Risk, Insurance, LUST, and Fish

September 24, 2010


Two papers crossed my desk yesterday highlighting the role insurance can play in mitigating environmental risk.  The first, by Yin et. al. in Risk Analysis, discusses three appoaches to mitigating the risk of leaking underground storage tanks (a problem with the fantastic acronym LUST).  

Large fines for spills, as it turns out, are not a particularly efficient enforcement tool, as most LUSTs are owned by small businesses like gas stations that would likely go bankrupt before paying all the fines and cleanup costs.  Many large firms outsource or spin off their tank operations to smaller companies so that they can declare bankruptcy in such an event.

Another option is to have a set of safety regulations that are strictly enforced.  However, the EPA and state regulators have lacked the resources to send inspectors into the field to make sure USTs are up to code.

Mandating insurance for tank owners, on the other hand, lowers the burden on regulators and also spreads the cost to operators out into a string of premium payments.  Some states have created public quasi-insurance funds by forcing industry to pay for cleanups through a gasoline tax.  However, it turns out that private insurers are better and forcing their customers to manage their tanks for safety.  The authors are able to show that in states that have robust private insurance markets for LUSTs, there are about 35% fewer spills.

In Ecological Econmics, D.S. Holland writes about possible insurance options for fishery markets.  Some fisheries have total bycatch quotas, meaning that the fishery is shut down when a total amount of bycatch is caught.  For example, if, collectively, all the Pacific flounder fisherman catch 20 loggerhead turtles, then regulators declare no more Paciifc flounder fishing for the year.

This can lead a "race to fish", where fisherman try to catch all they can before the fishery is shut down.  Holland explores the possibility of bycatch insurance where fisherman are compensated for a loss of revenue if the fishery is shut down earlier than expected.  This is only tangentially related to the LUST insurance above, but it again creates an interesting situation where the insurance company is incentivized to reduce its clients' environmental damages.  In this case, would insurers force fisherman to find ways to reduce bycatch?

I'm interested to see how insurance models scale up to addressing large scale, systemic ecological risks.  There's an intruiging example of the potential of private insurance in the underwriting of reforestation in the Panama Canal.  Where else is it applicable?

(For more on lust, see Christine O'Donnell.)

ResearchBlogging.org Yin, H., Pfaff, A., & Kunreuther, H. (2010). Can Environmental Insurance Succeed Where Other Strategies Fail? The Case of Underground Storage Tanks Risk Analysis DOI: 10.1111/j.1539-6924.2010.01479.x

ResearchBlogging.org Holland, D.S. (2010). Markets, pooling and insurance for managing bycatch in fisheries Ecological Economics : 10.1016/j.ecolecon.2010.08.015

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