'In the Chinese market, there is no insurance company really offering pollution liability products, but we have plans to do some research in this area this year,' said Shao Yun Zhou, director of liability insurance product development at People's Insurance Company of China (PICC). Mr Shao predicted his firm would be underwriting its first policies within a year.

American International Underwriters has already been approved by regulators to underwrite pollution liability policies, sources say. The firm would not comment. China Pacific Insurance (Group) is another firm seen as an early entrant.

'The demand potential is high in China, but the problem is for insurance firms to decide what they can afford to insure and what they can't cover,' said Mr Shao.

PICC offers clauses for accidental pollution coverage on some property policies but not as a standard product.

Sepa is working with the China Insurance Regulatory Commission to promote compulsory liability insurance to some of the country's dirtiest industries. Such insurance would help protect victims and change the existing situation of the government being charged with vast losses for each pollution accident.

Sepa's measure of 'green GDP' shows that pollution caused 511.8 billion yuan in losses, or 3.05 per cent of the gross domestic product, in 2004.

'We'll monitor industries with high risk and heavy pollution or factories in environmentally fragile areas,' said Bie Tao, deputy director of Sepa's department of policies, laws and regulations, when he announced the initiative in December. 'Enterprises involved in hazardous chemical products will be obliged to buy insurance.'

The push for insurance cover could also encourage industrial polluters to clean up, as no underwriter will offer coverage to a company that does not already have safeguards in place and does not display a sense of environmental responsibility.

Eric Gan, a property and casualty portfolio manager at Swiss Re, said that while companies were showing interest in buying the coverage, inquiries were mostly driven by curiosity and fact-finding as the business community became more aware of the insurance options open to them. So far, foreign companies, multinationals and those considering corporate mergers had been showing the most interest. 'In 2006, pollution and environment were big issues in China as people became more aware of them and companies realised they needed to consider risk management. Now they're starting to look at insurance and ways to manage and transfer that risk,' Mr Gan said. 'This is something that will be very much driven by legislation.'

The government is struggling to deal with a rapidly escalating pollution problem as years of industrial growth without proper regulation has left plants belching smoke and spewing dirty water into rivers.

That means even if your company is not producing excessive pollution, it could be exposed to pollution risks that an insurance policy can help mitigate.

'You don't know what was formerly on this site, but your company could be set up on property that is polluted and that could damage your company,' said Jim Finnamore, head of the Asian environment practice at Marsh Brokers.

Environmental liability insurance can include third-party liability, protection against the liability of company directors and executives, property insurance and cover for possible suits by employees.

The insurance industry is still trying to figure out how to price such products. General liability insurance costs are relatively low, with a competitive field of underwriters trying to grab a slice of an enormous, untapped market. Pollution coverage costs are expected to be high relative to other liability coverage.

Each policy is likely to be highly unique, and while they may cover litigation and clean-up costs, they will not protect polluters from paying fines imposed by regulators. In every case, insurers will expect the buyers to try to clean up their act before they are insured.

'It has to be a holistic approach. They need to change the way they run their factories as well. Just having insurance does not resolve this issue,' Mr Gan said. 'It's all part of building up a more credible and strong system, and risk management is just part of this.'