Sponsor segment – Recycling our approach to waste management risk and insurance

Thursday 6 May 2021

The waste management sector is one of the most challenging in the UK insurance market.

Waste management is an essential public service for all of us, with Government statistics showing the UK generated some 221 million tonnes of waste in 2016. While improvements have been made to recycling rates, and environmental, health and safety standards, the sector presents challenges for insurers.

Waste management risks

Fire is the most significant risk. UK fire and rescue services attend around 300 significant fires at waste sites every year. On average ten to 15 of these are classified as major fires.

While the number of fires has remained static over the last ten years, the average size, scale, duration and cost of these losses has increased significantly.

New trends have also fuelled the fire risk. Lithium-ion (Li-ion) batteries, which are commonly used to power electrical and electronic household items including mobile phones, laptops and cordless power tools, are responsible for around 48% of all waste fires, according to Eunomia Research & Consulting.

Other key risks include environmental damage, employer’s liability, machinery breakdown and business interruption.

Contamination of waterways due to water run-off from fire extinguishment, for example, can create major problems and significant clean-up costs. The waste sector is also second only to agriculture, forestry and fishing sector for the highest number of fatal accidents involving employees.  

Insurance market reaction

This deterioration in insured losses is a major challenge for the UK insurance market. In the last few years most composite insurers and Lloyds syndicates have withdrawn from the market. The handful that remain are much more selective about the risks they’ll consider; the underwriting terms and conditions; and the risk control measures they require.

The resultant reduction in financial capacity and general appetite for the sector has led to reduced net retentions by insurers and significant increases in both premiums and deductible levels. It’s not unusual to see broking slips with multiple insurers involved and deductibles of £1 million plus for fire and business interruption on larger risks.

Use of captives and protected cell captives have also increased to create more financial capacity and flexibility, including providing direct access to the reinsurance market.

A captive insurance company is wholly owned and controlled by its insured. Its primary purpose is to insure the risks of its owners. Its insureds benefit from the captive insurer’s underwriting profits.

A protected cell captive is a corporate structure in which a single legal entity consists of a core linked to several cells that have separate assets and liabilities. The assets and liabilities of one cell are segregated and protected from those of the other cells.

Use of captives and protected cell captives has a number of financial benefits such as providing a means of insuring otherwise challenging risks at economic premiums, providing direct access to the reinsurance market and tax mitigation since captives are normally domiciled in locations with favourable tax regimes.

Risk management rules

Given the size and frequency of the insured losses across the sector, the subject of risk management and insurance has become a focal point for many stakeholders including DEFRA, the Environment Agency and Chief Fire Officers Association.

In 2014, the Waste Industry Safety and Health Forum (WISH) published good practice guidance on reducing fire risk at waste management sites and highlighted the importance of several key issues such as:

  • Accredited building construction standards and fire suppression systems
  • Maintenance regimes and electrical inspections
  • Correct separation and storage
  • Site security and control of contractors on site (notably hot work permits)
  • Comprehensive training regimes for employees.

Good risk management is also a fundamental part of any insurance programme and underwriters will expect these standards to be in place before they accept the business.

If claims are suffered, thorough reviews are undertaken by insurers to identify any weaknesses and further risk control measures will be required.

Securing cover

With the Prime Minister setting out his ‘blueprint for a green industrial revolution’ last November, and a target of reducing carbon emissions to net zero by 2050, the waste sector has a key role to play in helping the UK achieve this. Therefore, it’s vital that businesses are able to purchase good quality insurance protection at a cost-effective price.

It’s not an easy task. Underwriting and risk assessment is more stringent than ever. Insurers won’t accept risks unless they are satisfied with effective fire protection and high standards of risk management.

Given this, it’s vital to adopt a highly proactive approach and start renewal negotiations as early as possible. Engaging with all parties, including risk managers, brokers, underwriters and claims teams, will enable an operator to demonstrate a positive approach to risk management.

By starting early, waste management operators will give themselves the best opportunity to explore a range of different options and achieve the optimum blend of insurance, self-insurance and cost.

Peter Grocock (peter.grocock@aon.co.uk) is Public Sector Practice Leader – South West, Wales & Central at Aon.

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