Risk-Based Pricing And Risk-Reducing Effort: Does The Private Insurance Market Reduce Environmental Accidents?

This paper examines whether risk-based pricing promotes risk-reducing effort. Such mechanisms are common in private insurance markets, but are rarely incorporated in government assurance programs. The authors analyze accidental underground fuel tank leaks - a source of environmental damage to water supplies - over a fourteen-year period, using disaggregate (facility-level) data and policy variation in financing the cleanup of tank leaks over time. The data suggest that eliminating a state-level government assurance program and switching to private insurance markets to finance cleanups reduced the frequency of costly underground fuel tank leaks by more than 20 percent.