Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?

50 Pages Posted: 20 Jun 2009 Last revised: 7 Oct 2024

See all articles by Haitao Yin

Haitao Yin

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

Howard Kunreuther

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

Matthew W. White

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: June 2009

Abstract

This paper examines whether risk-based pricing promotes risk-reducing effort. Such mechanisms are common in private insurance markets, but are rarely incorporated in government assurance programs. We analyze accidental underground fuel tank leaks--a source of environmental damage to water supplies--over a fourteen-year period, using disaggregate (facility-level) data and policy variation in financing the cleanup of tank leaks over time. The data suggest that eliminating a state-level government assurance program and switching to private insurance markets to finance cleanups reduced the frequency of costly underground fuel tank leaks by more than 20 percent. This corresponds to more than 3,000 avoided fuel-tank release accidents over eight years in one state alone, a benefit in avoided cleanup costs and environmental harm exceeding $400 million. These benefits arise because private insurers mitigate moral hazard by providing financial incentives for tank owners to close or replace leak-prone tanks prior to costly accidents.

Suggested Citation

Yin, Haitao and Kunreuther, Howard C. and Kunreuther, Howard C. and White, Matthew Wallace, Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents? (June 2009). NBER Working Paper No. w15100, Available at SSRN: https://ssrn.com/abstract=1422978

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

Howard C. Kunreuther (Contact Author)

National Bureau of Economic Research (NBER)

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

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Matthew Wallace White

University of Pennsylvania - Business & Public Policy Department ( email )

The Wharton School
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United States

National Bureau of Economic Research (NBER)

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