Environmental insurance and resilience in the age of natural disasters

The emergence of natural disasters induces a trade-off in the environmental insurance market. While firms need more coverage against large potential losses, the higher damage caused by accidents increases the cost of insurance. As a result, firms may choose to switch to resilient production, which reduces the severity of environmental damage and exempts the firm from paying an emissions tax. We study this problem in a duopoly industry where two risk-averse firms choose their type (resilient or non resilient) based on their production strategy, and their demand for insurance against financial losses caused by environmental accidents. Our results highlight a non-trivial interaction between insurance demand and technology choice: a resilient firm demands lower insurance coverage when the cost of implementing the resilient technology is relatively low. The emergence of natural disasters ultimately favours the adoption of resilient production methods.