The insurance market's influence on investments in safety measures

In a risky process there are three alternative ways to treat the negative consequences of the risk or the accident. We can: (1) take all the consequences when an accidental event occurs, (2) reduce the probability and/or the consequences of an accidental event by safety measures or (3) transfer the consequences of the occurrence to parties better able to carry them (i.e. buying insurance). In safety management a prevailing practice is that access to an insurance market does not affect the investment in safety measures. In this paper we discuss what the consequences are of this common practice in relation to insurance and mandatory safety requirements. We conclude that an overinvestment in safety measures is very likely if insurance is not taken into account. Moreover, mandatory safety measures and insurance can lead to both over- and underinvestment in safety measures. (C) 2010 Elsevier Ltd. All rights reserved.