Faure and He, ‘Private Law and Climate Disasters: Insurance Law’

Since climate change becomes one of the most crucial challenges on earth, how to adapt to its impacts and mitigate ensuring losses become extremely important and urgent. Increasingly, policymakers have come to realize that government alone cannot adequately prevent or defray climate-related disaster risks; a combination of public and private regulation is therefore warranted. Among the many solutions to climate change adaptation and risk mitigation, this Chapter focuses on insurance, which has received increased attention due to its emphasis on risk management.

As a well-known risk-spreading tool, private insurance could be an efficient financial instrument to compensate catastrophe disasters. Compared to government-provided/subsidized compensation programs, private insurance has been praised due to its lower transaction costs, lower adverse selection, and greater efficiency as a result of competitive markets. Private insurance can act not only as a form of post-disaster compensation but also as a form of private regulation – a contractual device controlling and motivating behavior to avoid the occurrence of losses. When insurers underwrite catastrophe risk, they have strong incentives to mitigate that risk and any ensuing losses in order to reduce their payouts. Compensation via insurance may help potential victims to adapt to climate change; meanwhile regulation via insurance may help to reduce the risk of climate change and mitigate losses due to its regulatory function in influencing policyholders’ behaviors.

Faure, Michael G and He, Qihao, Private Law and Climate Disasters: Insurance Law (February 17, 2017). Climate Disaster Law: Barriers and Opportunities (Edward Elgar: 2017 forthcoming).

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