Pollution issues across Asia have brought environmental protection concerns to the fore but incentives are required if they are to be effective


The choking haze which last month enveloped Singapore and parts of Malaysia was a highly visible and extreme reminder of the danger and problems which pollution can bring.

While the haze has become a familiar feature of the dry season, 2013 will be remembered for its unexpected severity.

Reaching record levels on Singapore’s Pollutant Standards Index that were almost double the previous high recorded in 1997, the smog not only threatened health but also brought many businesses to a standstill.

It is ironic that the primary victim of this particular incident was Singapore - a country which not only prides itself on the cleanliness of its air and surroundings but also has strict laws to enforce the same.

However, as the source of the haze originated beyond the borders of the island state in Indonesia, taking effective action against the perpetrators will prove difficult under current legislation without a bi-lateral agreement or indeed tri-lateral one should Malaysia also be included.

Outwardly the Indonesian government was in no mood to be rebuked. According to the Straits Times, Indonesia’s Minister for People’s Welfare Agung Laksono hit back at complaints from their neighbour by saying: “Singapore shouldn’t be like children, in such a tizzy”.

He also went on the offensive over criticisms that Indonesia had not yet ratified an Asean agreement on transboundary haze pollution.

“Singapore is like that,” he said. “The border issue hasn’t been settled, neither has extradition, corruption.”

Behind the bluster and away from the glare of the cameras it is possible that intensive diplomatic negotiation between Indonesia, Singapore and Malaysia will yield long-term results but, in the interim, it is likely that the haze will return before the rains come.

Action against polluters is becoming an increasing priority across the Asia region.

Tough legislation has been in place for decades across large parts of the West, prompting businesses which are prime offenders to turn their attentions to the East where they could operate unencumbered without fear of legal action.

Indeed China’s open door policy had allowed many such companies to do exactly that until earlier this year when the country’s Ministry of Environmental Protection introduced nationwide compulsory purchase of pollution liability insurance for companies with high environmental risks a full two years ahead of its scheduled 2015 date.

Cynics might argue that the legislation was one way of taxing the operating profits of foreign business - but in truth its early introduction was most likely a response to a range of pollution crises which have alarmed even those most hardened to the country’s ongoing environmental issues.

The haze which hit Singapore and Malaysia in June was severe but short lived. In Beijing it has become so prevalent as to become a way of life.

So severe is the smog that it is not uncommon for darkness to appear to fall at midday in the city. Millions stay indoors where possible and the impact is having an effect on business activity - with concerned foreigners preferring to stay away

Add to this concerns about water quality - and indeed scarcity - and it is easy to see that the actions of the Chinese government were motivated by genuine concern rather than short-term financial gain.

But Julien Combeau, Executive Director for Willis’ Environmental practice, believes that governments need to offer both incentives and enforcement if environmental insurers are expected to bear the social responsibility of reducing pollution events in countries where pollution liability insurance is compulsory.

“One of the rationales behind these government decisions is that officials tend to believe that mandatory environmental insurance achieves the same social efficiency as imposing operating permits or penalties and sanctions,” he said.

According to Combeau, the logic is simple:

  • By transferring the review of operating controls and potential environmental threats to insurance, governments are expecting that specialty underwriters will assess the risks and apply pressure on operators to improve pollution risk prevention and protection at manufacturing sites.
  • Controlling the supervision of environmental insurance by enforcing authorities is a lot easier and cheaper than carrying out a full compliance gap analysis against operating permits. It can be done more extensively and more often, therefore improving the scale of the supervisory work. Authorities could then choose to suspend licencing of those which are not insured because they do not meet the insurability criteria.
  • After a pollution incident, governments are ensured that with environmental insurance, the responsible party is solvent and that tax payers’ money will not have to be used to pay for pollution liabilities.
  • Under such regimes, environmental insurers are bearing an important social responsibility, acting almost as non-administrative policy organisations by supporting the resolution of pollution problems at country scale.

Combeau said: “First, to perform as described, the mandatory environmental insurance schemes must overcome moral hazard exposures, have participating insurers mature enough to provide required coverage at a sustainable price for both themselves and for the insured, have sufficient manpower and engineering support to guarantee sufficient risk assessment and be in a position to enforce recommendations, which, in most of the countries where mandatory insurance is required, is not the case.

“Secondly, with these mandatory insurance requirements generally applicable only for the most hazardous classes of business, governments are generating an adverse selection which could cause insurance markets to shrink rather than to develop. Insurers could be more tempted to manage their own risks rather than those from their captive but dangerous customer base.

“For countries like China, mandatory environmental insurance should enable sufficient funding to clean-up, repair and indemnify, with no more bankruptcy after pollution which will be a great achievement. But for China and anywhere else in the world, if mandatory insurance is not implemented with authority-driven incentives to enhance pollution prevention and control, along with strong enforcement and sanctions, it is probable that we will see insurers pulling out of coverage areas or walking away from markets, rather than seeing them leverage industries on behalf of governments.

“If this is the case, these provisions could prove themselves to be more counterproductive than beneficial to society, with not only pollution problems remaining but also unprotected populations and ecosystems.”

Whether these incentives materialise or indeed what form they might take in practice might appear to some to be as clear as this summer’s haze but what is certain is that action needs to be taken to address environmental concerns on a number of levels to satisfy governments, businesses and insurers.