An actor who benefits from a collective decision without bearing its cost; in insurance, the less scrupulous carrier who picks up a risk excluded by a responsible peer.
The free rider is an economic concept designating the actor who benefits from a collective good or a common decision without bearing the share of cost or constraint. In the context of sustainable insurance, it refers to the less demanding insurer or reinsurer who picks up, at reduced price and without conditions, a risk that a responsible peer refused or conditioned for sustainability reasons. This transfer mechanism is the main argument against a pure exclusion policy: exiting a risk does not eliminate it, it hands it to more tolerant capacity that applies no transition pressure to it. The theory of change of actors engaged in sustainable finance holds that pure divestment generates a systemic free-rider effect, cancelling the benefit of exclusion while depriving the asset of the pressure and conditions that could improve it. The alternative posture is to engage, condition the coverage and exclude only the genuine outlier, so as to remain in a position to influence the transition.
A reinsurer refuses to cover a data center due to its excessive carbon footprint. The capacity picked up by a less demanding competitor, with no transition condition, illustrates the free-rider effect: the exclusion does not reduce systemic risk, it shifts it.
free rider, free-rider