The Role of Actuaries and Underwriters in Insuring Ambiguous Risks

Although there is a large body of literature on the unwillingness of the insurance industry to offer protection against risks such as environmental pollution, there has been only limited analysis regarding two key actors in the decision process—actuaries and underwriters. However, if actuaries and underwriters feel that a particular type of risk is uninsurable, then it is unlikely to be offered. This paper investigates how ambiguities associated with a risk affect actuary and underwriter decision processes, the paper contends that the decision of the insurance industry to not provide protection against environmental pollution liability is due to ambiguity of the risk. Empirical evidence from controlled laboratory experiments with actuaries and a model of choice in underwriter decision processes support this point.