Managing Catastrophic Risk

Encyclopedia of Energy, Natural Resources and Environmental Economics, J. Shogren (ed.), Forthcoming

20 Pages Posted: 1 May 2012

See all articles by Howard Kunreuther

Howard Kunreuther

National Bureau of Economic Research (NBER); University of Pennsylvania - Wharton Risk Management and Decision Processes Center

Geoffrey M. Heal

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2012

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 are thus crucial for addressing these issues and 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.

Keywords: Behavioural biases, Catastrophe bonds, Interdependencies, Multi-year insurance, Natural disasters, Nuclear risks, Protective decision making, Terrorism

Suggested Citation

Kunreuther, Howard C. and Kunreuther, Howard C. and Heal, Geoffrey M., Managing Catastrophic Risk (April 30, 2012). Encyclopedia of Energy, Natural Resources and Environmental Economics, J. Shogren (ed.), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2049456

Howard C. Kunreuther (Contact Author)

National Bureau of Economic Research (NBER)

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

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Geoffrey M. Heal

Columbia University - Columbia Business School, Finance ( email )

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212-316-9219 (Fax)

HOME PAGE: http://www.gsb.columbia.edu/faculty/gheal/

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