TOMASZ MIAZEK: But this would not apply to the internal walls, the construction of the building itself. This is what the people responsible for selling the buildings are asking me.

ARIE J VAN DER STEEN: What are they worried about?

TOMASZ MIAZEK: They are worried that some asbestos may be discovered.

ARIE J VAN DER STEEN: We have very many plants all over the world. Some of them still have asbestos in them. In general it is not a problem if you know it’s there and you manage it, and that also applies with divestments or acquisitions. If you know it’s there and you know where it is, you can handle it as part of the maintenance programmes. You have to take special measures, call in specialist companies, but in general if you know it is there and it is marked well, as soon as maintenance is up you can take it out, pack it, wrap it, and get rid of it.

KARL RUSSEK: The question of biodiversity came up and the political risk, what’s coming down the pipe, it is not unusual in the context of due diligence to identify issues at a site that are not actionable based on current regulation. That doesn’t mean they won’t be actionable four or five years down the road. We see this particularly in continental Europe, where large companies have a great deal of knowledge on what is under their sites. Their industrial facilities are likely to remain industrial facilities so there is no reason that it may need to be contained or there may need to be restrictions put on the property. That situation can be very well managed without a lot of active clean-up. But you cannot necessarily control what happens to the neighbouring property. That neighbouring property may be developed for commercial and residential purposes which changes your clean-up levels or, at a minimum, changes the risk perception and changes the potential plaintiff pool in that what was formerly industrial property is now residential. The question of biodiversity comes up. You may have had a completely permitted discharge, but what is the possibility that you can be brought to task for historic discharges over the past 20 or 30 years? Or even going forward, something may be permitted but is it resulting in some sort of long term cumulative impact so that a governmental body or a third party may allege some sort of claim? The mention came up about the insurability of biodiversity. Frankly I think biodiversity is very insurable. It will take some time to develop the specific methodologies, but, biodiversity in the US is referred to as natural resource damages and has been part of environmental insurance policies for the last 10 years.

ADRIAN CLEMENTS: I have to disagree slightly because we have a plant down in Marseille, for example, which is right next to the acid ponds where the flamingos nest in the summer. You could gradually contaminate and create a state where the flamingos don’t come back. How are you going to get those flamingos back? You can’t. No matter how much you pay, you have changed their natural habitat. We have rare plants on some of our sites. If they’re gone, they’re gone. I don’t know how the legislation will cope with that.

KARL RUSSEK: How it is typically handled in my experience - and a lot of the guidance documentation that is being developed at the EU level is consistent with what I have seen – it’s a question of not necessarily focusing on individual organisms but on what is called habitat equivalency where, if you contaminate a priceless irreplaceable piece of habitat, and it can never be brought back to 100%, maybe it can be brought back to 80%. These are very rough over-simplistic numbers I am using. In exchange for not being able to bring it back to 100%, part of the settlement negotiated may be to purchase and protect other similar habitat, to restore other similar habitat or to create additional wetland for example - to purchase one of the former unused industrial properties and turn it into a wetland. It is basically questions of what services was this area you contaminated providing to the environment and how can those services be restored? And also it is a question of a payment in kind. You cannot replace that bird but you can restore additional habitat, you can provide additional funds for environmental education, you can fund the regulatory agency, these are all things I have seen happen in practice.

ADRIAN CLEMENTS: If I play devil’s advocate, maybe that is the cheapest solution.

PIERRE SONIGO: The application of the Environmental Liability Directive which involves repairs to damage to natural resources has an annex which is Annex 2 which clearly defines what are called primary remediation, complementary remediation and compensatory remediation. The primary remediation is to try to provide remediation on the same site with the same species of the same kind up to a certain level. If you cannot go back to baseline, then you have complementary remediation which does not necessarily involve species of the same kind and is not necessarily at the same location. So if you cannot restore the habitat for your flamingos at that location, you may be asked to restore habitat for salmon in another area.

ADRIAN CLEMENTS: What I am getting at from a devil’s advocate point of view, to give an example, if I am a local government I might well think it would be great to have a highway running through this nature reserve because it will bring more people to my industrial area, to the shopping area, etc. Then OK, I take the bulldozers and destroy this natural habitat, build a highway, and somewhere else - on really cheap land - build another habitat. The cheapest solution is to use this legislation in a very negative way because who is going to sue the government for doing that?

PIERRE SONIGO: That’s an issue with government, but in the case of a company, the government is going to tell you whether it is acceptable to repair damage to the habitat at another location.

KARL RUSSEK: I wouldn’t understate the monetary amounts involved and the amount of time involved to do compensatory and complementary remediation.You are buying yourself a 20 year project to purchase and restore a habitat. It is not like soil remediation or even ground water remediation where it’s a capital expenditure of five to seven years and done.

ADRIAN CLEMENTS: And that is why I say, looking at it again from the negative side, maybe the cheapest short-term solution is to completely destroy that habitat in a way which can’t be rebuilt and pay for somewhere else.

PIERRE SONIGO: But I think it will depend on what is called the exchange rate between a pink flamingo and a salmon somewhere else, and now the European Union is facing some difficulties in trying to find the adequate exchange rate between two different species. So I am not sure you will be gaining from a cost point of view if you have this attitude of specifically and intentionally destroying. But it is an issue.

ADRIAN CLEMENTS: It is not my opinion, it is just a point of view!

PIERRE SONIGO: I think some governments, particularly in some eastern countries, may decide that it may not be worth repairing damage in a certain area but may be more important for other political reasons to repair damage in another location. So they say: OK, we agree that you won’t repair the damage here but you have to do it somewhere else. Now obviously this raises insurance questions - whether the insurance company is willing to compensate for that at another location not directly connected to your risk.

HANS BRANDT: But with property insurance today, you can negotiate with the insurance company if you have a fire in a building in one country, so that you can get your financial settlement and build in another country instead.

PIERRE SONIGO: But it is quite difficult and you have to go into cash value or repair replacements, which are different if you do it at another location and at another site. But yes, you can negotiate anything with an insurance company!

ADRIAN CLEMENTS: Well, if we take the CO2 problem, if we blew up a coke plant, we would probably not be able to rebuild it within Europe because of the CO2 emissions. Therefore, we actually have that clause that allows us to build anywhere because the government in the country where we had the loss might not allow us to rebuild there.

PIERRE SONIGO: Has anyone any more comments on the risk financing side, the coverages that the insurance market is providing or not providing? What do you think, Karl? Except for biodiversity, can we buy any type of coverage that we might need?

KARL RUSSEK: There is a lot more out there now than there was even three or four years ago. There is a lot more breadth of cover and flexibility in the market place.

PIERRE SONEGO: Is this is going to be true in all the EU countries?

KARL RUSSEK: Definitely.

PIERRE SONEGO: Even Poland, Bulgaria, Romania?

KARL RUSSEK: Obviously we look at every risk individually but compared to three or four years ago the amount of coverage and the affordability has changed drastically because I think you have seen ACE in particular but other companies as well viewing this as a long term differentiator. We feel it is an emerging risk but it is very much a quantifiable risk in our opinion so we feel it is an area that we need to be in as this issue develops.

PIERRE SONEGO: Would you treat electromagnetic fields as an environmental risk or another type of liability?

KARL RUSSEK: At this point we consider environmental risks to be what we talked about earlier - the soil, ground water contamination, discharges to air, water and the like. A lot of the emerging risks you see bubbling up tend to be either products or occupational issues. They may have some environmental overtones. The environmental risks as we underwrite them are more either first party clean-up of your own site or third party discharge of a solid, liquid, or gas.

PIERRE SONEGO: One last question on risk financing, do brokers add value in this area? I used a broker in the US to place a cap on clean-up costs for a mine which needed to be rehabilitated. I think in that case the knowledge of the brokers and the engineers that we used really helped us to deal with the insurance company to place the business. But I think that the expertise that exists in brokers in the US in the environmental area, doesn’t yet exist in Europe and it is difficult to use brokers to place our business right now.

TOMASZ MIAZEK: I think they concentrate more on the placement, finding the capacity for the risk instead of providing technical expertise. Generally there is a limit to the amount of cover you can buy from one insurer and if we need, say, a billion dollar policy we may need several insurers. Then we would need the worldwide broker to find the pool to cover the risk. That is how we use brokers mainly, not for their technical expertise.

Is there much competition in the environmental insurances market?

KARL RUSSEK: Currently in the EU I am aware of three other companies actively writing this and some of them are country specific. You have the pools in certain countries as well. It is not an area at this point that many of the large historic indigenous property and casualty carriers have invested resources in. Similarly, a few of the larger brokers have developed some specific expertise but they struggle to get their knowledge spread through the network and to get it in front of specific clients. It is a long term resource and education question even for the brokers that have agreed that they want to invest in this area. It is a high barrier entry because to underwrite and to broke these risks takes a great deal of expertise and it is difficult to find a chemical engineer who wants to be in the insurance business! So it is going to be a long term play until perhaps awareness of these issues moves down into the middle market. Then you will see some speciality brokers pop up and some of the larger houses develop speciality teams.

HANS BRANDT: I know a few brokers in the Scandinavian countries who are involved in this area but it’s almost a sideline. I think the reason for this is that there hasn’t been any big incident involving environmental liability issues so there is not really that much demand for insurance coverage. But from time to time you need it and the broker may not be that familiar or up to date with it.

KARL RUSSEK: Being in London we see things coming in from a lot of different places. We have got risks in front of us now from Finland, Norway, Singapore, China, Australia, largely from western European or North American companies who have experience with risks of this type who are looking to hedge against the regulatory risk in emerging areas. There is definitely an increasing demand. Whether or not it is necessarily well qualified from a commercial standpoint or underwritable depending on where they are is a different question, but the awareness level is certainly increasing.

TOMASZ MIAZEK: May I ask you a question, Peter? You said that environmental risk is a hot topic at the moment because of the new directive. I understand that the directive extends the risk to biodiversity. Does it have any other effects?

PETER JOY: It seems to be a tighter approach to soil, water and air contamination. A lot of the concern, I think, seems to revolve around the gap between national legislation and EU legislation. My impression from the interviews was that, particularly in the Nordic region for example, there was a firm degree of confidence that the EU Environmental Liability Directive would bring little if anything new and that people are already up to or beyond the EU standard. But in southern Europe there was a sense, true or not remains to be seen, but there was a sense that there was a gap between existing national legislation and this new directive that they were going to have to step up and fill now, right across the board. Does that tally with your own views and experiences gentlemen?

ADRIAN CLEMENTS: As a company, we apply the same standards worldwide so at the end of the day I guess it doesn’t really matter if there is a gap between, say, Greece where we have a small plant and the EU legislation. Each company should define what their level is and then benchmark themselves and their level must be at least European legislation, best practice or whatever. Maybe the bigger companies that have the resources should look to the future and say, what will the future legislation be?

There can also be conflicts of interest. Just for example, it costs us a fortune to replace all the halon systems in our plants. Halon puts out fires wonderfully but there is a conflict of interest between environmental protection and fire protection. The question is, is the smoke worse than the halon? We are having a similar situation now with another chemical which puts out fires wonderfully but is associated with ozone depletion and global warming. So who is right? The risk engineer from the fire property standpoint who wants to put out the fire or the environmentalist? And in some areas you end up with this small conflict where all the parameters are not being reviewed. Normally we have alternatives so therefore environmental comes first.

And when it comes to the some of the things that I’ve talked about, for example the flamingos in Marseille and some of our plants being in migration paths, you have to make sure to have high environmental standards regardless of the EU.

PETER JOY: By contrast, the people that were most concerned about the directive tended to be nationally based and in southern Europe and therefore would have been able to get away with taking a different approach to your own company up to now.

ADRIAN CLEMENTS: But what do they do when they merge or are taken over. Suddenly they have a enormous risk that they don’t identify because they are not used to it.

PETER JOY: Yes, and this is what they have become increasingly aware of, it seems.

ADRIAN CLEMENTS: When you are always merging you tend to be more aware of these additional risks. You have a mechanism within your company to handle them. But if you are a small company taking the first merger steps, the learning curve is very steep sometimes.

PETER JOY: Tomasz, can I ask you a quick question? Electromagnetic radiation, pollution from that, is this a concern in your industry these days or has it receded?

TOMASZ MIAZEK: Yes it is. First of all, there are protests in local communities against building base stations because people think it may be dangerous for their health. Secondly, we need permission from the government for certain amounts of emissions. Thirdly, there are cellular phones and the possible health damage they may cause. There is still not any proof regarding the negative effects but, like tobacco, asbestos and so on, it may be that suddenly someone will prove that there is a negative effect. Then we will be liable.

PETER JOY: Have you an insurance strategy where this is concerned?

TOMASZ MIAZEK: Yes, we have liability insurance against claims from electromagnetic fields. I must say that it was not easy to buy.

PIERRE SONEGO: This relates to occupational health as we discussed before but I think more and more legislation is putting occupational health as part of the environment liabilities. More and more I see that environmental risk is no longer outside of our facilities, it is also inside the facilities, the working environment. For example, the exposure of our workers to the chemicals that we use is treated as an environmental issue. Programmes like REACH will impose a risk assessment of all chemicals being used and may imply long term health issues for our employees. So perhaps there are going to be a new type of environmental liabilities which are probably not certain right now but will become a major problem for us. I don’t know how reinsurance companies will respond to that type of risk because it is difficult to quantify them, it is difficult to identify them and they represent very long term liabilities. I believe that’s the next challenge for the risk manager.

I’d like to end this discussion by asking if anyone would like to make a final comment on environmental liability. Perhaps we can start with you, Tomasz.

TOMASZ MIAZEK: After this discussion I can see that environmental risk is not only penalties from government, it is also first party, damages and some other costs for recreating or rebuilding new habitats. It is not only compliance with the regulations.

HANS BRANDT: The environment and taking care of it is very important and you have to take care of your reputation. I found Adrian’s comments on having to sell assets significantly below their book value particularly interesting. That really proves how much environmental risk can cost. How many buildings like that do we have on our books? I don’t think I have many but I may be wrong.

ADRIAN CLEMENTS: My personal opinion is that the environment doesn’t stop at the border. Therefore I would have to really seriously ask the question whether it’s better to invest the million dollars that we invest in one plant in France in Africa instead. Maybe in terms of the global effects, the world environment, the investment is better put there than in Europe?

KARL RUSSEK: These issues are becoming more and more boardroom issues and having significant financial impact. From the insurance standpoint I think the definition of what is insurable continues to expand.

ARIE J VAN DER STEEN: It was good to hear that an insurance company is looking to deal with the risks associated with biodiversity.