Adverse selection, limited compensation, and the design of environmental liability insurance contract in the case of enterprise bankruptcy

Abstract

In the case of incomplete environmental liability insurance, enterprises are likely to go bankrupt. Rational enterprises generally do not want to insure the environmental loss liability in case of bankruptcy even if they are compensated by insurance companies. This means that the premium calculated now is high, which may be the main reason for the current enterprises to cherish insurance. Based on this, a basic model of environmental liability insurance contract considering bankruptcy under ex ante asymmetric information is established. The model is improved by using the information screening combination tool, which further improves the efficiency of information screening.

Environmental Pollution Liability Insurance and Corporate Performance: Evidence from China in the Perspective of Green Development

“…The final result is that EPLI brings pressure to the corporation, reduces the operating cost of the corporation for production and circulation, and reduces the operating income of the corporation; the existence of EPLI, in turn, reduces the deterrent effect of laws and local environmental regulations on corporations, and increases potential litigation costs and pollution prevention costs. Some scholars, starting from Porter's five forces model, found that EPLI will reduce the efficiency of technological innovation and resource management of corporations, leading to a reduction in the market competitiveness of corporations [54], and ultimately affecting corporate performance. As shown in column (4), the two-way fixed effects model verifies the above conclusions.…”

“…Third, even if there is an unavoidable payment, EPLI will still be responsible for the cost. Although the number of environmental compensation lawsuits in China is increasing [67], considering the fairness and instrumental role of insurance, EPLI does not set a maximum compensation limit, and it is still based on the insurance amount [54]. This paper takes property ownership rights as the dummy variable ownership and assigns the value of 1 to the corporation whose actual controller is the government, and the value of 0 to the corporation for whom the government is not the actual controller.…”

Environmental risks insurance in Slovakian market

“…From the view of international space and from the view of influence to the living environment, Miranda and Hale (2002) are also leaning to the idea as "environmental risks" [14]. In the case of incomplete environmental liabilities insurance, company is threaten by bankruptcy and rational enterprises generally do not want to insure the environmental loss liability in case of bankruptcy even if they are compensated by insurance companies [15]. Boonen (2019) studied market with insurances from the view of optimal insurance, when insurer is protected by limited liability, and the multivariate insured risk is exchangeable, showing existence of an equilibrium in the market [16].…”