Financial Market Solutions for Environmental Risk Management University of Toronto March 31, 2005

Marsh 2 Managing Environmental Risk Why Environmental Risks are Financial Risks Main Types of Environmental Risks Managing Environmental Risk Using Insurance Evolving Risk Transfer Solutions

Marsh 3 Why Environmental Risks are Financial Risks Increased pressure on companies, specifically Directors and Officers, to report on their significant liabilities (e.g. Sarbanes-Oxley et al) Increased pressure to identify and quantify environmental liabilities and to disclose this information in financial statements Increased costs associated with the regulation of activities that can affect the environment Often difficult to obtain financing on sites/operations that have environmental liabilities (actual/potential) Reputational issues can affect demand for stock

Marsh 4 Main Types of Environmental Risks Legacy Exposures – Resulting largely from past operations, mergers/acquisitions/divestitures Operational Exposures – Risks associated with day-to-day operations – Include operation & maintenance, products, waste-disposal activities, and compliance with local, Provincial, Federal environmental rules and regulations Strategic Exposures – Effect of environmental issues on corporate reputation – Effects of changes in regulations and treaties (Kyoto) Conclusion: Unmanaged Enviromental Risk can slowly undermine a company’s financial stability Companies that manage their environmental risks can create competitive advantage

Marsh 5 Managing Environmental Risk Identify and Assess Risks – Due diligence (site assessment/audits, etc) – Risk Mapping Avoid Risks – Change process or don’t buy site/operation Manage Risks – Develop appropriate Environmental Management System (e.g. ISO 14001) Transfer Risks – Insurance and alternate risk financing

Marsh 6 Managing Environmental Risk Using Insurance Back up/substitute for /augment indemnity Bring certainty to known cleanup costs Transfer risks of unknown, pre-existing contamination and new contamination Transfer risks of 3rd party liability Provide an environmental cleanup “warranty” Transfer risk associated with cleanup process Transfer risk associated with financing site/operations

Marsh 7 Main Types of Environmental Insurance Environmental Impairment Liability (EIL) – Also known as Pollution Legal Liability (PLL) Contractors Pollution Liability (CPL) Cleanup Cost Cap (also known as Remediation Stop Loss) Blended Finite Risk Transfer – Combination of pre-payment for known/expected liabilities and risk transfer for unknowns and cost overuns Lender Environmental Insurance (so called “Secured Creditor”)

Marsh 8 Pollution Legal Liability (“PLL”) Primary coverage -- on- and off-site: – Third-party claims for bodily injury – Third-party claims for property damage – First- and third-party cleanup costs for unknown pre-existing environmental conditions – First- and third-party cleanup costs for new environmental conditions Defense costs triggered by pollution conditions Environmental exposures related to owned transportation, vendor transportation, business interuption and non-owned disposal sites ↓ Reliable Risk Management Tool That Covers Third-Party Liabilities

Marsh 9 Cleanup Cost Cap (“CCC”) Protection from cost overruns associated with a remediation project – Offsite cleanup costs adjacent to the covered site – Other unknown contamination found during remediation – Increased cost of remediation due to change in regulations during project Turns an unknown liability into a manageable, defined number Policy responds when remediation expenses exceed an agreed-upon cost (Self Insured Retention) Underwriters review environmental studies and remediation design reports ↓ Manages the Economic Risk When Environmental Remediation Exceeds the Projected Costs

Marsh 10 Premium Variables Limit of Liability Purchased Self-insured Retention Level Expected Remedial Costs / Stage of Remediation Future Site Use and Surrounding Occupancies Variability of Risk (Severity / Frequency) Competition between Insurers Level of Characterization (i.e. the more data the better - as long as it’s understandable!)

Marsh 11 “Secured Creditor” or Lender Environmental Insurance Policy purchased by the lender Pays for the lesser of loan balance or clean up – Dual Trigger - combination of a default and an environmental condition. Protects the lender from 3rd party bodily injury, property damage, and cleanup claims resulting from on and off site pollution conditions. Provides coverage for 1st party claims for on and offsite cleanup costs if the insured has foreclosed on the property. Third party or discovery trigger.

Marsh 12 The Insurance Markets: AIG Environmental AIG Environmental XL Environmental Chubb Chubb Zurich Environmental Zurich Environmental ACE INA ACE INA Liberty Liberty Elliots Special Risk Elliots Special Risk Limits:Up to 150mm Term: Up to 10 Years Single site, multi site, portfolio Who Writes This Coverage?

Marsh 13 Evolving Risk Transfer Solutions Use of Finite Risk Transfer as part of Financial Assurance requirements: – mine reclamation obligations; – landfill site closure/post-closure obligations; – Financial assurance related to cleanup orders – Substitute for escrow and/or back-up indemnity on transactions with identified environmental liabilities Use of Risk Transfer to manage risks associated with greenhouse gas emission reduction projects/investments

Marsh 14 “Pre-funded” liabilities with Cost Cap and Pollution Legal Liability Attractive for long-term clean-ups and long-term operation & maintenance Takes advantage of discounted present value dollars Ensures funding is available for clean-up Incorporates all benefits of PLL & CCC May have tax advantages* Unspent monies may be refunded Option: Insured Fixed-Price Cleanup Estimated clean-up costs $25M Cost Overrun Coverage for “Knowns” $25M “Unknown Liabilities” Coverage $25M Deductible e.g., 20 yrs. $25M pre-funded with insurance discounted present value *Depending upon facts and circumstances, certain tax or accounting benefits may be associated with this product. Organizations should consult with their tax, accounting and legal advisors to determine whether such benefits would be applicable. Blended Finite Risk Programs

Marsh 15 Project cycle Feasibility Assessment/ Financing Construction / Erection Project Implementation / Commissioning Carbon Assessment Validation & Registration Carbon Transaction Verification & Certification Issue of Carbon Credits ROC’s Political Risk Technology / Efficacy Risk Credit Risk Permit Price Volatility Risk Permit Quantity Risk Natural Peril Business Interruption * It should be noted that many of the above risks may exist individually or in combination throughout the project cycle *Potential Risk Existence Project Design Permit Delivery Verification Risk Counterparty Risk Carbon Related Project Cycle Conventional Project Cycle GHG Reduction Project Risks

Marsh 16 Existing Insurance Solutions Property Damage and Business Interruption (BI) Contractors all risks and Advanced Loss of Profits (ALOP) Efficacy or Performance guarantees for technology failure / machinery breakdown Environmental Impairment Liabilities Credit and Trade Credit Political All can be extended to include GHG related activities and revenues but singly do not provide protection against the non delivery or shortfall of permits

Marsh 17 Emission Permit Delivery Guarantee Concept Surplus Credits Emission Reduction Project TRADE – Immediate Settlement ($10/tCO2e) Insurance Wrap Added value $8 t/CO 2 e* *For a trade of nominal value $10 /tCO 2 e Delivery uncertainty Discounted carbon price $2tCO 2 e* Carbon Assessment Validation & registration Verification & certification Issue of Carbon Credits ROC’s Feasibility Assessment /Financing Construction/ Erection Project implementation/ Commissioning Political Risks Technology / Efficacy Risk Credit / Counterparty Risk Permit Price Risk Permit delivery / volume uncertainty Hazard Risk Business Interruption Audit error & omission It should be noted that many of the above risks may exist throughout the project cycle. Permit Delivery Guarantee Potential Forward Transaction Carbon Transaction

Marsh 18 Who is buying Environmental Insurance Real Estate owners/managers (e.g. REITs, Pension Funds, Property Management) Manufacturing Companies Brownfield sellers/purchasers Lenders (or their borrowers) Contractors and Consultants Mining Companies Waste Management Companies

Marsh 19 Questions? George Boire VP, Environmental Solutions Marsh Canada Limited