Why China getting tough on polluters is good news for insurers

When air pollution in China’s capital Beijing soared to hazardous levels in January there was a media and social media backlash. Visibility was less than 100 metres in some areas, flights were grounded and the city government warned residents to stay indoors.

Even Chinese state media called for environmental improvements with the official People’s Dailydescribing the smog as a ‘suffocating siege’ that had to be urgently addressed.

In an effort to take a tougher stance against companies that pollute or damage the environment, the Ministry of Environmental Protection and the Chinese Insurance Regulatory Commission (CIRC) have announced that heavy polluting industries will soon be required to buy specialist environmental liability (EL) insurance cover.

In particular, the government is encouraging mining and smelting organisations, lead battery manufacturers, leather goods firms and chemical factories to take out the insurance. Multinational companies operating in China will not be exempt from having to buy the cover.

The smog in Beijing and other major cities is not an isolated problem. There have been several pollution accidents in recent years, symptoms of a rapidly developing Chinese economy that has taken a light touch approach to protecting the environment.

These include algae blooms in some of China’s major lakes, the 2009 cadmium pollution accident in Hunan and 2010 oil pipeline explosion in Dalian City. In 2009, three officials held responsible for the cadmium leak that affected more than 500 people in Liuyang City were dismissed from their posts. The government offered free health checks to villagers living in areas close to the site of chemical discharge.

Opportunity for Chinese insurers

In all these events the government has been on the hook for the clean-up costs. “China has a significant issue with pollution and has some relatively high polluting industries,” says Simon Johnson, director of the EMEA Environmental Services Group at Aon Risk Services.

“They tried a number of voluntary-based schemes in specific regions over the past three years to promote environmental insurance and they do have some local markets – mainly through pooled facilities,” Johnson continues. “But I think what’s happened is the government and regulator has decided they want to go down a mandatory route.”

For the industry, mandating the purchase of EL insurance offers an opportunity for those carriers licensed to operate in China. International insurers offering EL cover in China include AIG, ACE, Chubb and Liberty International Underwriters. In May 2010, Lloyd’s was granted a licence to write direct insurance business in China.

Some are partnering with local companies. ACE, for example, has teamed with Huatai to offer its premises pollution liability policy in Chinese. The policy covers new conditions and unknown pre-existing conditions with limits of up to $40m.

“We have for a number of years now been watching China, and on global programmes we have a number of clients where they have a global environmental programme and local cover for their Chinese operations,” says Johnson. “And increasingly over the last perhaps two years or so there has been local market developments and demand – obviously China is a non-admitted country.”

“There are markets in China that can offer full environmental insurance coverage as we would consider full coverage here to be,” he continues. “It means going beyond the sudden and accidental pollution for third-party liability and covering clean-up costs, regulatory actions, offsite clean-up, environmental damage and gradual pollution – so we do have markets that can offer that in China.”