11 - Insurance for Environmental Damage

Summary

Insurance has two basic theoretical motivations. First, for those parties holding a risky asset to purchase a commodity that reduces the overall expected risk of the two assets, being the original asset and the asset of the insurance policy. Insurance policies are available in various forms on the market, but two of the main types of policies for environmental accidents are first-party (damage to self and own assets) and third-party (damage to other parties and their assets) liability insurance. Moral hazard contains the idea that if you assume the risk for someone else, then they no longer face the costs of those risks and thus are more likely to undertake those risks. Market capacity to supply the necessary volume of insurance policies and to be able to pay them out when needed can be reinforced with several tools, including forms of co-insurance, reinsurance, and pooling. Again, it bears repeating that while some injuries, like a wrecked car, might be remedied by cash payouts, this is not often the case for material environmental injuries. Thus, the creation of moral hazard for environmental insurance policies, both first-party and third-party, is a serious concern.