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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Risk, Information and Insurance

After a brief overview of the traditional functioning of the insurance and reinsurance mechanisms, this chapter introduces the general issue of insurability of environment-related risks. It describes the different types of attitudes towards risks and provides a synthesis of the criteria of insurability, which could be summed up under the following headings: assessibility, randomness, mutuality and economic feasibility. Against this backdrop, it is argued that two major factors influence in practice the provision of insurance policies for a particular risk: generalized uncertainty, which largely depends on the legal framework, and informational asymmetries, which may lead to adverse selection and moral hazard problems. As underlined by the author, the assessment of these two factors is of paramount importance in order to establish appropriate insurance mechanisms to cover environment risks....

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