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

50 Pages Posted: 20 Jun 2009 Last revised: 26 Jul 2009

See all articles by Haitao Yin

Haitao Yin

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

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

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 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)

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

Matthew Wallace White

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

The Wharton School
3100 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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