ABI challenges EU plan for mandatory environmental cover

A European Parliament Directive could force insurers to cover the cost of species that have been wiped out.

The Environmental Liability Directive, currently being considered by the European Parliament's legal affairs committee and the Council of the European Union, was designed to prevent and remedy environmental damage to water, land and biodiversity.

It could be adopted by the parliament within 15 months.

It would give governments power to recover the cost of environmental restoration from polluter companies, with Article 16 of the Directive covering the need for insurance for such companies.

The Directive puts forward the possibility of such insurance being made compulsory.

The Association of British Insurers (ABI) said that it supported the objectives of the Directive, but questioned the viability of providing cover for biodiversity.

A confidential ABI report on the Directive points out that any loss must be quantifiable in monetary terms.

"An insurer has to be able to estimate the probability of any loss and the severity of loss," the report says.

Royal & SunAlliance (R&SA) technical insurances manager and liability expert Phil Bell said underwriters would not touch such a risk without being able to accurately assess it.

"If you get a habitat that's polluted, you can insure the cost of cleaning up the soil and the water, but if all the butterflies from the habitat disappear, how do you quantify that?" he said.

The ABI's report also warns against making the insurance compulsory, particularly given the current squeeze on liability capacity.

It says the current UK environment impairment liability market is worth about £50m in premiums each year, making it tiny in proportion to the employers' liability market which is worth between £800m and £1bn.

"Environmental liability insurance is unlikely to be attractive enough under current market conditions in the UK for insurers to commit themselves to this new and relatively unknown area to the extent that would be required if insurance was mandatory," the report says.