Session 16 1

Comparative Emergency Management

Session 16 Slide Deck

Session 16 2

Session Objectives

1. Provide a Broad Understanding of Risk Transfer, Sharing, and Spreading Mechanisms

2. Explain the Various Risk Transfer, Sharing, and Spreading Techniques and Provide Examples from The United States and Abroad

Session 16 3

Risk Transfer

• Also called:– Risk Sharing

– Risk Spreading

• Debated as a mitigation measure• Allows for the financial disaster consequences that

do occur to be shared by a large group of people, rather than a large financial burden falling only on the affected individuals or communities

Session 16 4

Risk Transfer Roots

• 1950 BC

• Practice of “bottomry”

• Costs of shipping losses shared among participants – e.g., all vessels in a fleet

Session 16 5

Modern Risk Transfer

• Can be private or government administered• Primarily consist of insurance and

reinsurance• Direct risk sharing more commonly found

in developing countries– Informal agreements within social / familial

groups– E.g., food sharing

Session 16 6

Insurance

“a promise of compensation for specific potential future losses in exchange for a

periodic payment”

Session 16 7

Insurance Considerations

• Can be mandatory or optional

• In 2008, over $4.2 trillion in premiums (17% increase over 2006)

• US – represents 26% of the insurance market

Session 16 8

Common Types of Insurance

• Automobile insurance• Homeowners / Renters insurance• Health insurance• Disability insurance• Life insurance• Flood insurance• Earthquake insurance• Terrorism insurance• Business interruption insurance

Session 16 9

Reinsurance Companies

• Reinsurance companies insure insurance companies

• Tend to be internationally based

• Spread risk across greater geographical ranges

Session 16 10

Two Factors of Insurability

• The hazard in question must be identifiable and quantifiable.

• Insurers must be able to set premiums for “each potential customer or class of customers”

• (Kunreuther and Freement, 1997).

Session 16 11

Insurance Problems

• Catastrophic Disasters

• Hazards for which information is scarce

• Disasters that cover wide geographic areas

Session 16 12

Catastrophic Insurance Problems

• Only those people who are likely to suffer the specific loss defined in the policy are likely to purchase that type of policy, creating the need for much higher premiums than if the specific hazard policy were spread across a more general population.

• This phenomenon is called “adverse selection”

Session 16 13

Advantages of Insurance

• Victims are guaranteed a secure and predictable amount of compensation for their losses

• Insurance allows for losses to be distributed in an equitable fashion, protecting many for only a fraction of the cost each would have incurred individually if exposed to hazards

• Insurance can actually reduce hazard impact by encouraging policyholders to adopt certain required mitigation measures

Session 16 14

Insurance Limitations• May be impossible to purchase in the highest-risk areas • Participation is often voluntary • Participation has been known to encourage more

irresponsible actions• Many companies are pulling out of specific disaster

insurance plans because the probability that they will not be able to cover catastrophic losses is too great

• Catastrophic losses that cover a wide but specific geographic space within a country may result in inequitable premium increases if coverage areas are too general

Session 16 15

Risk Sharing Pools

• Group members share risk internally• Often used by government agencies to cover

public sector risk• Can work by allowing individual members to

benefit from group buying power• Risk insured is specific to the needs of the pool• Can include other services, such as technical

assistance or advice

Session 16 16

Weather Derivatives

• Use investment instruments to mitigate risk

• Used heavily by agricultural / energy sectors

• Used to cover losses associated with cancelled / affected events

Session 16 17

Catastrophe Bonds

• Disaster-based investment mechanism

• Investors ‘bet’ that a disaster will not occur

• Disassociated with standard financial markets

• Require a trigger

Session 16 18

Cat Bond Triggers

• Indemnity

• Modeled Loss

• Indexed to Industry

• Parametric

• Parametric Index