Implications of environmental liability on the insurance industry

The fundamental principles of insurance can be applied to insure against potential environmental liabilities. However, it is shown that there are inherent constraints on what insurance can do to provide a soft cushion to the societal decision to make polluters pay. Given the lack of relevant environmental information, it is very difficult for insurers to offer traditional insurance products and organisations are forced to carry out their own risk reduction and risk management programmes. Where insurance can help, it must tread carefully because the magnitude of environmental clean-up is many times larger than existing reserves within the industry. Thus, there is pressure from regulators and financial stakeholders to find shared solutions. The intellectual leaders of the insurance industry will need to focus their energy on developing new risk finance instruments.