Making the polluter pay: mandatory environmental liability insurance as a powerful tool for advancing sustainability impacts in China

Environmental pollution is a critical challenge that threatens sustainable development. This study explores the potential of environmental liability insurance to promote sustainability by complementing traditional regulations. It argues that liability insurance incentivises the prevention of pollution and victim compensation through its compensation and governance functions. It presents the theoretical foundations of environmental insurance. It also demonstrates how insurance can facilitate the integration of environmental protection and economic growth. Besides, it analyses how insurers influence policyholders’ behaviours through risk-based pricing, loss prevention, claim management and contract design, mitigating moral hazard. Evidence from China demonstrates that liability insurance effectively reduces emissions and promotes green innovation, but market development faces challenges such as adverse selection, limited liability rules and insolvency risks. This study also advocates introducing mandatory environmental liability insurance (MELI) in China, supported by a liability–insurance–regulation mix.