Boosting environmental risk protection in Brazil
Environmental risk insurance protects companies against events related to the discharge, detachment, emanation or leakage of substances polluting the environment in a sudden or gradual way. The cover is currently available for companies in the transport, infrastructure, commercial or industrial sectors. Such policies differ from those covering sudden and accidental pollution which are usually limited to third party damage. In contrast, environmental risk insurance can not only cover third party material damage and/or bodily injury, but also the clean-up cost of affected insured areas, which in many cases can be much higher than third party or environmental damages.
Premiums for environmental risks have only reached around R$ 85 million (£15.2 million) in Brazil in 2018, a small fraction of premiums in general liability or property lines, for example.
Admittedly, it really is a complex risk to underwrite. It can be complicated to define adequate limits, deductibles and premiums for policies that will guarantee extensive damage and losses related to environmental pollution. In addition, the insurance and reinsurance market, in some cases, needs to identify pre-existing pollution risks in the area in order to define the insurance conditions. As a result, the policies can be relatively expensive if compared to other insurance lines.
Events involving environmental pollution usually occur with high severity. Take the catastrophe of Brumadinho, for example, where a dam containing iron ore mining waste collapsed on January 25, 2019, releasing some 11.7 million cubic metres of toxic sludge into the environment. The mud and mining waste barrelled through a valley near the town of Brumadinho in the Brazilian state of Minas Gerais, wiping out everything in its wake. It left behind a lunar landscape of dark mud in what is one of Brazil’s worst environmental disasters, destroying forests and polluting rivers. The disaster has also caused more than 250 fatalities and has prompted the introduction of stricter regulations. Only relocating the mud to a safer place is estimated to take five years.
The potential for expensive claims could be the reason why currently there are only around 10 insurers underwriting this type of risk in Brazil. The picture is similar on the reinsurance side. Therefore, this “lack of competition” may be keeping premiums too high for many potential clients.
This difficult situation could change with the introduction of new legislation. A law that would make environmental risk insurance obligatory in Brazil for activities that need an environmental licence is currently being discussed in parliament. In order to obtain a licence to operate, a company would need to purchase an insurance policy covering damage to the environment and to third parties. The law proposes the creation of an insurance consortium, but this may prove tricky as insurers’ appetite for this risk is currently limited. Furthermore, as insurers are free to accept or reject risks, insured’s would likely face difficulties in finding appropriate cover and comply with the law.
But there are reasons for some optimism, driven by trends in society propagating sustainability as people increasingly worry about the future of our planet and humankind. In this context, environmental pollution insurance can offer companies piece of mind from a financial and an entrepreneurial perspective. Because of that, growth in environmental risk underwriting has a good chance of occurring in a natural and gradual way in the coming years.
Meanwhile, insurers can contribute to the development of the environmental risk insurance market by broadening the coverage range, for example by adding first party loss of profits to environmental risk polices, potentially with sublimits. Another addition that could make the cover more attractive to buyers could be the inclusion of employer liability, as well as an extension covering fines and penalties.
Fines and penalties’ cover is already available in other insurance lines such as directors and officers (D&O) and cyber risks in Brazil, and such an addition could further boost demand for environmental risk policies.
For further information, please contact:
Jairo Rodrigues, Technical Manager
Tel: + 55 11 3371 9132