Carl Leeman – IFRIMA President

The European Commission intends to publish its final report on the review of the Environmental Liability Directive (ELD) in April. The question of mandatory financial security for environmental impair risks currently remains open. It is one of several options which the Commission will consider presenting to the new Parliament and commissioners when they are in place after the May European elections.

The ELD regime came into effect in 2004 and established a new kind of liability regime for environmental damages for certain industrial operators. The issue of financial security was left open at the time to see how well the insurance market would react.

FERMA strongly hopes that the Commission will see that the insurance market has responded to the need for environmental impairment insurance since the ELD came into effect and will finally drop the proposal for European-wide compulsory financial security.

Most recently we have expressed our comments to BIO Intelligence Services, a French environmental consulting firm that will be reporting to the Commission in March on the scope and exemptions of the ELD.

We believe that compulsory financial security schemes are likely to give a false sense of security to officials and the public which is horrified by pollution incidents. They may look reassuring on the surface, but they run the risk leaving insurers with the worst risks through counter-selection.

As insurers will have to adjust for this exposure carefully under Solvency 2, they are likely to reduce, rather than increase, the capacity they are willing to offer. Businesses would have to pay much higher premiums or resort to more expensive letters of credit or forms of contingent finance.

In the case of ELD more specifically, there are likely to be unintended and potentially damaging consequences, as it would be a long and risky task to reach a consensus over such measures among member states. In the face of such uncertainty, the development of insurance products would slow down or stop.

Since the ELD came into effect in 2004, the insurance industry has been developing products to meet the needs of operators. 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.