September 8th, 2009

Environmental Insurance in Asia – A Profound Opportunity

Posted at 6:00 AM ET

Thomas Herde, Senior Vice President

The environmental liability insurance market in Asia is poised for growth. Limited resources support a large and rapidly growing population, which has resulted in a considerable environmental toll. In China and Japan in particular, the effects of pollution are potent and proliferating. Some legal measures are emerging in an effort to reduce behaviors that cause environmental damage. With the establishment of liability, there is a salient role for (re)insurers in these markets. Despite challenges around data availability and a small existing market for environmental liability insurance, the long-term opportunity is profound, especially for early market entrants.

Limited Resources at Risk

Northeast Asia, consisting of China, Japan and the Korean peninsula, is home to 25 percent of the world’s population but occupies only 8 percent of the planet’s land. Because so many people have to be supported by a limited natural resources base, the environment has been made quite vulnerable to a pollution risk that continues to increase. Water resources, especially, have been affected, with quality deteriorating significantly in recent years. In China, these problems are quite severe. But, progress is being made toward the establishment of regulatory structures to protect the environment in these countries.

These developments translate directly to (re)insurance market opportunities. With regulations establishing liability — and the potential for expense in remediation — companies are likely to look for ways to reduce their exposure. As this trend develops, the market for environmental liability insurance is likely to grow, resulting in a new revenue stream for carriers eager for growth.


The most severe environmental problem in China is water pollution. According to the World Health Organization, an estimated 100,000 people die from illnesses related to water pollution every year. A 1995 World Bank study put economic damage attributable to water and air pollution at approximately USD54 billion a year, and the situation has only worsened since then. Further, the majority of chemical facilities in China are located near waterways — almost half of them have been identified as severe sources of risk by China’s State Environmental Protection Agency (SEPA).

Earlier this year, SEPA announced plans to implement a mandatory environmental insurance program, which is intended to be fully effective by 2015. Some insurers are already offering environmental liability coverage — addressing personal injury, clean-up costs and unexpected and unintended losses caused by pollution (including defense costs related to litigation for accidental and sudden pollution).

The highest hurdle, however, is claims data availability. Judgments generally are not published, and environmental claims amounts are kept confidential by insurers. So, it is difficult — almost impossible — to analyze historical results, impeding effective underwriting and thus the growth of this segment.


Several environmental disasters in the 1960s and 1970s caused Japan to adopt a variety of environmental regulations, including the “polluter pays” principle. This was followed in 2003 by a regulation giving prefectural governors the power to designate a site as polluted … and with it the authority to order the polluter (or landowner, if the polluter is unidentifiable) to clean it. The implication, of course, is that the party responsible for the environmental damage assumes the burden (and cost) of remediation.

Despite these measures — not to mention Japan’s leadership in the development of environmental technologies (20 percent of the international technology market) — few companies have developed products for offsetting environmental risks — and even fewer are buying them. Nonetheless, the conditions necessary for a robust environmental liability insurance market - clear environmental risk, regulation and alternative technologies (showing that there are options available) — are coalescing. Once the costs to clean a polluted site are sufficiently high (and frequent), the market for environmental liability insurance is likely to grow rapidly.

Market Opportunity

Northeast Asia’s environmental risks and regulatory developments suggest that a significant environmental liability insurance market will emerge. The future incumbent carriers are most likely to be those that enter the market early and establish a track record ahead of their competitors. Once the market has developed fully, it will be too late to take sizeable shares of available premium quickly. Early entry will define the environmental liability insurance market leaders in China and Japan.

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