Concurrent session: Environmental liability
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Transcript of Concurrent session: Environmental liability
Concurrent session:Environmental liability
2006 CAS seminar on reinsurance
Peter Schultheiss, FCASZurich June 1 - 2, 2006
2© Zurich
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
3© Zurich
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
4© Zurich
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
5© Zurich
Environmental liability
• Limited data
• Engineering analysis
• Government data
• Case law
• Other relevant factors
Pricing considerations
6© Zurich
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
7© Zurich
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
8© Zurich
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
9© Zurich
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
10© Zurich
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
11© Zurich
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
12© Zurich
Environmental liability
• Natural resource damages
• Mold
• Changing government standards
Emerging issues
13© Zurich
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
14© Zurich
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
15© Zurich
Environmental liability
Mold
16© Zurich
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
17© Zurich
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
18© Zurich
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
19© Zurich
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