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Mitigation of Long-Term Risks and the Role of Insurance: A Behavioural Law and Economics Perspective

Published online by Cambridge University Press:  17 April 2023

Qihao He Open the ORCID record for Qihao He [Opens in a new window]  and
Michael Faure Open the ORCID record for Michael Faure [Opens in a new window]
Qihao He*
Affiliation:
China University of Political Science and Law (CUPL), Beijing, China
Michael Faure
Affiliation:
Faculty of Law, Maastricht University, Maastricht, The Netherlands Erasmus School of Law, University of Rotterdam, Rotterdam, The Netherlands
*
Corresponding author: Qihao He; Email: qihaohe@gmail.com
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Abstract

In a world of rising long-term risks and their ensuing syndromes, the mitigation and financing of long-term risks are therefore arguably some of the most critical issues facing society. However, long-term thinking involving future generations draws limited attention in current political and social systems. Private insurance has received increased attention due to its expert role in risk management and its risk transfer mechanisms, and it has played an important role in dealing with some types of long-term risk, such as floods and earthquakes. Increasingly, insurance also contributes to disaster mitigation through regulating the conduct of policyholders by creating incentives for policyholders to counter short-termism and invest in reduction measures regarding long-term risks. In addition, it has been shown that supply-side problems and behavioural anomalies make it difficult to insure against long-term risks. Innovative long-term insurance solutions and a combination of public and private partnerships are proposed to overcome these restrictions.

Keywords

long-term insurancelong-term riskpublic–private partnership

Information

Type
Articles
Information
European Journal of Risk Regulation , Volume 14 , Special Issue 4: Special Issue on Long-Term Risks and Future Generations , December 2023 , pp. 779 - 792
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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31 Collier and Cox, supra, note 7.

32 ibid.

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39 ibid.

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41 ibid.

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46 ibid.

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48 See B Berliner, “Large Risks and Limits of Insurability” (1985) 10 Geneva Papers on Risk and Insurance 313–29; A Charpentier, “Insurability of Climate Risks” (2008) 33 Geneva Papers on Risk and Insurance – Issues and Practice 91–109. See also Q He, “Mitigation of Climate Change Risks and Regulation by Insurance: A Feasible Proposal for China” (2016) 43 Boston College Environmental Affairs Law Review 326–27.

49 The uncertainty of long-term risk will significantly affect the insurability of liability relating to tort litigation. It is inevitable that liability insurers will pay enormous litigation costs for the insured. See H-C Wang, “Adaptation to Climate Change and Insurance Mechanism” (2014) 9 National Taiwan University Law Review 317.

50 Jaffee and Russell, supra, note 40.

51 Take Florida’s Citizens Property Insurance Corporation, for example: citizens can secure emergency funding for catastrophic losses that exceed the Citizens Property Insurance Corporation’s own reserves under the assessment process. Citizens could impose a tax on all citizens’ policyholders. Part of this assessment/tax is collected up front, and part is spread out over a number of years, until the deficit is paid. See O Ben-Shahar and K Logue, “The Perverse Effects of Subsidized Weather Insurance” (2016) 68 Stanford Law Review 571.

52 Faure and Philipsen, supra, note 37, p 216.

53 ibid, p 230.

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56 ibid.

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58 D Laster et al, Innovating to Insure the Uninsurable (Zurich, Swiss Re 2005) p 14.

59 Reinsurance can be understood as simply insurer’s insurance. Insurers have protected themselves through private reinsurance contracts whereby portions of their losses from a catastrophic disaster are covered by some type of reinsurance arrangement. Insurance-linked securitisation could be regarded as the process of transferring insurance risks from insurers and conveying them to third parties through tradable securities. Catastrophe bonds, also called “cat bonds” or “Act of God bonds”, represent the most prominent and popular form of insurance-linked securities today. See He, supra, note 48.

60 The government has a deep credit capacity due to its ability to raise money through tax or borrow money by issuing debt far more readily than private insurers or reinsurers. See L Kaplow, “Incentives and Government Relief for Risk” (1991) 4 Journal of risk and Uncertainty 167–75.

61 See infra, Section IV.3.

62 This theory assumes that individuals with accurate information about risks decide on insurance purchases by making explicit trade-offs between the expected benefits and the costs of different policies. See Kunreuther et al, supra, note 36, p 8.

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65 PathogenRX, “An Innovative Solution for Pandemic and Epidemic Risks” <https://www.marsh.com/us/campaigns/pathogenrx.html> (last accessed 2 February 2023).

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92 For example, Kunreuther already proposed mandatory insurance several decades ago. See H Kunreuther, “The Case for Comprehensive Disaster Insurance” (1968) 11 The Journal of Law & Economics 133. Telesetsky treats mandatory catastrophe insurance as a risk-sharing mechanism serving the goals of both corrective and distributive justice. See A Telesetsky, “Insurance as a Mitigation Mechanism: Managing International Greenhouse Gas Emissions through Nationwide Mandatory Climate Change Catastrophe Insurance” (2010) 27 Pace Environmental Law Review 691.

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98 Baker and Siegelman, supra, note 13, p 502.

99 H Kunreuther and EO Michel-Kerjan, At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes (Boston, MA, The MIT Press 2009) pp 333–50.

100 Kunreuther et al, supra, note 36, pp 228–32.

101 ibid.

102 H Kunreuther, R Meyer and E Michel-Kerjan, “Overcoming Decision Biases to Reduce Losses from Natural Catastrophes” in E Shafir (ed.), The Behavioral Foundations of Public Policy (Hoboken, NJ, Princeton University Press 2013) pp 398–413.

103 Botzen et al, supra, note 69.

104 Faure and Heldt, supra, note 8, p 225.

105 Examples include but are not limited to Japan (Japan Earthquake Reinsurance Co.), the UK (Flood Re; insurers can cede the riskiest properties to the Flood Re pool at a discounted price) and the USA (the Terrorism Risk Insurance Program and the Florida Hurricane Catastrophe Fund, an example of state-level reinsurance).

106 Thank you to Bas Heerma van Voss for useful feedback on disentangling conceptually the different types of mitigation and compensation.