Skip to main content
SpringerLink
Log in

Securitization product design for China’s environmental pollution liability insurance

  • Research Article
  • Published:
Environmental Science and Pollution Research Aims and scope Submit manuscript

Abstract

The environmental catastrophic accidents in China over the last three decades have triggered implementation of myriad policies by the government to help abate environmental pollution in the country. Consequently, research into environmental pollution liability insurance and how that can stimulate economic growth and the development of financial market in China is worthwhile. This study attempts to design a financial derivative for China’s environmental pollution liability insurance to offer strong financial support for significant compensation towards potential catastrophic environmental loss exposures, especially losses from the chemical industry. Assuming the risk-free interest rate is 4%, the market portfolio expected return is 12%; the financial asset beta coefficient is 0.5, by using the capital asset pricing model (CAPM) and cash flow analysis; the principal risk bond yields 9.4%, single-period and two-period prices are 103.85 and 111.58, respectively; the principal partial-risk bond yields 10.09%, single-period and two-period prices are 103.85 and 111.58, respectively; and the principal risk-free bond yields 8.94%, single-period and two-period prices are 107.99 and 115.83, respectively. This loss exposure transfer framework transfers the catastrophic risks of environmental pollution from the traditional insurance and reinsurance markets to the capital market. This strengthens the underwriting capacity of environmental pollution liability insurance companies, mitigates the compensation risks of insurers and reinsurers, and provides a new channel to transfer the risks of environmental pollution.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

References

  • Bantwal VJ, Knreuther HC (2000) A cat bond premium puzzle? J Psychol Financ Markets 1(1):76–91

    Article  Google Scholar 

  • Chen LQ (2003) On institution of environmental liability insurance. Water resources, water environment and water legal construction. China Environment and Resources Law Seminar (Annual Meeting) Proceedings.

  • Chen MG, Hou XH (2011) Discussion of improving the environmental pollution liability insurance law. Shanghai Insur 7:22–32

    Google Scholar 

  • Faure M, Grimeaud D (2003) Financial assurance issues of environmental liability. In: Faure M (ed) Deterrence, insurability and compensation in environmental liability. Springer, London, pp. 194–206

    Chapter  Google Scholar 

  • Feng Y, Mol APJ, Lu Y, He G, van Koppen CS (2014) Environmental pollution liability insurance in China: compulsory or voluntary? J Clean Prod 70:211–219

    Article  Google Scholar 

  • Fragnelli V and Marina ME (2002) Environmental pollution risk and insurance. Economic theory and applications, October, 2002.

  • Hagendorff B, Hagendorff J, Keasey K, Gonzalez A (2014) The risk implications of insurance securitization: the case of catastrophe bonds. J Corp Finan 25:387–402

    Article  Google Scholar 

  • Hamiton J and Russell W (2003) Unearthing historical environmental liability policies. Canadian Underwriter/January: 36–39.

  • Hong Z (2004) On securitization of insurance risk. Mod Financ Econ 3:15–18

    Google Scholar 

  • Jia AL (2012) On review and enlightenment of institution of environmental liability insurance oversea. Environ Protect Recycl Econ 12:10–13

    Google Scholar 

  • Karl R (2005) Main street clients need pollutions covers. National Underwriter, Property and Casualty. May.

  • Kuntz-Duriseti K (2004) Evaluating the economic value of the precautionary principle: using cost benefit analysis to place a value on precaution. Environ Sci Pol 7:291–301

    Article  Google Scholar 

  • Lei L (2004) On innovation of the institution of environmental tort liability insurance. J Kunming Univ Sci Technol 4:22–25

    Google Scholar 

  • Leng C-C, Meier UB (2006) Analysis of multinational underwriting cycles in property-liability insurance. J Risk Financ 7(2):146–159

    Article  Google Scholar 

  • Li L (2010) On model of the development of environmental liability insurance. Coop Econ, Sci Technol 12:60–61

    Google Scholar 

  • Li F, Zhao C (2010) On advantages and disadvantages of the system selection of environmental pollution liability insurance. Shanghai Insur 5:9–14

    Google Scholar 

  • Lintner, J (1965) The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of economics and statistics, no. 47.

  • Liu J (2005) On the development of catastrophe insurance. China Finance 7:57–58

    Google Scholar 

  • Merrifield J (2002) A general equilibrium analysis of the insurance bonding approach to pollution threats. Ecol Econ 40:103–115

    Article  Google Scholar 

  • Monti A (2003) A comparative analysis of the role of insurance in the management of environment—related risks. Policy issues in insurance—environmental risks and insurance no. 6.

  • Mossin J (1966) Equilibrium in a capital asset market. Econometrica 34(4):768–783

    Article  Google Scholar 

  • Neil M, Richter A (2004) The Geneva papers on risk and insurance. Issues Pract 29(2)

  • Pei G (2002) On the competitiveness of Chinese insurance industry. China Financial Publishing House.

  • Que XD (2007) On the impact of the securitization of insurance risks on environmental liability risks. Fujian Financ 9:34–37

    Google Scholar 

  • Sharpe, W (1964) Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, no. 19.

  • Shi JX (2009) On bilateral game among the hosts of environmental pollution liability insurance contract. Insurance Institute of China, The First Annual Conference Proceedings. 558–565

  • Shun Q (2004) The interation between capital market and insurance market. The Chinese Banker 2004 (3)

  • Soichiro M, Urrutia JL, Witt RC (1992) The equilibrium insurance price and underwriting return in a capital market setting. J Risk Insur 59(2):291–300

    Article  Google Scholar 

  • Swiss Reinsurance Company (2007) Insuring environmental damage in the European Union. Zurich, 2007.

  • Wei X (2008) On environmental pollution insurance of hazardous wastes in transboundary. Ocean University of China.

  • Whitmore A (2000) Compulsory environmental liability insurance as a means of dealing with climate change risk. Energy Policy 28(11):739–741

    Article  Google Scholar 

  • Wong HE, Du Y-T, Geng P (2011) On innovation of the development model of environmental liability insurance. Technol Manag Res 7:15–17

    Google Scholar 

  • Wu WY (2013) On the devising of environmental pollution liability insurance derivatives. Jiangxi Soc Sci 12:51–54

    Google Scholar 

  • Xie Z (2011) On path of system construction of the environmental liability insurance. Econ Financ 5:76–78

    Google Scholar 

  • Yang WS, Yan W (2007) On the feasibility of Chinese insurance risk securitization. Finan Account 7:54–60

    CAS  Google Scholar 

  • You GY (2009) On model selection and pricing of environmental liability insurance in China. Ocean University of China

  • Yu X (2012) Game of the system of environmental liability insurance. For Econ 6:94–96

    Google Scholar 

  • Zhang CJ (2008) On construction of the Institution of Environmental Liability Insurance in China. Northwest A and F University.

  • Zhou Z (2005) Latest news of world catastrophe reinsurance market. Shanghai Insur 5:56–63

    Google Scholar 

Download references

Acknowledgements

This paper is supported by the Central Universities Project (2014SZYTD01), the National Social Science Fund (12XJL012), SSF of the Ministry of Education (11YJA850016), and the China Postdoctoral Science Foundation (2011M501409, 2013T60851).

Author information

Authors and Affiliations

  1. School of Economics, Southwest University for Nationalities, No. 16, Section 4, 1st Ring Road South, Chengdu City, Sichuan Province, 610041, China

    Chengyi Pu & Xiaojun Pan

  2. School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, 610054, China

    Bismark Addai

  3. Binhai College, Nankai University, Tianjin, 200016, China

    Pangtuo Bo

Authors
  1. Chengyi Pu
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bismark Addai
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Xiaojun Pan
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Pangtuo Bo
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Chengyi Pu.

Additional information

Responsible editor: Philippe Garrigues

This research project received the China central and provincial governments’ financial support. Part of the research results has been shared with relevant government offices and insurance companies in China. Feedback from them is very positive.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Pu, C., Addai, B., Pan, X. et al. Securitization product design for China’s environmental pollution liability insurance. Environ Sci Pollut Res 24, 3336–3351 (2017). https://doi.org/10.1007/s11356-016-8172-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11356-016-8172-1

Keywords

Search

Navigation