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Environmental Challenges in China

Pollution and Beyond

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Karl J Russek Senior Vice President, Environmental Risk

ACE Overseas General

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Key Objectives

1. Outline some key factors leading to the rapid development of environmental risk in China.

2. Discuss the current state of Environmental Regulation and Environmental Insurance in China.

3. Outline developing trends and troubling gaps in the current regulatory approach to insuring environmental risk in China.

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China’s Unprecedented Rise:Not Without Consequences for its People • Largest rapid industrialization in history = Largest human migration

in history. Almost 1bn people have migrated from the countryside to urban centers.

• Offshoring of vast chunks of US/EU industry was not solely due to lower labor costs. Heavy industry, basic chemicals, etc. = disproportionately polluting industries + coal for power generation

• Major air, water and soil pollution issues, soaring cancer rates: Pollution estimated to kill ~1.3M people per year (Source: the Lancet)

• Changing Demographics. China’s population is increasingly aging (though still quite young), better paid, better educated, and better connected

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Government Forced to Respond Large growth can’t be sacrificed • Energy: Massive investment in nuclear and renewables.

Solar and Wind + modernization and efficiency of other sources. Next: unconventional gas?

• Increased regulation and stepped-up enforcement of existing rules. Criminal penalties, strict liability, “polluter pays” : all strong on paper. Enforcement in practice? A matter of political will.

• Financial Mechanisms: Conditions for financing, securities rules, financial assurance requirements

• Compulsory Insurance: Pools established for specific regions

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Compulsory Pollution InsuranceManaged on a Provincial Level • Pilot programs in nine provinces & two municipalities • Targets certain industries (those deemed heavy polluters by the

government)• Low limits• Coverage limited to sudden & accidental trigger only • Each Insurance Pool consists of several local insurers• No meaningful risk selection • No loss control services provided by the provincial schemes

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Remaining Gaps and IssuesSignificant questions remain…• Provinces focused on what was politically possible. • Current legal context imposes Strict Liability and mandates

cleanup, however: o The approved scheme coverages are extremely narrow (e.g.

Sudden and Accidental).o There is typically no provision for first-party cleanup.o Individual policies must be purchased within each scheme.

• Broad 1st and 3rd party “U.S.-Style” pollution cover IS available in China for firms who apply a global EHS standard.o Can this be used to satisfy local requirements? Open

question. o The most significant risk CAN still be transferred, however.

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Questions?

Contact Information:

Karl J RussekSenior Vice President, Environmental Risk ACE Overseas General 100 Leadenhall Street, London, EC3A 3BP.T +44 (0) 20 7173 7541 M +44 (0) 77 66 99 44 78Karl.Russek@acegroup.com www.acegroup.com

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Many Thanks!