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

Risk Analysis, 2011, 31(1):12-24

30 Pages Posted: 10 Sep 2008 Last revised: 27 Sep 2013

See all articles by Howard Kunreuther

Howard Kunreuther

National Bureau of Economic Research (NBER); University of Pennsylvania - Wharton Risk Management and Decision Processes Center

Alexander Pfaff

Duke University - Policy, Economics, Environment

Haitao Yin

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: September 9, 2008

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

Suggested Citation

Kunreuther, Howard C. and Kunreuther, Howard C. and Pfaff, Alexander and Yin, Haitao, Can Environmental Insurance Succeed Where Other Strategies Fail? The Case of Underground Storage Tanks (September 9, 2008). Risk Analysis, 2011, 31(1):12-24 , Available at SSRN: https://ssrn.com/abstract=1265658 or http://dx.doi.org/10.2139/ssrn.1265658

Howard C. Kunreuther (Contact Author)

National Bureau of Economic Research (NBER)

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

3819 Chestnut Street
Suite 130
Philadelphia, PA 19104
United States
215-898-4589 (Phone)

Alexander Pfaff

Duke University - Policy, Economics, Environment ( email )

201 Science Drive
Box 90312
Durham, NC 27708-0239
United States

Haitao Yin

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

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