From Environmental Insurance to Environmental Derivatives?

Abstract

Economists propose to use certain financial instruments (like put options and call options) in order to solve two key issues of Environmental Security: funding and prevention. In particular they propose to substitute traditional environmental security instruments (like liability and insurance) for derivative contracts. Although both insurance and derivatives are financial instruments since they allocate financial resources, they are substantially different and need to be distinguished. In this article, I will illustrate the two instruments and discuss differences. Insurance can't be substituted for derivatives, but need to be reconsidered and innovated, particularly in the case of coverage of catastrophic events through the intervention of public reinsurers or of Citizens Insurance Corporation acting as insurance of last resort. Moreover it is possible to design an interplay between insurance and derivative contracts in order to achieve the two basic goals of environmental security: funding and prevention.