Environmental Risks and Insurance

A Comparative Analysis of the Role of Insurance in the Management of Environment-Related Risks

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From the increasing incidence of environmental pollution and soil contamination, to recurring natural disasters, the risks posed by the constant interaction between human activities and the environment are diverse, manifold and often catastrophic in their consequences. Therefore, the elaboration of effective risk-management plans, aimed at formulating viable response strategies, requires the contribution of all the economic actors involved: private parties, financial institutions, governments and international organizations.

This report focuses on the role of insurance and reinsurance companies in the management of environmental risks - environmental pollution risk and natural catastrophe risk in particular.

It discusses the issue of insurability of such risks, analyses the increasing risk of liability for environmental pollution and the underlying trends in the development of environmental liability regimes in OECD countries. It also presents an overview of the various environmental pollution insurance products and techniques developed in response to legal and factual evolutions. In addition, it describes the special features of natural catastrophe risks, the role of traditional insurance markets in the coverage of such perils, and alternative options of coverage, from governmental disaster schemes to new financial market instruments.

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Natural Catastrophe Risk and Insurance

This final chapter is devoted to the analysis of the role of insurance in the management of natural catastrophe risk. The author underlines the role of insurers as well as the limits of private insurance solutions for the coverage of such extreme risks, due to the magnitude of their economic consequences and the difficulties faced in pooling risks. He also gives an overview of complementary or alternative risk management options already tested in different institutional contexts and analyses the crucial role played by governments in partnerships with the private sector. Besides he describes the main features of several governmental disaster schemes and other institutional arrangements that have been designed in order to supplement or replace traditional reinsurance and provide regulatory incentives for the development of private coverage. The overview of alternative risk management techniques also includes an analysis of the development of new financial instruments (e.g. catastrophe bonds or weather derivatives) aimed at providing additional funding and economic protection against large losses from natural disasters...

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