Mandatory financial security: a threat on three fronts – a report from Ferma on the effect of some new rules

Since January, the risk management community has become heavily concerned with one EU issue: the question of having to present financial security for specific industrial activities in order to operate across the EU. Julien Bedhouche of Ferma considers the implications.

This is not a new subject in itself, but it is interesting to notice that this year, it has become the centre of the attention of three initiatives from three separate Directorates General (DG) of the European Commission: Environment, Energy and Internal Market & Services.

These initiatives are obviously connected and reveal an overall desire from the EU executive branch to push forward this issue and convince member states that there is a necessity for mandatory, pan-European financial security schemes to cover the consequences of industrial accidents, regardless of whatever they already have in place.

On behalf of the risk management community, the Federation of European Risk Management Associations (FERMA) argues, however, that voluntary financial security must remain the rule. When the insurance market is working well, there is no specific reason to move to a mandatory financial security scheme.

The DG Environment  is the responsible branch of the Commission for environmental matters. Since 2012, it has commissioned a series of reports over the enforcement of the Environmental Liabilities Directive (ELD)in the 27 member states, which were published in June.

While the ELD regime established a new kind of liability regime for biodiversity damages for certain industrial operators, the current ELD review is the opportunity for the Commission to start thinking more deeply about some EU-wide mandatory financial security schemes. Its idea is that operators would have to demonstrate they had the financial capacity to pay the costs of recovery from an environmental incident.

FERMA has consistently stated that that the environmental insurance market should be allowed to develop without any constraints from a rigid and “one-size-fits-all” kind of regime. The ELD-related risks are too diverse and their exposure is over a long time. They cannot be covered by one single mandatory insurance scheme.

The concept of mandatory financial security is also trendy regarding oil and gas offshore activities. The current initiative by DG Energy and the Directive on offshore safety adopted in June 2012 by the EU member states have to be interpreted as the long term consequences of the Deepwater Horizon oil spill in the Gulf of Mexico in 2010.

DG Energy has ordered a study on civil liability and financial security for offshore oil and gas activities.The University of Maastricht, which was awarded the contract, will provide its conclusions by the end of 2013 after broad consultation with stakeholders.

Finally, the idea of mandatory financial security emerged in an initiative from the Directorate General for Internal Market and Services (DG Markt). It published a consultation(Green Paper) on the insurance of natural and man-made disasters in April 2013.

Out of 21 questions of the document, question 16 asks: “What are the most important aspects to look at when designing financial security and insurance under the Environmental Liability Directive 2004/35/EC?”

On top of that, let’s remind ourselves that the Commission is now also active on the cybersecurity front with a specific strategy and a proposed Directive on Network and Information Securitytargeting “critical operators” and their infrastructure. No doubt that insurance will also come up at some point.

In all these cases, it is up to industry to convince the Commission that imposing mandatory financial security schemes on European operators would lead to unintended and potentially damaging consequences, as it would be a long and risky task to reach a consensus over such measures among member states with very uncertain results.

Julien Bedhouche is EU affairs adviser for FERMA. He provides regular reports on EU matters of interest to risk managers on the FERMA website at http://www.ferma.eu/category/european-affairs/

Julien Bedhouche - FERMA