Correlation, Coverage, and Catastrophe: The Contours of Financial Preparedness for Disaster

39 Pages Posted: 20 Jul 2014 Last revised: 4 Dec 2014

James Ming Chen

Michigan State University - College of Law

Date Written: July 18, 2014

Abstract

Laws regulating financial preparedness for catastrophe reveal the actuarial suppositions underlying disaster law and policy. This article explores three facets of catastrophic risk transfer. First, it explores how risk transfer emerges as the preeminent tool for managing risk. Measures sufficient for managing risks break down as the probability of loss plummets, but the magnitude of potential loss increases. Second, this article explores one alternative risk transfer mechanism by which insurance companies have sought to deepen their financial reserves in anticipation of correlated risks. Correlation among risks, the primary obstacle to functional insurance markets for catastrophic coverage, emerges in new form as the motivation for catastrophe bonds — and as these instruments’ leading pitfall. Finally, this article explores constraints on public intervention into disaster insurance. Along the dimensions of space, time, and human behavior, policies compensating individuals for disaster-related losses elude economic justification. The political economy of public intervention in disaster finance virtually guarantees catastrophic legal responses to catastrophic risks.

Keywords: Disaster, catastrophe, risk management, risk transfer, disaster law, disaster policy, disaster relief, catastrophe bond, flood insurance

Suggested Citation

Chen, James Ming, Correlation, Coverage, and Catastrophe: The Contours of Financial Preparedness for Disaster (July 18, 2014). Fordham Environmental Law Journal, Vol. 26, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2468361 or http://dx.doi.org/10.2139/ssrn.2468361

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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