis for this conclusion. The report further notes that a “lack of practical experience in the application of the ELD” signifies that “there is

not sufficient justification at the present time for introducing a harmonised system of mandatory financial security” (p 10).

Financial Security?

EC ELD Article 14 Report

Mandatory vs. voluntary financial security

Mandatory financial security scheme*: Portugal (01/2010), Spain (04/2010), Greece (05/2010), Bulgaria (01/2011), Hungary (01/2011), Slovakia (07/2012), Czech Republic (01/2013), Romania (date still to be determined) All above countries facilitate the implementation of mandatory financial

security with a gradual approach, financial guarantee ceilings and/or the exclusion of low-risk activities.

However, mandatory financial security is delayed in all three countries where it was supposed to come into effect in 2010 (Portugal, Spain, Greece) because essential provisions are not yet in place.

Remaining EU States rely upon a voluntary financial security scheme.

ELD Transposition

*Note that dates may be subject to change

Source CEA

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1Environmental Liability Directive

EC ELD Article 14 Report

Challenges for Insurance

EU Action on Oil Pollution

2013/14 EC ELD Review

4

5

Challenges for Insurance

Fewstatistic

s & expertis

e

New liability

No single transposition

No single enforcement

Recent implementation

Challenges for Insurance

Operator demand for environmental liability insurance is currently still low. Why? Economic crisis - operators may feel

pressured to tighten their budgets and avoid “unnecessary” expenses

Lack of claims – Member State authorities may still be raising claims under preexisting environmental laws

Lack of communication - Brokers may not want to push the ELD polices with which they are not familiar

Lack of familiarity - Risk managers do not yet appreciate the strict liability regime implemented under the ELD

Challenges for Insurance

GTPL with ELD

Stand-alone non-binding

models

Pools

Stand-alone EIL

Need to prevent gaps and overlaps between insurances

A voluntary financial security scheme is best for ELD

Effectiveness of insurance products relies upon sustainability and stability across the EU:

Need frequency + cost of environmental accidentsNeed to match concepts and criteria for endurance

Environmental liability insurance options are increasingly available, but:

product development still in process;varying levels of liability cultures in EU States;low operator demand for ELD cover;transposition and execution phases differ.

CEA Position

Experience with traditional damage

New skills in response to ELD claims

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Sufficient data on ELD-related losses

Full execution of transposed laws

Legal clarity on duty to inform

Claims filed by competent authorities

Development of ELD products

CEA Position – Voluntary Financial Security

Market Development

AustriaFinalising a non-binding model

Finland3 major insurers now offering ELD productsInterest in products also growing

FranceStatistical tool used to measure development of ELD claims

GermanyUp to 70% of operators have an Environmental Damage Insurance based on nonbinding model

ItalyIT Pool supporting ELD cover

Market Development

SpainES Pool and 5 multinational insurers offer ELD productsGuidelines being developed for the calculation and management of claims

SwitzerlandNon-binding model for general liability insurance conditions (Swiss Insurance Assoc, February 2010)Model covers sudden and accidental environmental impact (ie not limited to pollution)

Czech RepublicSome insurers have begun to offer ELD productsQuestionable whether products are compatible with ELD scope

Source CEA

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3

1Environmental Liability Directive

EC ELD Article 14 Report

Challenges for Insurance

EU Action on Oil Pollution

2013/14 EC ELD Review

4

5

In the summer of 2010, Energy Commissioner Günther Oettinger proposed that “oil spill insurance” against environmental catastrophes should be made mandatory for all oil companies in Europe. Oettinger recommended that the

EU “consider a global civil responsibility insurance scheme” that would be “similar to the one for nuclear power plant operators, which have to hold

financial reserves ready to be employed in the event of an accident”.

*Photo by European Commission

DG Energy Proposal

The EP Committee for Environment, Public Health and Food Safety (EP ENVI Committee) held a meeting on 6 September 2010 to discuss taking action in relation to this proposal.

(1) The Committee adopted a question for oral answer to the Commission that asked if the EC would be “willing to revise the Environment Liability Directive and establish thorough and strict liability for all offshore drilling extraction and injection practices within the EU”.

(2) The Committee considered a Motion for a Resolution on EU action on oil exploration and extraction in Europe, ie a request that the EC address “gaps and weaknesses in the regulatory framework at EU level” with respect to environmental liability. This motion further proposed that a compulsory insurance scheme for oil extraction and exploration should be considered for the ELD.

European Parliament Motion

At the EP ENVI Committee meeting on 27 September, the Directorate-General of Environment for the EC answered to a question for oral answer by the European Parliament which concerned oil drilling and environmental liability. The EC announced that it recognised a gap on damages to water (ecological status) in the current EU legislation and that the ELD will be amended as part of a broader legislative package.

European Parliament Motion

On 6 October, the EP plenary debated the EP ENVI Committee. Commissioner Oettinger and the President of the Council, Olivier Chastel, participated in the debate.

European Parliament Motion

On 7 October, the Motion was adopted with 601 votes in favor, 23 against and 13 abstentions.

“Because of the lack of practical experience in the application of the ELD, the Commission concludes that there is not sufficient justification at the present time for introducing a harmonised system of mandatory financial security. Developments in those Member States that have opted for mandatory financial security, including the gradual approach, and in the Member States that have not introduced obligatory financial security, will have to be further monitored before reliable conclusions can be drawn. The Commission will also actively monitor recent developments such as the oil spill in the Gulf of Mexico, which may provide the justification for an initiative in this area”.

As reported by EC, 12 October 2010

Next EC ELD Review

EC questions need for mandatory ELD insurance in light of BP oil spill in

the Gulf of Mexico

“While the ELD covers specific environmental damage, mainly on land territory, the coverage of the marine environment is incomplete. The ELD extends to coastal waters and the territorial sea as regards ‘damage to water’ (through the Water Framework Directive) and to protected marine species and Natura 2000 sites within the jurisdiction of the Member States (extending to the exclusive economic zone and continental shelf where applicable), leaving a gap in the full remediation of damage to the marine environment. Damage to the marine environment due to oil spills caused by oil drilling activities is therefore not fully addressed by the present ELD provisions”.

As reported by EC, 12 October 2010

Next EC ELD Review

The EC will re-examine mandatory financial security possibly before the

review of the Directive planned for 2014.

On 13 October 2010, the Directorate-General on Energy of the European Commission, led by Commissioner Günther Oettinger, publishes its

Communication, “Facing the challenges of the safety of offshore oil and gas activities".

DG Energy Communication

In this communication presented by Commissioner Oettinger, the Commission states that it will:

re-consider introducing a requirement for mandatory financial security examining the sufficiency of actual financial ceilings for established financial security instruments; call for “responsible licensing” by defining at EU level key requirements for the licensing of hydrocarbon exploration and production to handle the consequences of unforeseen events, including possible participation in suitable insurance schemes or risk coverage instruments;propose amendments to ELD to cover environmental damage to all marine waters (oil companies have to be responsible of clean up and remedy environmental damages caused within a zone of maximal 200 nautical miles from the coast); call for the EU to take a key role in international efforts to strengthen existing rules globally regarding issues such as financial liability for oil and gas pollution from offshore installations, currently not covered by any international convention.

DG Energy Communication

DG Energy Commnication

Next Steps?

EC invites the European Parliament and the European Council to support and express their views on these actions.

EC to table proposals for concrete legislative and/or non-legislative measures

before summer of 2011, after consultations with national regulators and other stakeholders on the scope of the proposed initiatives.

The CEA shall aim to show the EC that the main insurability issues of liabilities under the ELD are vastly different from those pertaining to offshore oil extraction and exploration, as the insurance market for oil activities is limited and highly volatile, hence, not large enough in terms of insurance capacity to cover oil company liabilities on an EU-wide basis.

Source CEA

1

2

3

1Environmental Liability Directive

EC ELD Article 14 Report

Challenges for Insurance

EU Action on Oil Pollution

2013/14 EC ELD Review

4

5

2013/14 ELD review should be balanced and recognise:

Substantial advances made by the (re)insurance industry in product development for environmental liabilities.Differing liability exposures amongst EU States still prevent risks from being standardised.Differing liability cultures result in complex risk portfolios that range from state to state.Differing execution of the ELD by various member states means the risks are perceived at various levels.

2013/14 EC ELD Review

With respect to oil and mandatory financial security:

A voluntary market encourages innovation. Each Member State can find different and effective solutions “to encourage the development of financial security instruments and markets” (Article 14).The energy market is highly specialised and highly volatile, thus, the risks posed by oil extraction and exploration exceed the capacity of the European insurance industry on an EU-wide scale.Oil exploration is an offshore risk and should not influence onshore risks which are intended to be under the scope of the ELD.

2013/14 EC ELD Review

For more information www.cea.eu

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