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China Set to Make Environmental Insurance Mandatory

By Alexander Gordon of Aon Risk Solutions

Last week authorities from the Communist Party of China announced that the country will soon require heavy polluting industries —including, mining and smelting enterprises, lead battery manufactures, leather goods firms and chemical factories— to participate in a compulsory program for environmental liability insurance. In the joint statement made by China’s Ministry of Environmental Protection (MEP) and the China Insurance Regulatory Commission (CIRC), officials also announced that companies involved in petrochemicals, hazardous waste management, and dioxin emitting enterprises would be strongly encouraged to participate. As the official statement explained, companies that participate in the program will have access to special environmental protection funds, and in addition, would be given priority for bank lending. The new requirements will build on a pilot program that since 2009 has secured environmental liability coverage for more than 2,000 companies across the country and underwritten nearly 20 billion Yuan ($3.21 billion USD) in environmental risk. Meanwhile, companies that fail to participate in the program can expect negative environmental impact assessments and credit downgrades that would be targeted to hamper their development.

Although hard statistics are difficult to come by, according to the Center for Legal Assistance to Pollution Victims (CLAPV), located in Beijing, over 2,000 lawsuits against environmental polluters are filed each year in China. In fact, a recent article by the state-owned China Daily claimed that mass protests over environmental pollution continue to grow annually by almost thirty percent. From a legal perspective, the 2009 Tort Law, which for the first time formally addressed liability for environmental pollution and shifted the burden of proof to polluters, has been seen as a landmark in the battle to codify environmental responsibility through statutory practice. Yet to date, the Chinese market for environmental liability insurance has faced major technical and existential hurdles; besides widespread uncertainty over how environmental protection laws will be enforced by local courts or third-party claims, the prevailing corporate risk culture has placed little stock in environmental responsibility. Simply put, why buy environmental liability products when the state has very clearly prioritized economic growth above all other concerns? With the new requirements on environmental insurance the Communist party has taken a direct step to bridge these contradictions, at once enforcing market demand and ensuring that companies can adequately provide compensation for pollution-related damages.

Meanwhile, as greater public space in China opens up to discuss environmental issues, companies can expect third-party claims for environmental pollution to expand in step. Here the recent coverage of Beijing’s air pollution woes is particularly instructive. As smog in Beijing reached record levels this past January, images of the ancient capital submerged in a thick soup of toxic haze were shared across the globe. Around the city, airports and highways were closed due to poor visibility, while officials urged citizens to stay indoors. Yet for many onlookers, the noticeable event was that the Communist government took a particularly unusual stance by allowing the official state press to deliver near unprecedented coverage of the dangerous air pollution. For the first time, not only did newspapers widely cover the details of the dangerous smog, but editors went so far as to unleash a flood of attacks against the lack of government action.

In one popular story, reporters told of a town in which the smog was so thick that a furniture factory burned for three hours before anyone noticed the rising smoke. So too, the Chinese government has had a hard time noticing the difference between the heady fog of economic growth and its now smoldering landscape of environmental damages. While environmental insurance penetration has remained low in China, the recent decision to force the heaviest polluting industries to purchase environmental insurance speaks to a new profound attentiveness to environmental risk. At Aon we have the expertise to help your company deal with the impacts of China's new environmental insurance requirements from today and into the future.