Issue Date: August 28, 2017
China readies new environmental liability insurance scheme
When a chemical producer in China accidentally or intentionally causes serious damage to the environment—be it through a spill, an explosion, or another way—the company is usually ordered to cease operations. Its managers can be fined or even jailed.
But most of the time, no compensation is paid to those affected. Local communities have to bear the cost of contaminated wells from which residents can’t drink, toxic soil that farmers can’t till, or polluted lakes that fishermen can’t fish.
This could soon change. The Chinese government is on track to approve regulations requiring manufacturers in high-risk industries to buy environmental liability insurance. Draft regulations, supported by the Chinese Ministry of Environmental Protection and the China Insurance Regulatory Commission, were unveiled last month to allow industry and the public to comment. The next step will be approval by the State Council, the top organ in the Chinese government.
“If you’re a marginal producer with poor compliance, you will be shut down."
—Steve Wang, general manager, Join King Fine Chemicals
Some in the Chinese chemical industry support the move. “You need such insurance in the chemical industry,” says Shuguan Gan, chairperson of Jingzhou Jianghan Fine Chemical, a producer of silane coupling agents based in the central China province of Hubei. “The insurance helps the company to survive if it has an accident that affects the community.”
Jianghan voluntarily purchased third-party environmental liability coverage several years ago, Gan notes.
In the U.S., chemical producers don’t have to get insurance to cover their environmental liability, notes David J. Dybdahl, president of the American Risk Management Resources Network, an insurance broker specializing in environmental coverage. “Chemical companies may need to purchase environmental liability insurance if it is related to their waste streams, but not their operations as a chemical company,” he says.
First proposed in China more than a decade ago, compulsory environmental liability insurance will mark another step in Chinese efforts to control the damage that industry can cause to the environment. The theory is that manufacturers will improve their environmental performance because not doing so would result in higher insurance premiums.
The insurance proposal is one of multiple measures that China has implemented in recent years to make manufacturers more accountable. The increasing scrutiny has led to plant closures and higher prices for certain materials.
Environmental liability insurance has multiple benefits, Dybdahl explains. For example, it helps bankers who are making loan decisions calculate the environmental risks their capital will be exposed to. It can also help governments decide what risks certain producers pose. “If something is uninsurable, it is always a good idea from a public policy standpoint not to allow those activities or to modify the activity to make it insurable,” he says.
When Jianghan bought its environmental policy, the insurer came to inspect the company’s facilities for three days. “The main purpose of the insurance is to provide coverage for communities against damage caused by industry,” Gan notes. “It’s not to protect the environment.” But the audit’s goal was to determine whether Jianghan can adequately manage its environmental performance.
“They looked at everything: our equipment, our manufacturing data, our wastewater treatment plant,” Gan recalls. “They wanted to make sure that our facilities can satisfy all regulatory requirements.” If Jianghan didn’t have a wastewater treatment plant, the insurer wouldn’t have agreed to sell the firm coverage, he says.
Over the past 10 years, the Ministry of Environmental Protection has run trial insurance programs all over China. The Chinese insurance industry spent the long trial period studying how to set premiums in policies covering environmental liability. When the program is rolled out nationally, several industries, including chemical production and hazardous waste handling, will have to get the coverage. Failure to do so will result in fines and sanctions by regulators.
China’s largest petrochemical producers are already required to get environmental liability coverage because of the outsize risk they pose, says the manager of a medium-size manufacturer of intermediate chemicals. He asked for anonymity because of his critical view of the government’s plan to require environmental liability insurance.
The government also encourages medium-size producers to buy environmental liability insurance, he says. But requiring such firms to get coverage may not do much to improve the environment, he adds. Whether they have insurance or not, he says, smaller companies that damage the environment will likely try to cover it up.
“If a company reports to its insurer that it had a mishap, the government will learn about it,” he says. Fear of official sanctions, including the possible arrest of managers, will discourage firms from disclosing spills to their insurers, he contends.
“The main purpose of the insurance is to provide coverage for communities.”
—Shuguan Gan, chairperson, Jingzhou Jianghan Fine Chemical
The proposed insurance coverage is part of the government’s effort to improve industrial company compliance with environmental regulations, according to Steve Wang, general manager of Join King Fine Chemicals, a producer of chemicals used in the pharmaceutical and agrochemical industries. For instance, he says, government inspectors have over the past two years been visiting manufacturing facilities more frequently, and their scrutiny is becoming increasingly thorough. In Wang’s view, more-frequent inspections are a stronger tool for enforcing compliance than compulsory insurance ever could be.
In Hangzhou, China, a chemical trader who buys chemicals from a variety of suppliers and also asked for anonymity tells C&EN that stricter environmental rules have raised the price of several intermediates used in the pharmaceutical industry.
The insurance, he argues, will not work as intended in China. “If you look at Chinese state-owned banks, many of them have a lot of bad loans on their balance sheets,” he says. “This is not because the banks cannot select good borrowers; it’s because the government orders them to make those loans.”
In the case of environmental liability insurance, he expects the government will order insurers to cover certain companies that might otherwise be uninsurable. “In fact, having insurance coverage could encourage those manufacturers to worry even less about their environmental performance,” he speculates.
While similarly skeptical about liability insurance, Join King’s Wang says the increasing pressure on companies to improve their compliance has been good for his business. In recent years, he says, Join King’s profitability has improved because of reduced competition as other firms are pressured out of business.
“If you’re a marginal producer with poor compliance, you will be shut down,” he says. “Investing in environmental abatement raises a company’s business sustainability.”
At Jianghan, Gan says even a temporary closure of facilities for environmental reasons can dramatically alter the competitive landscape. “Even if one of our competitors has to shut down for only three months after a government inspection, that’s enough for some of their customers to permanently switch to us,” he says.
Although opinions vary on whether compulsory environmental liability insurance will help China’s environment, the country on the whole appears to be making progress in reducing the damage caused by industry. And if the insurance can be made to work as intended, notes Dybdahl, the U.S. insurance executive, it will play an important role in encouraging companies to limit their environmental risk.
“Safer firms pay less for insurance than risky firms, and they can use these lower insurance costs to finance their investments in safety and other loss control measures,” he says.
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