The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks

This paper examines the impact that specific risk mitigation measures (RMMs) could have on reducing losses from hurricanes and earthquakes as well as improving the solvency position of insurers who provide coverage against these hazards. We first explore why relatively few individuals adopt cost-effective RMMs by reporting on the results of empirical studies and controlled laboratory studies. We then investigate the impact that an RMM has on both the expected losses and those from a worst case scenario in two model cities---Oakland (an earthquake-prone area) and Miami/Dade County (a hurricane-prone area) which were constructed respectively with the assistance of two modeling firms—Risk Management Solutions and Applied Insurance Research. The paper then explores three programs for forging a meaningful public-private sector partnership: well-enforced building codes, insurance premium reductions linked with long-term loans, and lower deductibles on insurance policies tied to mitigation. We conclude by briefly examining four issues for future research on linking mitigation with insurance: regulatory issues facing insurers, uncertainty issues in estimating risks, tradeoffs between reinsurance and mitigation and the impact of mitigation on capital market instruments.

The Supply of Catastrophe Insurance Under Regulatory Constraints

Klein and Kleindorfer provide a brief overview of the current extent of their research on this topic. The intent of this research is to empirically address interactions across the multiple stakeholders in the Catastrophe Insurance Business, i.e. homeowners, businesses, insurers, reinsurers, the construction and real estate sector, and regulatory institutions. Their analysis is aimed at addressing three questions: What is the structure and performance of the catastrophe insurance market? How do factors such as, interdependencies, profits, risk exposures, and distribution impact the performance of the market? What is the impact of regulation of this market on pricing adequacy, pricing precision, and financial risk? What is the current state of the market, and what future sustainable states of the market are possible? This paper is primarily devoted to describing what authors consider to be the structural drivers of supply and demand and the impact of regulatory controls. These drivers are: "Demand structure" (i.e. why consumers buy what they do) obviously contains several components. Items such as location, demography, price, policy features such as the presence of absence of bundling, "quality" effects such as perceived solvency and claims processes, and finally, how products are distributed, all impact consumer choice. In addition, consumers have other risk management options open to them, the most obvious being where to live, what type of construction to choose and what type of "mitigation", if any to employ. "Supply Structure" describes how the consumer business of insurance is conducted. Salient features would be the degree of competition, geography, profitability, solvency, exposure, loss costs, marketing costs, organizational form, financial structure, and regulatory/solvency constraints. Obviously, insurance companies attempt to maximize profits in the face of these variables "Regulatory Impact" on such things as pricing adequacy, pricing precision, and financial risk has important effects on all parties. In particular the freedom to manage ones risk exposure is critical to everyone from the individual consumer to the largest company, and regulation may produce. In an analysis to come later, the researchers will utilize detailed premium record data obtained from ISO on insurance transactions, supplemented by information on expected costs for different policies and risk characteristics. The data will, for the first time, provide and empirically grounded understanding of the supply and demand for CAT-related coverage provided in residential insurance policies. The study will seek to identify the factors that most affect supply and demand and the magnitudes of their relative effects, including the pricing of CAT coverage and alternative policy provisions.

The demand for homeowners insurance with bundled catastrophe coverages : Wharton project on managing catastrophic risks

In this paper, we estimate the demand for homeowner insurance in Florida. Since we are interested in a number of factors influencing demand, we approach the problem from two directions. We first estimate two hedonic equations representing the premium per contract and the price mark-up. We analyze how the contracts are bundled and how contract provisions, insurer characteristics and insured risk characteristics and demographics influence the premium per contract and the price mark-up. Second, we estimate the demand for homeowners insurance using two-stage least squares regression. We employ ISO's indicated loss costs as our proxy for real insurance services demanded. We assume that the demand for coverage is essentially a joint demand and thus we can estimate the demand for catastrophe coverage separately from the demand for noncatastrophe coverage. We determine that price elasticities are less elastic for catastrophic coverage than for non-catastrophic coverage. Further estimated income elasticities suggest that homeowners insurance is an inferior good. Finally, we conclude based on the results of a selection model that our sample of ISO reporting companies well represents the demand for insurance in the Florida market as a whole

Gratitude Among Mothers Raising a Child With Special Health Care Needs

For a mother raising a child with special health care needs (CSHCN), maintaining positive feelings of gratitude can become challenging because of the stress associated with caregiving, as well as the consequences of unmanaged stress, which include decreases in both physical and psychological health and well-being. Chronic, unmanaged stress has been associated with various health issues that can be severe and potentially life-threatening. The purpose of this phenomenological study was to examine how mothers raising a CSHCN experience gratitude. A secondary purpose was to identify possible barriers to experiencing gratitude, which, when implemented as a coping style, may decrease the negative effects of daily stress and improve mental health. The broaden-and-build theory of positive emotions along with the transactional model of stress and coping provided an optimal conceptual framework for this study. The research questions were centered around the challenges and stressors unique to each mother, coping strategies, and gratitude. The ways in which the combination of factors contributed to quality of life among the mothers were examined specifically. Data from face-to-face interviews with 15 mothers were transcribed, coded, and thoroughly analyzed for themes. The primary themes that emerged were support from family and friends, feelings of gratitude, coping mechanisms, life satisfaction, gratitude for a flexible job, stress related to full dependency, high stress levels over the past 30 days, increased stress when describing the child, and a need to work on eating habits. Findings and recommendations from this study may contribute to positive social change and support the benefits of gratitude, especially in highly stressful situations

The Demand for Homeowners Insurance with Bundled Catastrophe Coverage

This paper analyzes the demand for homeowners insurance in markets subject to catastrophe losses and where consumers have choices in configuring their coverage for catastrophe and non-catastrophe perils. We estimate the demand for homeowner insurance in Florida and New York using two-stage least squares regression with advisory indicated loss costs as our proxy for the quantity of real insurance services demanded. We decompose the demand for insurance into the demand for coverage of catastrophe perils (i.e., hurricanes or windstorms) and the demand for non-catastrophe coverage and estimate these demand functions separately. Our results are relatively consistent in New York and Florida, including evidence that catastrophe demand is more price elastic than non-catastrophe demand. We also find evidence that consumers value options that expand coverage, buy more insurance when it is subsidized through regulatory price constraints, and consider state guaranty fund provisions when purchasing insurance.

Insuring against Country Risks: Descriptive and Prescriptive Aspects

Today multinational firms face grave uncertainties with respect to their investment strategies in other countries. This paper stresses the importance of integrating the descriptive aspects of this problem with prescriptive recommendations. It does so by raising two interrelated questions: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions on what investments to undertake? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions? These questions are addressed by developing a conceptual framework which emphasizes the importance of problem formulation, institutional arrangements and decision processes as a basis for prescriptive recommendations. The problem is characterized by lack of a detailed statistical data base to estimate probabilities and consequences of different types of political, economic, and social risks. Corporate planners and risk managers who have responsibility for these investment decisions would Like concreteness. Hence, their actions appear to be greatly influenced by past experience and personal contacts. Our prescriptive recommendations are designed to widen the statistical data base by the use of experts and Bayesian analysis as well as to broaden the responsibility for investment decisions within the organization. We also propose a jointly operated US private-federal insurance program which maintains features of current government operated systems but has private firms marketing policies and settling claims. The above theoretical concepts are illustrated with a case study of Indonesia's investment evaluation problem pursuant to their decision to provide the United States with liquefied natural gas in the early 1970's. This case study illustrates the political risks of firms investing even in highly developed economies such as the United States

Misinformation and Equilibrium in Insurance Markets

This paper focuses on the role of misinformation by firms and consumers with respect to the selling and buying of insurance. For example, the reader may wish to think of automobile insurance when the firms do not know the accident probabilities for each of their customers and insured individuals in turn, may misperceive the probabilities of being involved in an accident. Our point of departure is the model developed by Rothschild-Stiglitz which demonstrated that firms could distinguish between different types of risks by offering a set of policies consisting of a premium per dollar and a stated amount of coverage. We will investigate two types of equilibrium concepts in the spirit of this model: a traditional Nash equilibrium where each firm determines the set of policies it will offer under the assumption that all other firms make no changes in their offerings and a Wilson equilibrium here firms look far enough ahead in the future to evaluate the consequences of a new policy offering on the profitability of current policies. The paper contrasts the Nash and Wilson equilibria for cases where consumers correctly perceive the probability of a loss as well as when they misperceive this probability. We focus attention on the case where there are two risk groups in order to highlight significant differences between Nash and Wilson equilibria through graphical procedures. The final portion of the paper generalizes the results to n risk groups and discusses the welfare implications of consumer misperceptions

Insuring Against International Hazards: Descriptive and Prescriptive Aspects

Today multinational firms face grave uncertainties with respect to their investment strategies in other countries. This paper stresses the importance of integrating the descriptive aspects of this problem with prescriptive recommendations. It does so by raising two broad interrelated questions: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions on what investments to undertake? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions? These questions are addressed by developing a conceptual framework which emphasizes the importance of problem formulation, institutional arrangements and decision processes as a basis for prescriptive recommendations. The problem is characterized by lack of a detailed statistical data base to estimate probabilities and consequences of different types of political, economic, and social risks. Corporate planners and risk managers who have responsibility for these investment decisions are anxious to avoid uncertainty. Hence, their actions appear to be greatly influenced by past experience and personal contacts. Our prescriptive recommendations are designed to widen the statistical data base by the use of experts and Bayesian analysis as well as to broaden the responsibility for investment decisions within the organization. We also propose a jointly operated private-federal insurance program which maintains features of current government operated systems but has private firms marketing policies and settling claims. The above theoretical concepts are illustrated with a case study of Indonesia's investment evaluation problem pursuant to their decision to provide the United States with liquefied natural gas in the early 1970's. This case study illustrates the political risks of firms investing even in highly developed economies such as the United States

Insuring and Managing Hazardous Risks: From Seveso to Bhopal and Beyond

This executive review describes in brief the International Conference on Transportation, Storage, and Disposal of Hazardous Materials, held at IIASA, and the ensuing Proceedings "Insuring and Managing Hazardous Risks." The Conference brought together representatives of academia, business and government from East and West to discuss the nature of current problems in the area of hazardous materials. An important objective of the Conference was to suggest steps that could be undertaken by industrial firms, the insurance industry, and government agencies to improve the safety and efficiency with which hazardous materials are produced and controlled in industrialized societies