Environmental laws impact on insurance premiums
Most would agree the Federal Government’s proposed emissions trading scheme is a positive step towards mitigating the effects of climate change. Few would be aware it is also likely to contribute to the rising cost of associated insurance premiums.
The proposed Carbon Pollution Reduction Scheme is designed to reduce Australia’s emissions without jeopardising economic growth, and is scheduled to commence on July 1 next year. The Federal Government released draft legislation last month.
The medium-term national target is a 5-15% reduction in Australia’s 2000 greenhouse gas emissions by the end of 2020.
The “cap and trade” scheme is designed to limit greenhouse gas emissions by introducing the economic concept of scarcity. Producers of greenhouse gas will need to acquire permits for every tonne of gas they emit, with emissions to be monitored, reported and audited.
Firms will compete to buy the number of permits they need. It is estimated the scheme will cover 75% of emissions in Australia, given certain exemptions.
Aon Environmental Services Group CEO and Managing Principal Peter Breitstone, one of the global insurance industry’s foremost authorities on environmental risk, says every company will have to be more transparent about their risks in regard to carbon emissions and climate change generally.
“As you do that you begin to see that there is a correlation of cost to mitigating those exposures,” he said. “Firms are going to want to make sure they are properly protected through both pollution policies as well as directors’ and officers’ (D&O) policies.”
Of course, insurers prepared to cover those risks will demand a higher price for their services.
There is already significant upward pressure on D&O premiums, exacerbated by the global financial crisis.
As reported by insuranceNEWS.com.au last week, D&O is one insurance line currently facing increases of up to 30%.
Other forces are also at play. In New South Wales the Contaminated Land Management Amendment Act 2008 (NSW) received assent on December 10. Most of it is expected to be in force by the middle of the year.
National law firm DLA Phillips Fox says the new provisions cast a wider net in terms of those with responsibility for reporting, investigating and cleaning up contamination in NSW.
Not only is this expected to impose higher responsibility on directors and officers, but the implications obviously extend to other environmental risk lines such as property and pollution liability.
Central to the law are wider regulatory powers granted to the Environment Protection Authority (EPA) to issue investigation and management orders. Failure to comply will attract stiff financial penalties, and businesses that own, lease or manage contaminated land in NSW may find themselves liable for the first time.
NSW directors will now have to prove to the court’s satisfaction that either they were not in a position to influence the conduct of the firm in relation to a contravention, and used all due diligence to prevent it.
Aon’s Asia-Pacific Regional Director Jim Finnamore says a key part of the new law removes the right of directors to defend charges on the basis they were unaware of the risk.
He says Aon executives are working closely with the insurance market to develop solutions to support emissions trading schemes in Australia and abroad to provide risk transfer and risk management solutions for broader climate change issues.
DLA Phillips Fox Partner Charmian Barton says it’s difficult to determine an exact outcome of the legislation because most of it isn’t yet in force.
She agrees that directors and officers “will have less ability to invoke certain defences. They will be required to have a greater understanding of the operations of the business.
“But I haven’t seen any hint that the EPA will take a stronger and more extensive role in regulation, so it’s really a case of wait and see.”
It’s obviously too early to determine the extent to which new environmental legislation will affect premiums, but with rates already on the rise and new types of risk arising, the industry is already moving to provide cover.
The proposed Carbon Pollution Reduction Scheme is designed to reduce Australia’s emissions without jeopardising economic growth, and is scheduled to commence on July 1 next year. The Federal Government released draft legislation last month.
The medium-term national target is a 5-15% reduction in Australia’s 2000 greenhouse gas emissions by the end of 2020.
The “cap and trade” scheme is designed to limit greenhouse gas emissions by introducing the economic concept of scarcity. Producers of greenhouse gas will need to acquire permits for every tonne of gas they emit, with emissions to be monitored, reported and audited.
Firms will compete to buy the number of permits they need. It is estimated the scheme will cover 75% of emissions in Australia, given certain exemptions.
Aon Environmental Services Group CEO and Managing Principal Peter Breitstone, one of the global insurance industry’s foremost authorities on environmental risk, says every company will have to be more transparent about their risks in regard to carbon emissions and climate change generally.
“As you do that you begin to see that there is a correlation of cost to mitigating those exposures,” he said. “Firms are going to want to make sure they are properly protected through both pollution policies as well as directors’ and officers’ (D&O) policies.”
Of course, insurers prepared to cover those risks will demand a higher price for their services.
There is already significant upward pressure on D&O premiums, exacerbated by the global financial crisis.
As reported by insuranceNEWS.com.au last week, D&O is one insurance line currently facing increases of up to 30%.
Other forces are also at play. In New South Wales the Contaminated Land Management Amendment Act 2008 (NSW) received assent on December 10. Most of it is expected to be in force by the middle of the year.
National law firm DLA Phillips Fox says the new provisions cast a wider net in terms of those with responsibility for reporting, investigating and cleaning up contamination in NSW.
Not only is this expected to impose higher responsibility on directors and officers, but the implications obviously extend to other environmental risk lines such as property and pollution liability.
Central to the law are wider regulatory powers granted to the Environment Protection Authority (EPA) to issue investigation and management orders. Failure to comply will attract stiff financial penalties, and businesses that own, lease or manage contaminated land in NSW may find themselves liable for the first time.
NSW directors will now have to prove to the court’s satisfaction that either they were not in a position to influence the conduct of the firm in relation to a contravention, and used all due diligence to prevent it.
Aon’s Asia-Pacific Regional Director Jim Finnamore says a key part of the new law removes the right of directors to defend charges on the basis they were unaware of the risk.
He says Aon executives are working closely with the insurance market to develop solutions to support emissions trading schemes in Australia and abroad to provide risk transfer and risk management solutions for broader climate change issues.
DLA Phillips Fox Partner Charmian Barton says it’s difficult to determine an exact outcome of the legislation because most of it isn’t yet in force.
She agrees that directors and officers “will have less ability to invoke certain defences. They will be required to have a greater understanding of the operations of the business.
“But I haven’t seen any hint that the EPA will take a stronger and more extensive role in regulation, so it’s really a case of wait and see.”
It’s obviously too early to determine the extent to which new environmental legislation will affect premiums, but with rates already on the rise and new types of risk arising, the industry is already moving to provide cover.