Climate Change and Effective Catastrophe Risk Management Mechanisms: A Law and Economics Analysis of Insurance and Insurance-Linked Securities

Abstract

Climate change represents one of the epic issues of our time and it is likely to cause catastrophic damages. How to efficiently manage climate change catastrophe risk is a universal challenge. Private insurance generally produces optimal outcomes in which consumers maximise utility and insurers maximise profits, but it faces market failure in both supply and demand of catastrophe exposures. Insurance-linked securities (ILS) is a good tool to increase insurers' supply of catastrophe insurance by enhancing insurers' capability, although its market is still in infancy. It implies that private market merits with insurance-linked securities will enhance to accomplish the goal of increasing catastrophe coverage.