Correlation, Coverage, and Catastrophe: The Contours of Financial Preparedness for Disaster
39 Pages Posted: 20 Jul 2014 Last revised: 4 Dec 2014
Date Written: July 18, 2014
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
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