Managing Catastrophic Risk

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