Environmental Liability: Stuck in the Middle Presented by Justin Perry, Vice President and National Practice Leader Aon Risk Solutions, Environmental Services Group Prepared by Aon Risk Solutions Environmental Services Group

Aon Risk Solutions | Environmental Services Group 2 Agenda Environmental Risk Management  Driving Forces Effecting the Use of Environmental Insurance  Common Environmental Exposures Environmental Insurance Environmental Insurance Overview Canada is Stuck in the Middle Alternative Financial Instruments Adaptation to Climate Change Environmental Insurance Transformation New Risk Transfer Opportunities

Aon Risk Solutions | Environmental Services Group 3 Driving Forces Effecting the Use of Environmental Insurance

Aon Risk Solutions | Environmental Services Group 4 Common Environmental Exposures  Natural disasters –Water events –Earth movement events –Permafrost increases in active-layer  Contractor operations / Tenant operations / Remote operations  Fire/explosion and the firefighting activity.  Product Storage - Storage Tanks Liability  Emission and effluent management  Solid waste management

Aon Risk Solutions | Environmental Services Group 5 Environmental Insurance Overview  Fixed Site Environmental Liability –Designed to indemnify and defend current and past owners from environmental incidences that exceed a government standard on, under or emanating from a site. –Protects against fines and penalties resulting from an unintended and unexpected emission or release, both sudden and gradual events. –Response threshold is designed around compliant contamination set by government regulations.  Contractors Environmental Liability –Designed to indemnify and defend a contractor from pollution incidences as a result of the contracting operations at a job site. –Response threshold is designed around the combination of remediation expenses and the diminution in value set by government regulations or as determined by a court.

Aon Risk Solutions | Environmental Services Group 6 Canada is Stuck in the Middle  Environmental Insurance is a global market with regional differences. –U.K. based Lloyds syndicates providing strong environmental insurance solutions in Europe. Target: Heavy Manufacturing and Waste Management Companies. Coverage drivers: Biodiversity and compliance with Environmental Liability Directive. Focuses on operational losses. –U.S. based coverage is designed around environmental regulations. Target: Contractors, Real Estate / Redevelopment Companies, and Waste Management Companies.. Coverage drivers: non-compliance with the maximum allowable concentrations and Natural Resource Damages. Focuses on management of historical conditions, unknown / undiscovered historical conditions, and operational losses. –Canada has been largely dependent on U.S. and U.K. Insurers Combining the appetite of the strongest global markets. Adapted to respond in a less prescriptive regulatory environment. Focuses on the discovery of environmental conditions and voluntary remediation in order to avoid government action or third party claims.

Aon Risk Solutions | Environmental Services Group 7 Alternative Financial Instruments  Reinsurance Marketplace use extensive analytical data to build Climate related products: –Crop-Hail Insurance. Crop yield based on a 10 year historical average and weather forecasting tools.  Designed to guarantee operational costs reimbursements of a fixed yield. –Climate Derivatives are single or multi-parameter bespoke program. Largest program is for the U.K. Construction Union based on temperature parameters.  Designed to subsidize PPE required to work below certain temperature thresholds. Canadian interests are diverse and focus on a combination of weather factors:  Consecutive winter precipitation hours (Fixed Contract subsidization).  Extreme Cold for outside workers (subsidize additional workers).  Extreme Wind Days for bridge construction (subsidize construction delays).

Aon Risk Solutions | Environmental Services Group 8 Adaptation to Climate Change: Environmental Insurance Transformation Environmental Insurance Trends:  Changing regulatory environment yields higher remediation expenses and more assignment of liability.  Increased social awareness resulting in increased allegations and claims.  Advances in environmental consulting practices resulting in more discoveries of existing conditions.  The marketplace is currently plagued with losses significantly exceeding premium levels.  Global platforms are restricting classes of risks globally in response to loss trending locally. Adaptation to Climate Change: What will it take?  Defined regulatory environment.  Incorporating climate change forecasting into infrastructure design / construction design.  Infrastructure classification updates / Design classification updates.  Comprehensive review and update of flood maps, precipitation tables, temperature fluctuations of specific infrastructure.

Aon Risk Solutions | Environmental Services Group 9 New Risk Transfer Opportunities Traditional Environmental Insurance Marketplace:  Restrictions in coverage scope of gradual environmental releases, especially with a Carbon Cap & Trade System.  Restrictions in coverage scope where permits do not address nuisance or trespass actions.  Market will continue to respond to individual incidences that exceed a regulation or a permit.  Continued increases of capital availability in Environmental Insurance: focus on lower risk classes. Opportunity for New Insurance Products:  Emissions and Effluent management insurance (ie. Carbon Cap & Trade Insurance). –Not confirmed to a single event but rather average output or total term output.  Extreme Weather business interruption insurance or delay in construction insurance.  Increase use of Captives and Reciprocals to address higher risk classes.

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