Mind the Gap

Hardly a day goes by without a headline on some environmental issue, whether a catastrophe such as the recent oil spill in San Francisco Bay, or an emerging liability like global warming. While environmental liability is not a new issue, the wide range of environmental problems occurring today underscores that the potential exposures for insurers may be growing. So the latest report from ratings agency A.M. Best on asbestos and environmental exposures makes for interesting reading. It notes that the industry’s unfunded environmental exposure totaled $22 billion at year-end 2006. This is a substantial number and dwarfs the industry’s estimated shortfall of $3 billion for asbestos. Based on A.M. Best’s estimate of $56 billion in ultimate environmental losses, the $22 billion funding gap is significant. A.M. Best’s explanation for the gap is that the industry has been funding its pollution liabilities very slowly based on optimistic assumptions about underlying claim trends. But while annual environmental loss payments have declined, payouts are still significant at $1.1 billion in 2006. Given emerging exposure trends and increasing demand for environmental coverages the question remains whether insurers’ environmental reserves are sufficient.

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