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Environmental cover remains a rarity among most eastern E.U. nations

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As the European Union expands eastward, new member states face the challenge of complying with tougher E.U. environmental standards.

Governments, however, are usually able to soften the blow to industry by negotiating reprieves before full compliance is required.

Such is the case for Bulgaria and Romania, which become member states in January 2007. The Accession Treaty signed in April 2005 between the 25 member states and both countries provides several "transitional measures," including some dealing with environmental directives.

Bulgaria and Romania will need to comply, for instance, with the E.U.'s integrated pollution prevention and control directive of 1996, which is designed to minimize industrial pollution throughout the European Union. Operators are required to get permits that take into account the whole environmental performance of a plant, including emissions.

Under the Accession Treaty, specific installations in Bulgaria and Romania have been given grace periods to comply with IPPC emission limits and other requirements as far ahead as 2015.

Still, not all facilities can put off compliance with this and other regulations.

Romanian companies not on the list will be hard pressed to comply with the new laws, said Ciprian Dragomir, a partner and head of the environmental practice group in the Bucharest law firm of Tuca Zbarcea & Asociatii.

"A lot of Romanian companies do not have the means to comply with (the new standards) because of a lack of funds," he said.

For instance, companies that operate slag or waste dumps may have to close down if they don't have the money to meet the standards beginning Jan. 1. "If you cannot operate the waste dump you cannot operate the company," he said.

Old mindset

In Bulgaria, the business community is also concerned with the cost and burden of compliance, said Stoian Lilov, chief executive officer of the Bulgarian Risk Management Association, based in Sofia.

"Risk managers in Bulgaria have always been aware of environmental risks, especially those working for foreign-owned companies," he said. Mr. Lilov noted that some companies have "gone through a lot of pains and cost to minimize negative impact on the environment."

However, there is still an old mindset on environmental pollution that may take time to change, he added.

The "environment in Bulgaria has suffered substantially from gradual and constant pollution for 50 years. The state, as principal owner of all former business activities, did little to prevent or narrow the scope of industrial pollution, which is an attitude difficult to break for some presently privatized enterprises," Mr Lilov said.

The attitude limits local demand for environmental liability insurance in the former Eastern bloc, according to some insurance executives and brokers.

Observers say, environmental coverage can be obtained, although mostly it is provided by major foreign insurers, such as American International Group Inc. and ACE European Group.

"So insurers are ready, but not the prospects," said Dimo Markov, chief executive of Aon Bulgaria in Sofia. "The problem here is owners and managers think, 'This will not happen to us."'

AIG's experience in Central and Eastern Europe is that there is just "sporadic interest from individual clients" for environmental impairment liability coverage, said Andrew Redman, AIG's regional liabilities manager for the Central and Eastern Europe countries and the Commonwealth of Independent States.

In the region, most of the interest is coming from Hungary, the Czech Republic and, to a lesser extent, Slovakia. But he said it was "still relatively few and far between." In countries such as Bulgaria and Romania, there was a "misconception" by companies that they have coverage in liability policies, not realizing that it is for only sudden and accidental environmental damage—or it could be excluded altogether, he noted.

"Clients aren't aware and the level of knowledge in the broker community is not sophisticated enough," said Mr. Redman, adding that one of AIG's goals is to train brokers and educate the market.

"There are serious exposures from past operations and from current operations that are poorly understood by local regulatory authorities," he said. "There has been very little done to actually identify what exposures exist, but there is absolutely no doubt that substantial exposures exist in the region."

The take-up situation would certainly change if coverage becomes mandatory in eastern countries. In Bulgaria, for instance, the Ministry for Environment and Water last month announced a proposal to impose mandatory insurance for environmental pollution in regulated industries. Business associations in Bulgaria were quick to denounce the requirement as an "unnecessary cost burden" and "going over the required compliance," with E.U. law, according to Mr. Lilov of BIRMA.

However, short of a compulsory insurance requirement in Bulgaria and elsewhere, environmental liability insurance will be bought mainly by western companies venturing into these new E.U. states, said Karl Russek, senior vp, environmental risk, for ACE in London.

That's been the case in Poland, which joined the E.U. in 2004. In recent years, there has been a steady stream of western companies—as well as banks funding private commercial development—buying environmental insurance as a way to hedge some of the exposure they perceive.

As for local companies, "we are just starting to see indigenous Polish firms seek out the coverage," Mr. Russek said. "That may be also a matter of infrastructure as well. We are just getting to the point where we've got local wordings for this coverage in the local language and sold through our local distribution as opposed to being a centralized London-type operation."

The newest E.U. member states could follow a similar trend.

"The first thing on the mind of the financial manager of a midsize Bulgarian company—provided there is not a compulsory insurance requirement—is not likely to be to rush out and buy environmental coverage," Mr. Russek added.

For now, demand will come from western investors.

"The amount of investment is not likely to curtail anytime soon and the people who are doing the investing are very aware of environmental liability and are seeking out ways to lay it off," Mr. Russek said.