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By GREGORY DL MORRIS, who has covered the chemical industry and issues in the financial industry for the past 20 years

The U.S. Environmental Protection Agency (EPA) wants to update the 34-year-old Toxic Substances Control Act; the Department of Homeland Security would like to make its Chemical Facility Anti-Terrorism Standards (CFATS) permanent.

For the first time in as long as anyone in the industry can remember, underwriters are recognizing chemical producers' efforts. That's good news for David McClain, director of insurance and fleet services for PPG Industries, the Pittsburgh-based manufacturer of paints, coatings, sealants, glass and chlorine, the latter a substance which is particularly lethal.

One of PPG's Gulf Coast refineries suffered hurricane damage several years back. The company, which is largely self-insured, conducted a post-mortem on the loss.

PPG risk managers ordered changes to some of the company's processes. Managers, for example, decided to store some of the inventory off site. Everyone, including McClain, learned from the experience. "When another hurricane struck three years later, our claim was much smaller, just business interruption," said McClain.

PPG, like many other chemical producers, turns to the commercial insurance market only for excess liability and other usual business lines.

The practice of chemical companies retaining more risk compared to the relative risk retained by companies in other industrial sectors has served the chemical industry well over the years.

It has allowed chemical companies as a whole to lay the real catastrophic risks off onto the insurance industry. Risk managers sometimes pay a little more than they would like but they can always find coverage. "We may take issue with the cost of excess liability, but we have never had difficulty with capacity or a problem with placement," said McClain.

How is it that the chemical industry has the ability to bear a greater burden of the risk relative to its capacity? It is because McClain and his peers are making use of detailed benchmarking data.

Data, supplied by Advisen Ltd. and Marsh, which publishes biennial surveys of its U.S. chemical clients and manages an interactive database of large global chemical producers, has given chemical industry risk managers more confidence in their ability to analyze their own risks.

Chemical producers have become highly skilled at figuring out which risks are not worth taking on themselves and which risks are prime candidates for transfer into the insurance marketplace.

One example is Primex Ltd., the chemical industry's Barbados-based group captive formed in 1986 and managed by Marsh.

Primex has played good soldier of sorts to the chemical industry, quietly and diligently taking on risks when rates in the traditional market hardened beyond what industry risk managers believed were reasonable.

In the mid-1980s, when rates were hard, "Small and medium-sized chemical companies were struggling to purchase liability insurance in the commercial market at the time," said Fabrice Lebourgeois, managing director and chemical practice leader at Marsh, and currently client executive for Primex.

Today, despite fewer than a dozen members belonging to Primex, mostly because of mergers and acquisitions, Primex still offers $25 million liability in excess of reasonable retentions, usually $1 million, Lebourgeois said.

Better data, a viable captive, a soft market ... it begs the question. Why do chemical industry risk managers even need to bother with traditional market underwriters at all, particularly with underwriters who didn't always seem to appreciate the business the chemical industry funneled their way?

Why indeed?

In fact, the chemical industry has gone even further than developing the traditional alternative risk vehicles like captives. The industry has shrewdly developed alliances with the insurance markets. Take, for example, the Society of Chemical Manufacturers and Affiliates (SOCMA).

In 2005, SOCMA adopted a broad risk-management program called ChemStewards, a self-assessment program, which involves setting priorities for addressing risks, and verifying mitigation.

As the name implies, it involves stewardship and requires participation from senior management and emphasizes the sharing of best practices, according to Bill Allmond, vice president of government relations for SOCMA and who is responsible for the program.

Compliance with ChemStewards is mandatory for members, and is verified by third-party auditors, similar to ISO certification.

By itself the SOCMA program reduced cost and risk to chemical manufacturers--a benefit risk managers were happy to keep to themselves. Still, chemical producers believed they deserved recognition from the underwriting community.

In 2007, two years after ChemStewards was launched, the program caught the attention of property/casualty insurance carrier Chartis, and the carrier entered into a deal to offer broad property/casualty and pollution program coverage to SOCMA members.

The Chartis deal was hailed as a breakthrough in terms of SOCMA's relationship with a property/casualty underwriter. "ChemStewards makes the owners' risks much more appetizing for us," said Tony Anzalone, senior vice president of the casualty business segment for Chartis.

At its core, coverage for SOCMA members is an enhanced version of Chartis's Environmental and General Liability Exposures (EAGLE) program. One advantage is a 10 percent credit off the premium, according to Anzalone.

"Another benefit is that we reimburse members for the cost of the third-party verification of ChemStewards, up to $6,000 over a three-year audit cycle."

Those dividends from the ChemStewards program come in additionn to the components of the standard EAGLE coverage. "We offer coverage for transported cargo, contractors' pollution, as well as off-site bodily injury and clean-up," Anzalone added.

EAGLE insureds also have the option of adding blanket coverage for additional insureds, blanket coverage for vendors, and the cost of product recalls. To support the underwriting of the EAGLE program, Anzalone has a platoon of 60 engineers visiting insured sites and making recommendations on environmental exposures.

Chartis, which handles about $650 million in gross underwritten premiums in the U.S. and Canada, also operates a network called Pollution Incident and Environmental Response, with 315 locations in the United States and Canada. "That includes about 130 preapproved contractors with negotiated rates for 24-7 emergency response," said Anzalone.

The SOCMA agreement isn't the first relationship between an underwriter and a group representing similar risks. Chartis had a similar arrangement with the National Association of Chemical Distributors (NACD), whose risk-management program is called Responsible Distribution.

The template for chemical environmental and process management practices dates back to a program called Responsible Care, developed by The Canadian Chemical Producers' Association in 1986 under then-president Jean Belanger, and adopted two years later by the larger and more powerful U.S. chemical industry trade association, the American Chemistry Council (ACC).

Today Responsible Care has grown to include a partner program for transportation companies and other service providers.

"The fundamental focus of Responsible Care today is on risk management rather than codes of management practice as when it began," said Debra Phillips, managing director of the program. "Member companies evaluate risk, set priorities, address risks in order, and have that certified by independent auditors."

There is a stand-alone Responsible Care Management System, and an RC 14001 designed for firms with ISO 14000 requirements from their customers. "Members use the certification to show they are less risky companies to do business with," said Phillips. "And we are seeing this throughout the supply chain."

Boston-based Cabot Corp., which produces a range of specialty chemicals from rubber to printer ink to drilling fluids, joined ACC last year to take advantage of the support to the member companies to enhance a vigorous home-grown risk management program, said Bill Milaschewski, Cabot's director of risk management.

The safety management program, focuses on operational risk assessment, process safety and internal audit of bulk material handling, according to Peter DiPasca, senior corporate environmental manager and author of Cabot's sustainability report.

Cabot's programs dovetail neatly with ACC's Responsible Care initiative, Milaschewski said, adding that he hoped to be among the quickest ACC companies to complete certification. Association officials confirm Cabot is on a fast track.

In early 2009, added Phillips, the DHS accepted Responsible Care under its Safety Act as a recognized technology.

"Our members are the users of the technology, and so are completely protected from liability on their facilities, supply chains, and information technology in case of a terrorist attack. The liability rests with ACC, and that is capped at our insurance deductible of $9 million."

In contrast to SOCMA and NACD, ACC has not arranged for group coverage. Instead ACC provides "relevant tools" for members to secure favorable terms with carriers of their own choice, said Phillips.

"Members have reported to us significant reductions in premiums," said Phillips. Most range in the 10 percent to 15 percent range on the total cost of the placement, but one is as high as 25 percent.

Milaschewski said Cabot cannot rely solely on insurance for its risk management needs, and buying insurance coverage--whether in the traditional or surplus markets--is no substitute for properly applied risk management strategies executed with the backing and commitment of senior management.

"Insurance is a financial tool to protect the company," said Milaschewski. "We are committed to continuous improvement, and have been reducing the number of incidents over the years. Having a commitment from senior management is very important in driving the process. We always go into insurance with a good handle on our exposures."

Milaschewski said Cabot's commitment gives the company the right to be choosy about which underwriters to work with, and to insist of some financial recognition in the form of discounted premiums.

"We don't do business with underwriters that just charge commodity prices," he said. "We go to great lengths to differentiate ourselves as better-than-the-average risk and that we deserve to pay a lower portion of carriers' loss cost."

March 1, 2010

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