Risk Modeling Beyond Insurance - Analyzing the Catastrophe Exposure of the State

To see presentations from the Risk Modeling Beyond Insurance Session at the Understanding Risk conference, click HERE.

How can risk modeling move beyond insurance and be leveraged to analyze the catastrophe exposure of the state?

Governments bear significant exposure to natural catastrophes. These events can exact upon the state a range of social and economic costs. Social costs may include death, disease, homelessness, civil disorder and the disruption of public services. Economic costs include lost economic activity, damaged infrastructure, costs of repair and reconstruction and potential diversion of budgetary resources from other priorities. In order to effectively manage its catastrophe risk, the state must first precisely identify what its catastrophe exposure is. Only then can a comprehensive approach to catastrophe risk management be devised such that the social and economic costs of catastrophes can be mitigated.

The exposure of the state is in some ways similar to that of insurance companies and in other ways notably distinct. Although probabilistic models have been employed by insurance companies for over two decades, their application towards analyzing the catastrophe exposure of the state is still in its youth. As catastrophes offer continuous reminders of the state’s exposure, it is worthwhile to ask whether risk modeling can be moved beyond insurance. Can risk modeling be used to analyze the catastrophe exposure of the state? If so, how can this technology be applied to the unique position of the state?

In order to address these questions and others we must consider their antecedents. A starting point for discussion is – what is the catastrophe exposure of the state? When formulating a catastrophe risk management strategy what should the state include and exclude when defining its catastrophe exposure? In particular, what is the nexus between the state and the private sector? What exposure do the state and the private sector assume the other will bear?

Hurricane Andrew is often referred to as the watershed event that brought catastrophe risk modeling into the mainstream within the insurance sector. Several prominent examples of the state applying risk modeling exist, yet the practice remains far from wide-spread. In order to effectively move catastrophe risk modeling beyond insurance what obstacles need to be overcome? Is the creation of public goods a key step that will allow state to employ risk modeling to analyze its catastrophe exposure? What are the supply side and demand side constraints that hinder the use of risk modeling by the state?

This session will focus on the aforementioned questions as we discuss how risk modeling can be moved beyond insurance. We welcome your participation.