By 2020, experts predict that internet-connected devices and sensors will reach 50 billion. As cloud-based technologies become integral to everyday business functionality, companies are discovering new ways to optimize and in some cases, completely re-imagine their products and services. These innovations force their competitors to rethink their business models and additionally create market ripple effects that can reshape dependent industries. Auto insurance is an example of a traditional product that is under pressure from innovative market forces like cloud-based ride-sharing services (Uber & Lyft), accident avoidance systems, and self-driving car technology. In addition to writing new types of policies and re-evaluating their driver risk models, auto insurance companies are embracing mobile communication technology and data analytics for efficient and rapid management of quotes, claims, and reporting. According to a survey by IHS Markit, usage-based auto insurance enabled by digital connectivity will grow nearly 1200% by 2023. This new form of insurance assesses actuarial risk based on real-time information about a driver’s actual driving habits.
Similar changes are in store for environmental liability insurance. Historically, environmental risk has been treated like a catastrophic risk product. Simply, that policies are offered at premiums set based on actuarial modeling of historical claims incurred for environmental events such as the dispersal, release, or escape of pollutants (which tend to occur on a scale comparable to catastrophic events). However, actuarial modeling of environmental liabilities is biased by an historical lack of environmental stewardship by businesses with neglected spills that exponentially increase liabilities.
To address the limitations of actuarial modeling for catastrophic risk, some insurers have committed resources to “Emerging Risk” research groups with the goal of identifying early signs of potential catastrophic risks and to quantify those risks. Using “Big Data” analytics, insurers can mine the immense scientific and product data sets available through the web and conduct predictive modeling and “what-if” analyses to assess emerging risks. This approach supports development of catastrophic liability models which can help insurers head off issues such as toxic ingredients in manufactured products.
However, emerging risk research has its challenges with heading off environmental pollution events. Not much can be done to eliminate environmental time-bombs left by poor environmental stewards but insurance companies can go a long way to ensure that future environmental liabilities are limited in scale by proactively screening or actively monitoring policy holder operations. Merger & acquisition assets should receive similar scrutiny to protect investors and underwriters from legacy environmental liabilities.
Forward thinking insurance companies will be using temporal event monitoring services to underwrite policies for environmentally risky clients to better manage risk, control losses, and secure premiums.
As environmental consultants can attest, costs for pollution investigation and remediation are generally proportional to the complexity of the release. And since event complexity reflects a chemical’s fate and transport to sensitive receptor mediums like groundwater, soil, and indoor air, it can be argued that environmental liabilities can be greatly reduced if events are discovered early (prior to significant migration). Advanced early-warning technologies and temporal monitoring systems are already available that can detect and alert certain chemical release and/or exposure events. Forward thinking insurance companies will be using temporal event monitoring services to underwrite policies for environmentally risky clients to better manage risk, control losses, and secure premiums.
For the Underwriting Process, facility audits can be supplemented with assessment and monitoring technologies to confirm risk assumptions, transfer known risks, and better align policy pricing with risk. For example, a chemical manufacturer that boasts a clean track record can secure a competitive premium by agreeing to a baseline screening of site conditions such as subsurface soil vapor levels or indoor air quality.
For the Loss Control Process, insurers can prevent or immediately control losses from release events by requiring periodic or ongoing event monitoring at the insured facilities. With sensor-based continuous monitoring, first notice of loss could occur instantly via email alerts. Early warning event monitoring can be used to privately manage risk exposures, quantify cost impacts, and optimize responses to reduce mitigation costs. Unlike compliance response approaches, proactive environmental management approaches like this are beneficial to all stakeholders and reduce overall compliance expenditures.
For the Claims Process, insurers can utilize these technologies to challenge exposure risk claims and reduce tort settlements. For example, chemical vapor intrusion claims can be actively managed using real-time continuous monitoring of indoor air quality where high-density sample data is automatically archived for legally defensible liability management. Furthermore, stakeholders can use the real-time event alerts to trigger rapid mitigation responses to eliminate or at least reduce exposure claims. When it comes to acute toxins such as Trichloroethylene (TCE), the ability to respond before an exposure duration of concern has transpired can mean the difference between a non-issue and tens of millions in legal fees alone. It goes without saying that environmental liabilities that can be identified before regulatory involvement or prior to tort actions can be controlled and mitigated with far less cost.
When pricing liability policies, insurers look at the frequency and severity of the insured potential environmental “perils” and the expected average payout resulting from those perils. Premiums may be further adjusted using loss ratios, expense loads, and loss relativities. Real-time monitoring technologies offer a form of “physical insurance” for the insurer/underwriter to secure their loss assumptions. The value of having increased control over risk is perhaps obvious for an insurance company, but what about the policy holder they are insuring?
It is no doubt that customer expectations are changing. With the mobile generation well entrenched, consumers are beginning to expect alternative products and services optimized by internet connectivity. Consumers are also recognizing that economics, human health, and well-being are interdependent and are therefore demanding eco-friendly products and services provided by companies following environmentally sustainable practices. Putting aside the positive benefits of being a good corporate citizen, what is the Return on Investment (ROI) for choosing to be proactively accountable for chemical releases?
- Reduced Compliance Costs – The USEPA has been advocating efforts to modernize the regulatory compliance process by encouraging the use of modern and emerging pollution detection and monitoring technologies, timely electronic (digital) reporting, and public transparency measures. Notwithstanding the concerns about transparency, the self-monitoring aspects can be very appealing to business.
- Efficient Liability Management – Self monitoring permits can be structured to allow a facility to build in a time buffer for operational and liability management. A permit-holder can use real-time monitoring information to accommodate data validation, emergency mitigation response, expert analysis, and reporting review prior to releasing the self-monitoring report to regulators.
- Lower Liability Expenditures – Proactive testing and advanced early detection systems can identify events of concern before they become large environmental liabilities or OSHA exposures. For example, temporal and spatial monitoring of indoor air quality can distinguish between vapor intrusion sources and indoor operational sources of contamination. These technologies can also be used for “cause and effect” analysis determining and verifying mitigation strategies. The same systems can be combined with SCADA controls for real-time activation of engineering controls (blowers, etc.) to manage liabilities and prevent exposures. Significant cost savings can be realized if continuous monitoring of indoor air quality provides verification that existing HVAC systems are resolving exposure issues.
- Efficient Use of Management Resources – Companies with existing environmental issues expend significant resources accommodating the phased compliance process. Compliance investigation and remediation approaches can take years to complete and although the traditional sampling methods may still be necessary, some approaches can be automated for efficiency. Technology innovations over the last decade have demonstrated the means to expedite impact assessments, support low risk conclusions, direct mitigation activities, and document remedial effectiveness. These emerging technologies improve professional decision-making by providing much more information with temporal and spatial resolution.
- Collaboration – The economy seems to be shifting towards digital platform-centric ecosystems where a connected digital infrastructure replaces the factory-centric model of the past. In this digital platform economy, resources and expertise are linked for efficiency and optimized service delivery. Although environmental management is not yet supported by a similar digital platform, capabilities are on the horizon. These digital connected ecosystems promise efficiencies and cost control through linking of resources.
- Productive Workforce – Environmentally-responsible companies have better retention rates for skilled workers. A 2016 Millennial Employee Engagement Study by Cone Communications revealed that 75% of millennials would take a pay cut to work for a socially and environmentally responsible company.
When it comes to environmental compliance, responsible parties may opt to implement the minimally acceptable field campaigns to minimize costs. However, insurance companies need an unbiased understanding of the potential risks before issuing a policy. They need to be able to identify and quantify liabilities by minimizing ambiguity and by employing high quality data that can result in an informed decision with lasting effect. Insurers need to insulate themselves from the growing threat of vapor intrusion risks by securing temporally-resolved indoor air quality data that is not easily challenged. The EPA has clearly acknowledged that vapor intrusion conditions and policies change, and the traditional methods currently accepted for evaluating indoor air quality require more time to process than the acute TCE exposure duration of concern. As such, use of traditional methods are readily susceptible to legal challenges because they do not always represent exposure conditions, are not preventative, and can yield false negative and false positive results.
As facility self-monitoring models become more common, it seems plausible that regulators will begin to shift their enforcement focus to facilities that avoid such transparency measures. Policyholders who invest in monitoring systems that automatically assess and report environmental conditions will benefit from simplified compliance costs and lower insurance premiums since their underwriting risk will be calculated outside the traditional risk pool. For policyholders that do experience a risk event such as a chemical spill, electronic monitoring can instantly alert stakeholders to enable rapid mitigation which limits costs and associated liabilities (including compliance costs). However, the value of real-time monitoring isn’t limited to risk management, perhaps of even more value is the accumulated data archive which can be analyzed by insurance companies to build a customer-specific risk profile. This approach is beneficial to both the policyholder and the carrier since it brings risk more in line with reality and reduces premiums and auditing costs.
Moving forward, we can expect that a growing number of insurance companies will turn to digital automation platforms to confirm, manage, and price risks, control losses, and reduce claims for environmental exposures. Companies that can harness the capabilities of these technologies will be better positioned to shape the direction of their business and compete in a rapidly changing marketplace.
Brian Kahl, PG