My mom often sends me articles to read. She just sent me this piece about new disclosure regulation intended to nudge insurers into revealing how they are updating insurance pricing and expected probabilities of nasty future events (i.e severe floods) caused by climate change. This is a nice example of the small ball of climate change adaptation but must government be involved here? In this cross-post, I discuss why anticipated ex-post moral hazard leads me to say “yes”. In a nutshell, the optimistic insurers will charge lower premiums and attract more premium buyers than insurers who are more pessimistic about climate risk. When Mother Nature strikes, the optimistic insurers will face huge claims bills and will go broke and the Federal Government will bail them out. This moral hazard is anticipated and rewards the optimists for being too optimistic.
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