Is a Threat to Lloyd's of London Also a Threat to the Environment?

Abstract

The insurance industry provides coverage not only for cleanup costs associated with environmental “accidents,” but also for legal defense costs in the event that an insured company is sued. As a mechanism for quantifying environmental risks and internalizing the environmental costs of doing business, the insurance industry plays an important role in addressing environmental problems. Lloyd's of London is the source of much of the world's environmental and pollution insurance and is a major reinsurer for almost all types of risk; its current financial troubles have deep ramifications for the international insurance industry and the global environment. Using recent oil spills and pollution cleanups as a vehicle, this paper examines the history of the insurance crisis, the importance of insurance with regard to environmental risks, and the role of Lloyd's in the environmental insurance arena. Two possible policy responses to this crisis are presented.