1. INSURANCE
GOOD FORTHE
ECONOMY AND
THE ENVIRONMENT
Dr. Dino Falaschetti
Executive Director
Property & Environment
Research Center
PERC.org

2. ALMOST NO ONE HAS EVER BEEN RICH
why, and how can insurance help?
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Insurance Market Summit 2013

3. INSURANCE & ECONOMIC PERFORMANCE
• Why are public bathrooms so dirty?
• Cleaning bathrooms takes time and effort…and is
unpleasant!
• We thus tend to avoid it, especially when relatively little
personal benefit can be enjoyed.
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Insurance Market Summit 2013

4. INSURANCE & ECONOMIC PERFORMANCE
• Why is economic prosperity only a recent phenomenon?
• Institutions for private property started to take hold only a
few hundred years ago.
• Where they have taken hold, people face not only the costs
of their actions, but also enjoy personal benefits.
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Insurance Market Summit 2013

5. INSURANCE & ECONOMIC PERFORMANCE
• Why is insurance important for economic performance?
• By facilitating the free exchange of risk exposures, insurance
can mitigate risks before-the-fact and efficiently distribute
recovery costs afterward.
• In other words, by helping people avoid costs that have
relatively little to do with their own decisions, insurance can
further the set of institutions that align costs and benefits.
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Insurance Market Summit 2013

6. INSURANCE GETS IT RIGHT!
• Insurance helps align costs and benefits, at least in principle
and oftentimes in practice.
at least in principle
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Insurance Market Summit 2013

7. INSURANCE GETS IT RIGHT!
• A recent BIS working paper (von Peter et al. 2012) highlights the
“macroeconomic value” of insurance contracts in a world prone to “major
natural catastrophes.”
• This value is created before-the-fact by offering and enforcing productive
rules (e.g., efficient building codes), and afterward by channeling resources to
high productivity uses.
• Though not immune from political pressures, private insurance can be more
productive on these dimensions than are public alternatives.
• In other words, the greatest value of insurance may be in its economic
governance services.
at least in principle
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Insurance Market Summit 2013

8. EASY ECONOMICS MEETS HARD POLITICS
• Why is this scientifically sound, and even common sense,
economic prescription so difficult to implement politically?
• Many people are happy taking a bigger slice from a shrinking
pie, and political campaigns provide strong incentives to
serve them.
• Distributional conflict over insurance and environmental
policies appears considerable, exposing both sectors to high
levels of political risk.
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Insurance Market Summit 2013

9. POLITICAL RISK ISTHE BIG HURDLE
• Understanding this interaction between economics and
politics can help policy entrepreneurs turn negative-sum
redistributions into mutual benefits for insurance, the
economy, and environment!
can green-wrapping insurance policy help?
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Insurance Market Summit 2013

10. POLITICAL RISK ISTHE BIG HURDLE
• Green wrapping policies that weaken economic performance
can nevertheless strengthen one’s electoral prospects in terms
of who wins and loses from associated political distributions.
can green-wrapping insurance policy help?
www.doctorfal.com
Insurance Market Summit 2013

11. POLITICAL RISK ISTHE BIG HURDLE
• If green wrapping bad economic policies makes political sense,
then why not good economic policies? And insurance is good
for the economy and environment!
can green-wrapping insurance policy help?
www.doctorfal.com
Insurance Market Summit 2013

12. GROWTH IS GREEN
• Economies can grow only if people continually make more
with less.
• But “more with less” is not only sustainable, it is the definition
of conservation.
• If growth is green, and insurance strengthens economic
performance, then insurance is green too!
and insurance helps
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Insurance Market Summit 2013

13. INCOME ANDTHE ENVIRONMENT
(Yandle et al. 2004)
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Insurance Market Summit 2013

14. INSURANCE FORTHE ENVIRONMENT
• Opportunities also exist for insurance entrepreneurs to do
well for themselves by doing good for the environment, and in
ways that can be less sensitive to inefficient distributional
conflict.
• Assurance contracts for energy exploration(Orlando 2012) and
fisheries (Falaschetti 2013)
• Extending RMS-type wind bonds (Palm 2008) to environmental
applications (e.g., forest fires, weather, agriculture)
• Hedge fund strategies (e.g., EKO Asset Management Partners)
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Insurance Market Summit 2013

15. • An efficient insurance sector can improve environmental
quality by strengthening economic performance.
• Contracting in general, and insurance in particular, plays
an important role in economic performance.
• Whether this role is productive, in turn, depends on
whether institutions for private property exist.
• These institutions can directly improve environmental
quality, and do so indirectly by increasing demand for
environmental quality.
www.doctorfal.com
Insurance Market Summit 2013
INSURANCE,THE ENVIRONMENT, &
A MORE PRODUCTIVE POLITICAL ECONOMY

16. • Innovative environmental insurance and financial services also
offer these benefits, and do so more directly for
environmental quality.
• Realizing these efficiency gains is impossible, however, without
a productive political-legal foundation.
• Highlighting the environmental benefits of insurance can
broaden constituent support for economically sound
insurance policy
www.doctorfal.com
Insurance Market Summit 2013
INSURANCE,THE ENVIRONMENT, &
A MORE PRODUCTIVE POLITICAL ECONOMY

17. BIBLIOGRAPHY
• Baron, David P. (2006). Business and its Environment, 5th Edition. Upper Saddle River, NJ: Pearson Prentice Hall.
• Falaschetti, Dino (2009). Democratic Governance and Economic Performance: How Accountability GoesToo Far in Politics, Law, and
Business. NewYork: Springer.
• Falaschetti, Dino (2013). Global environmental governance: Mechanism design lessons from corporate governance. PERC Research
Paper 13-2 and FSU College of Law, Law, Business & Economics Paper.Available at ssrn.com/abstract=2199573.
• Falaschetti, Dino and Laura Huggins (2012). Green wrapping expensive environmental policies.Townhall.com, December 19.
• Falaschetti, Dino and Michael J. Orlando (2008). Money, Financial Intermediation, and Governance. Edward Elgar Publishing.
• Friedman, David D. (2000). Law’s Order:What Economics Has to Do with Law and Why It Matters. Princeton University Press.
www.doctorfal.com
Insurance Market Summit 2013

18. BIBLIOGRAPHY
• Galor, Oded (2005).“From Stagnation to Growth: Unified GrowthTheory.” In P.Aghion and S. Durlauf (eds.) Handbook of Economic
Growth, North-Holland.
• Gilson, Ronald J. (1984).Value creation by business lawyers: Legal skills and asset pricing.Yale Law Journal, 94(2), 239-313.
• Grossman, Gene M. and Alan B. Krueger (1995). Economic growth and the environment. Quarterly Journal of Economics, 110(2),
353-77.
• Orlando, Michael J. (2012). Financial assurance for environmental protection:Trends and opportunities. PERC Research Paper 12-17.
Available at ssrn.com/abstract=2141337.
• Palm,Anika Myers (2008).Weather stations could help insurers assess storm damage. Orlando Sentinel, July 25.
• von Peter, Goetz, Sebastian von Dahlen, and Sweta Saxena (2012). Unmitigated disasters? New evidence on the macroeconomic
cost of natural catastrophes. BIS Working Paper No. 394.Available at www.bis.org.
www.doctorfal.com
Insurance Market Summit 2013

19. BIBLIOGRAPHY
• Weil, David N. (2005). Economic Growth. Addison Wesley.
• Yandle, Bruce, Madhusudan Bhattarai, and MayaVijayaraghavan (2004). Environmental Kuznets Curves:A review of findings, methods,
and policy implications. PERC Research Study 02-1 (Update).
www.doctorfal.com
Insurance Market Summit 2013

20. ABOUTTHE SPEAKER
Through 20 years of experience in business, policy, and inter-disciplinary research and teaching, Dino
Falaschetti (PhD, MBA, CPA) managed Fortune 100 audit-engagements and corporate finance
operations, created insightful business analytics and litigation support strategies, and helped develop
productive policies for the White House and state legislatures.
Dr. Falaschetti now serves as Executive Director of the Property & Environment Research Center
(PERC), a think tank that applies economic principles to solve environmental problems. He also
serves as Special Consultant to Economists Incorporated, a premier economic consulting firm for law
and economics, public policy, and business strategy, and as Adjunct Professor for the Florida State
University College of Law and University ofTexas at Arlington College of Business.
Dr. Falaschetti previously served the Executive Office of the President as Senior Economist for the Council of Economic
Advisers (under President George W. Bush and Chairmen Ben Bernanke and Edward Lazear), held endowed, tenured,
and research faculty appointments in economics, finance, law, and policy at the University of California at Berkeley, Florida
State University, Montana State University, Seattle University, Stanford University, University ofTennessee, and Washington
University in St. Louis, and managed a $1 billion money market portfolio, foreign currency exposures, and business
valuations for a Fortune 100 conglomerate. He continues to share his opinions on business, law, and politics through
public and professional speeches, radio and television interviews, and other news and policy media.
He earned a PhD in economics from Washington University in St. Louis (with fields in political economy, economic
theory, and industrial organization), an MBA with high honors from the University of Chicago Booth School of Business
(with concentrations in economics and finance), and a BS with distinction from the Indiana University Kelley School of
Business (with a major in accounting and work-in-depth in philosophy).
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Insurance Market Summit 2013