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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: Mandatory security is not good security

Carl Leeman argues that EU mandatory financial security proposals are not taking into account the market capacity already available
Carl Leeman

Mandatory financial security has become a big trend at EU level, thanks to recent catastrophic events, such as the 2011 Fukushima reactor disaster in Japan. But as business insurance buyers, we believe this is not the way to allow the market to create the most efficient solutions for the industry.  

Three separate Directorates General (DG) of the European Commission – Environment, Energy and Internal Market & Services – have come up with mandatory financial security proposals this year. The Commission wants to convince member states that such pan-European schemes are necessary to cover the adverse consequences of industrial activities. It’s also looking at ways of funding the impact of natural and man-made disasters, likely to be highlighted by the devastation caused by Typhoon Haiyan in November.

Starting in 2012, DG Environment commissioned a series of reports on the enforcement of the Environmental Liability Directive (ELD) in the 27 member states, which were published in June 2013. The ELD established a new kind of liability regime for biodiversity damages for certain industrial operators; this current review was the opportunity for the Commission to start thinking more about the ability of companies to pay for the recovery. Its idea is that operators should be able to demonstrate they have the financial capacity to pay the costs of environmental remediation, by insurance, letter of credit, internal provision or some other means. 

Risk and insurance

Except for the largest companies with deep resources, insurance is likely to be the most cost-effective means of covering these exposures, and since the ELD came into effect in 2004, the insurance industry has been developing products to meet the needs of operators. The Federation of European Risk Management Associations (FERMA) sees no need for what is in effect a compulsory scheme for financial security for environmental impairment, and there have been no cases to date where it would have been necessary. 

The Commission is not taking account of what market capacity is already available. A compulsory scheme could not be flexible enough to respond to the diverse nature of operators and risks under the ELD, and it would reduce the ability of the insurance industry to build a viable pool of business. 

When the insurance market is working well, there is no specific reason to move to a mandatory financial security scheme. A free insurance market is likely to respond better to the needs of insurance buyers at a fair price, and there is established law on many of the coverage issues that could arise. 

The Commission will release its final report on ELD financial security in April 2014, with a list of options to be discussed by the new Commission following the European elections in May. The only exception among the current crop of proposals is the nuclear sector, for which the energy commissioner confirmed there would be a proposal before the end of the year for a mandatory insurance scheme for nuclear operators, and that it will be high on the agenda of the new parliament. 

It is up to industry to convince the Commission that imposing mandatory financial security schemes for environmental damage on European operators would be counter-productive. For one, it would lead to unintended and potentially damaging consequences, as it would be a long and risky task to reach a consensus over such measures among member states with very uncertain results. 

The environmental insurance market should be allowed to continue to develop without constraints from a rigid and ‘one-size-fits-all’ kind of regime. ELD-related risks are too diverse and their exposure is over a long time. These cannot be covered by one single mandatory insurance scheme.

Let’s also remind ourselves that the Commission is now also active on the cyber security front, with a specific strategy and a proposed Directive on Network and Information Security targeting ‘critical operators’ and their infrastructure. No doubt financial security will also come up at some point.

Carl Leeman is a board member of FERMA and president of the International Federation of Risk and Insurance Management Associations (IFRIMA). He is chief risk officer of global logistics services provider Katoen Natie, based in Antwerp

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