Insuring and Mitigating Risks of Large-Scale Natural Disasters
Hurricane Katrina highlights the fact that the United States does not have a systematic, coherent and well thought out approach for dealing with large-scale natural disasters. It has raised a number of questions regarding the role that insurance can or should play in providing protection against losses to residential and commercial structures from such extreme events. Preliminary estimates suggest that it will be the most costly disaster in the history of the insurance industry with total claims ranging between $40 and $55 billion. The previous year's Hurricanes Charley, Frances, Ivan and Jeanne that hit Florida in the fall of 2004 produced a combined total loss of $24 billion. Each of these disasters was among the top 10 most costly insurance losses in the world in the last 35 years, 1970-2005 (2005 index priced).
As a result of the new scale of these losses, some insurers are fundamentally reexamining the role they can and should play in providing financial protection against mega losses from natural disasters. Should the coming years be as damaging as these two, or even more so, there would be a need for the insurance industry to rethink what should be its business model to cope with that new era. At a national level, the question then becomes "What is the best way for the nation to minimize the impact and recover from large-scale natural disasters?"
As input into this process, the Wharton Risk Center, Georgia State University, and the Insurance Information Institute (III) propose to work with their partners to examine alternative programs for reducing losses from natural disasters and providing funds for recovery following a catastrophic event. This study will build on over 20 years of experience the Risk Center has had in research on managing and financing extreme events. The Insurance Information Institute with more than 45 years of experience communicating on disaster-related issues around the globe, will seek to improve awareness and understanding of the decision processes that contribute to vulnerability to catastrophic loss and the many opportunities to reduce future human and economic suffering.
The short-term goal of the study is to develop a strategy document that could be used by key stakeholders in the current policy debate on the role that the private and public sectors should play in mitigating future disaster losses and financing the recovery process.
To this end, the project focuses on the following questions:
- Who are the interested parties involved in dealing with natural disasters, and what are their goals, values and objectives?
- What role can the public sector play in partnering with the private sector in general and the insurance sector in particular to lever its strengths (knowledge, network, financial capacity) in reducing the potential losses from future natural disasters and increasing the speed and efficiency of recovery from any large scale disaster?
- What are the costs, benefits and tradeoffs associated with alternative risk mitigation strategies?
Brief Description of the Project
Seminar Series on Catastrophic Risk Regulation
Recent publications:
"Managing Large-Scale Risks in a New Era of Catastrophes: Insuring, Mitigating and Financing Recovery from Natural Disasters in the United States,""An Extreme Events Project of the Wharton Risk Management and Decision Processes Center in conjunction with Georgia State University and the Insurance Information Institute, March 2008.
"Who Will Pay for the Next Hurricane?" Op-ed by Howard Kunreuther on financing the costs of natural disasters.
New York Times, August 25, 2007
"Managing and Financing Extreme Events Project Snapshot," Spring 2007