Mitigating Losses and Providing Protection Against Catastrophic Risks: The Role of Insurance and Other Policy Instruments. Howard Kunreuther, Wharton Risk Management and Decision Processes Center, University of Pennsylvania, Philadelphia, PA 19104, (215) 898-4589
There is grave concern by the insurance
and reinsurance industry that they cannot provide protection against
catastrophic risks from natural, technological and environmental
hazards without exposing themselves to the danger of insolvency
or significant loss of surplus. This paper explores the role
insurance can play coupled with other policy instruments, such
as regulations and standards, to encourage loss reduction measures
and provide financial protection against these hazards. The challenge
is to find ways to make these catastrophic risks insurable. New
advances in information technology and risk assessment coupled
with the emergence of new financial instruments for covering large
losses provide the ingredients for rethinking the way society
deals with catastrophic risks. The paper proposes a program for
rethinking how we manage these risks in which insurance plays
a key role but which requires the involvement of other stakeholders
and policy instruments. The natural hazard problem is the principal
example used to illustrate these points, but the concepts have
relevance to technological and environmental risks, as indicated
in the concluding section of the paper.