Can Environmental Insurance Succeed Where Other Strategies Fail? The Case of Underground Storage Tanks

Abstract

Private risk reduction will be socially efficient only when firms are liable for all the damage that they cause. We find that environmental insurance can achieve efficiency even when fines and management mandates do not. The evolution of the U.S. Environmental Protection Agency's and states' Underground Storage Tank programs suggests that despite the hurdles for novel insurance products, mandating environmental insurance can succeed. The possession of insurance is much easier to monitor than the implementation of a mandate to do socially efficient risk management. Insurance also addresses the problem of small firms declaring bankruptcy, which limits the economic incentive of large ex-post, i.e. damage-based, fines.

Keywords: Insurance, Fines, Risk Management, Environment, Regulation, Underground Storage Tanks

JEL Classification: G22, M48, Q51