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

Loading...
Thumbnail Image
Penn collection
Operations, Information and Decisions Papers
Degree type
Discipline
Subject
Insurance
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Yin, Haitao
Kunreuther, Howard
White, Matthew. W
Contributor
Abstract

This paper examines whether risk-based pricing promotes risk-reducing effort. Risk-based pricing is common in private insurance markets but rare in government assurance programs. We analyze accidental underground fuel tank leaks—a source of environmental damage to water supplies—over a 14-year period, using disaggregated (facility-level) data and policy variation in financing the cleanup of tank leaks over time. The data indicate that eliminating a state-level government assurance program and switching to private insurance markets to finance cleanups reduce the frequency of underground fuel tank leaks by more than 20 percent. This corresponds to more than 3,000 fuel tank release accidents forgone over 8 years in one state alone, a benefit in avoided cleanup costs 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.

Advisor
Date Range for Data Collection (Start Date)
Date Range for Data Collection (End Date)
Digital Object Identifier
Series name and number
Publication date
2011-05-01
Journal title
The Journal of law and Economics
Volume number
Issue number
Publisher
Publisher DOI
Journal Issue
Comments
Recommended citation
Collection