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Managing Catastrophic Risk

Author

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  • Howard Kunreuther
  • Geoffrey Heal

Abstract

A principal reason that losses from catastrophic risks have been increasing over time is that more individuals and firms are locating in harm's way while not taking appropriate protective measures. Several behavioural biases lead decision-makers not to invest in adaptation measures until after it is too late. In an interdependent world with no intervention by the public sector, it may be economically rational for those at risk not to invest in protective measures. Risk management strategies that involve private-public partnerships that address these issues may help in reducing future catastrophic losses. These may include multi-year insurance contracts, well-enforced regulations, third-party inspections, and alternative risk transfer instruments such as catastrophe bonds.

Suggested Citation

  • Howard Kunreuther & Geoffrey Heal, 2012. "Managing Catastrophic Risk," NBER Working Papers 18136, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18136
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    References listed on IDEAS

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    1. Deborah Lucas, 2010. "Measuring and Managing Federal Financial Risk," NBER Books, National Bureau of Economic Research, Inc, number luca07-1.
    2. McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. "Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
    3. Hogarth, Robin M & Kunreuther, Howard, 1995. "Decision Making under Ignorance: Arguing with Yourself," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 15-36, January.
    4. Erwann Michel-Kerjan & Ivan Zelenko & Victor Cardenas & Daniel Turgel, 2011. "Catastrophe Financing for Governments: Learning from the 2009-2012 MultiCat Program in Mexico," OECD Working Papers on Finance, Insurance and Private Pensions 9, OECD Publishing.
    5. Lucas, Deborah (ed.), 2010. "Measuring and Managing Federal Financial Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226496580.
    6. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 573-597.
    7. Erwann Michel-Kerjan & Frederic Morlaye, 2008. "Extreme Events, Global Warming, and Insurance-Linked Securities: How to Trigger the “Tipping Point”," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(1), pages 153-176, January.
    8. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
    9. Howard Kunreuther & Erwann Michel-Kerjan, 2004. "Policy Watch: Challenges for Terrorism Risk Insurance in the United States," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 201-214, Fall.
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    Cited by:

    1. Radoslav Raykov, 2015. "Catastrophe insurance equilibrium with correlated claims," Theory and Decision, Springer, vol. 78(1), pages 89-115, January.
    2. Riza Andrian Ibrahim & Sukono & Herlina Napitupulu & Rose Irnawaty Ibrahim, 2023. "How to Price Catastrophe Bonds for Sustainable Earthquake Funding? A Systematic Review of the Pricing Framework," Sustainability, MDPI, vol. 15(9), pages 1-19, May.

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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