Concurrent session: Environmental liability

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Concurrent sessionEnvironmental liability
2006 CAS seminar on reinsurance
Peter Schultheiss, FCAS Zurich June 1 - 2, 2006
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Environmental liability
Objectives for todays discussion

• Clean-up cost trends
• Major pricing considerations
• EIL/CPL
• Storage tanks
• Cost cap
• Lenders liability
• Emerging issues

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Environmental liability

• Evidently were leaking some oil and we are
  going to be here for a while.
• Captain John Hazelwood

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Environmental liability
Clean-up cost trends

• Flat to decreasing over the historical period
• Contractor competition
• Improving technologies
• Supported by internal analysis
• Updated standards can change the historical
  picture.

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Environmental liability
Pricing considerations

• Limited data
• Engineering analysis
• Government data
• Case law
• Other relevant factors

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Environmental liability
Pricing considerations EIL/CPL

• Class
• State
• Exposure base
• Revenue
• Area
• Soil type
• Groundwater depth
• Proximity to open water
• Materials - contents

• Containment
• Storage methods
• Monitoring
• Loading/unloading
• Age
• History
• Proximity to populated areas

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Environmental liability
Pricing considerations storage tanks

• State
• Exposure base
• Capacity
• Tank construction
• Age
• Soil type
• Groundwater depth
• Materials contents

• Containment
• Connections
• Monitoring
• Loading/unloading
• History
• Overfill protection

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Environmental liability
Pricing considerations cost cap

• Places a ceiling on the cost of a remediation
  project
• Scope of work
• Engineering firm analyses cost estimates
• Identifies potential cost over runs
• Identifies alternative clean-up approaches
• Provides probabilities of additional cost
• Multi-year projects inflation vs. discounting
• Law revisions
• Place a distribution around engineering estimates

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Environmental liability
Pricing considerations cost cap
TASK DESCRIPTION TOTAL
1.0 REMEDIAL INVESTIGATION  
1.1 Access negotiations 102,022
1.2 RI workplan 37,722
1.3 Grab groundwater sampling, C-zone 101,969
1.4 RI report preparation 32,000
  Subtotal for task 1.0 290,122
2.0 INSTALLATION OF REMEDIATION SYSTEM  
2.1 Design and specifications 157,000
2.2 Construction of GW treatment system 349,762
2.3 Construction of injection wells 67,600
2.6 Construct B-zone GW extraction wells 75,072
2.9 Piping and electrical controls 303,350
2.10 System start up 34,282
2.12 Install B-zone GW monitoring wells 43,520
2.14 Construction completion report 52,965
2.15 Update of OM manual 33,020
2.16 Waste management and disposal 16,837
  Subtotal for task 2.0 1,034,355
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Environmental liability
Pricing considerations cost cap
3.0 OPERATIONS AND MAINTENANCE  
3.2a GW-TS (year 2001) 40,759
3.2b GW-TS (years 2002-2030) 2,319,898
3.2c Expanded downgradient area (years 2002-2030) 637,319
3.2d On-site pump and treat (years 2005-2015) 1,121,397
3.4a Reporting costs (year 2001) 16,682
3.4b Reporting costs (years 2002-2030) 660,056
  Subtotal for task 3.0 6,266,079
4.0 GW MONITORING AND REPORTING  
4.1b Total monitoring costs, years 2002-2008 487,784
4.1c Total monitoring costs, years 2009-2030 341,605
  Subtotal for task 4.0 1,422,263
7.0 MISCELLANEOUS TASKS  
7.1a Project management, year 2001 10,205
7.1b Project management, year 2002-2030 403,790
7.3a Regulatory fees, year 2001 3,300
7.3b Regulatory fees, year 2002-2030 130,574
  Subtotal for task 6.0 676,099
  GRAND TOTAL 11,277,361
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Environmental liability
Pricing considerations Lenders liability

• Covers the lesser of the cost of clean-up or loan
  balance pay-off
• Claims reported near inception or expiration
• Default rates
• Loan to value ratio
• Debt coverage ratio
• Loan type
• Interest only
• Balloon
• Declining balance

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Environmental liability
Emerging issues

• Natural resource damages
• Mold
• Changing government standards

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Environmental liability
Natural resource damages

• Does the site or surrounding area have landmark,
  cultural, scenic or historic designation/value?
• Is the site or surrounding area under the control
  of Indian tribe authority?
• Are there sensitive habitats, estuaries, rivers,
  wetlands, endangered species?
• Is sediments an issue for clean-up?
• What is the recreational use and proximity to
  population?
• What is the regional water supply/demand picture?

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Environmental liability
Recent NRD settlements

• Site Value Year
• Grand Calumet River 56.3M (2004)
• Lower Fox River 10.8M (2004)
• Passaic River 7.0M (2004)
• Clinch River 3.8M (2003)
• W. Va. site 0.5M (2003)
• Chesapeake Bay 3.0M (2003)
• Missouri River 0.1M (2002)
• Cuyahoga National Park 0.8M (2002)
• NJDEP plans to recover additional amounts

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Environmental liability
Mold
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Environmental liability
Mold

• Human health affected by
• Release of volatile organic compounds
• Release of toxin-containing spores
• Health effects
• Common (e.g., cold and flu symptoms)
• Severe (e.g., impaired brain function, cancer),
  but generally only in the case of people with
  suppressed immune systems
• Causation none proven

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Environmental liability
Mold

• Actuarial data difficult to evaluate - claims are
  coded as water damage.
• Most available claims statistics relate to
  Homeowners claims.
• The vast majority of claims are small. Average
  mold claim per the Policy Holders of America is
  12,000.
• 85 percent of claims are less than 50,000.

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Environmental liability
Mold - risks

• Change in regulatory authority
• Causation between bodily injury and existence of
  mold is discovered
• Improper building management/maintenance results
  in third party damages
• Poor construction practices introduce
  mold-enhanced environment

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Environmental liability
Objectives for todays discussion

• Clean-up cost trends
• Major pricing considerations
• EIL/CPL
• Storage tanks
• Cost cap
• Lenders liability
• Emerging issues

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