Risk Management Roles of the Public and Private Sector

Date01 March 2018
Published date01 March 2018
AuthorHoward Kunreuther,Carolyn Kousky
DOIhttp://doi.org/10.1111/rmir.12096
Risk Management and Insurance Review
C
Risk Management and Insurance Review, 2018, Vol.21, No. 1, 181-204
DOI: 10.1111/rmir.12096
PERSPECTIVE
RISK MANAGEMENT ROLES OF THE PUBLIC AND PRIVATE
SECTOR
Carolyn Kousky
Howard Kunreuther
ABSTRACT
Insurance is an essential component of household and community resilience.
It protects insureds financially against disaster losses, can encourage invest-
ments in cost-effective mitigation measures through premium reductions, and
facilitates the rebuilding of property and long-term recovery. Private insur-
ers face challenges in providing full protection against disasters. This has led
governments around the world to create a variety of public insurance entities,
often designed as public-private partnerships. At a November 2016 workshop,
“Improving Disaster Financing: Evaluating Policy Interventions in Disaster In-
surance Markets,” participants evaluated disaster insurance programs for flood,
earthquake, and terrorismlosses. This article synthesizes six papers and findings
from the workshop and suggests ways to improve public-private partnerships
for disaster financing in three interrelated areas: (1) risk communication, (2) risk
reduction, and (3) risk transfer. It concludes with a proposal for a comprehen-
sive insurance program that could harness the benefits of both the public and
private sectors.
INTRODUCTION
The cost of natural disasters has been steadily increasing around the world largely
because more properties—often more valuable properties—are being built in risky lo-
cations (e.g., Benson and Clay, 2004; Kousky, 2014; Swiss Re Institute, 2017). Govern-
ment outlays after disasters have also been increasing. Between 2000 and 2014, the U.S.
Carolyn Kousky is Director for Policy Research and Engagement, Risk Management
and Decision Processes Center, Wharton School, University of Pennsylvania; e-mail:
ckousky@wharton.upenn.edu. Howard Kunreuther is James G. Dinan Professor of Decision
Sciences and Public Policy; and Co-Director, Risk Management and Decision Processes Center,
Wharton School, University of Pennsylvania; e-mail:kunreuth@wharton.upenn.edu. This article
was prepared for the “Improving Disaster Financing: Evaluating Policy Interventions in Disaster
Insurance Markets” workshop held at Resources for the Future on November 29–30, 2016. We
thank the sponsors of this project: the American Academy of Actuaries; the American Risk and
Insurance Association; Risk Management Solutions; the Society of Actuaries; and XL Catlin. This
research was partially supported by Resources for the Future and the Wharton Risk Center’s
Managing and Financing Extreme Events project.
181
182 RISK MANAGEMENT AND INSURANCE REVIEW
government spent $265 billion on supplemental appropriations for disaster relief (Lind-
say and Murray, 2014). In response to the 2017 disasters, Congress has appropriated
more than $130 billion. Costs may continue to grow; climate scientists predict extreme
events will be intensifying or becoming more frequent in many parts of the globe as the
planet warms (Sander et al., 2013; IPCC, 2014; Emanuel, 2017).
Insurance is an essential component of household and community resilience against
disasters because it encourages investments in cost-effective loss reduction measures
while facilitating the rebuilding of damaged property and long-term recovery (e.g.,
Turnham et al., 2011; Kunreutheret al., 2013a, 2013b). Yet, few individuals protect them-
selves against damage either by investing in mitigation measures or purchasing flood
insurance.
The same forces that make insurance and protective measures ever more important also
increase the challenges for underwriting these risks because of the potential for extreme
and correlated losses. Tomeet regulatory and rating agency requirements, insurers must
hold or purchase access to sufficient capital to manage insolvency risk, which can be
costly.Prices for disaster insurance may exceed what homeowners are willing or able to
pay. The severe loss of capital following a catastrophic disaster may also lead to “hard”
insurance markets, where supply is scarce and coverage costly. These challenges have
prompted various kinds of government intervention in disaster insurance markets in
the United States and around the world.
This article synthesizes findings from the dialogue at a workshop, “Improving Disaster
Financing: Evaluating Policy Interventions in Disaster Insurance Markets,” co-organized
by Resources for the Future and the Wharton Risk Management and Decision Processes
Center in November 2016, as well as the six papers prepared for the workshop. The
papers evaluated the following programs: the National Flood Insurance Program (NFIP),
the California Earthquake Authority (CEA), wind pools in the state of Florida, the
TerrorismRisk Insurance Act (TRIA), Flood Re in the UK, as well as the potential for all-
hazards disaster insurance. Although the focus was largely on U.S. programs many of
the findings related to public–private partnerships are also applicable in other countries.
In this article, we distill lessons learned from the papers and workshop to suggest ways
of improving public–private disaster insurance partnerships in three interrelated areas:
(1) risk communication, (2) risk reduction, and (3) risk transfer. We first review the
challenges of insuring residential property against disasters, and the nature of the de-
cision processes of interested parties in dealing with low-probability, high-consequence
events.1We then provide the rationale for the emergence of government disaster insur-
ance programs. With this background,we discuss the complementary roles of the public
and private sector across the three areas.
EXAMINING THE DISASTER INSURANCE GAP
Insurance against disaster losses can help finance the repair and rebuilding of dam-
aged residential property without having to divert current income or significantly draw
down household savings. Insurers that give premium discounts for hazard mitigation
1Our focus is on households, so we do not consider insurance for infrastructure or large com-
mercial entities.

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