In 1997, the Wharton
Financial Institutions Centerin collaboration with Wharton's
Risk Management and Decision Processes Centerinitiated a multi-year
research initiative to examine the management and financing issues linked
to catastrophic risks associated with natural disasters. The program led
by Wharton's Franklin Allen and Richard Herring, David
Kunreuther and Paul
Kleindorferhas been working with a group
of insurers, re-insurers and bankers to examine a range of issues associated
with the management and financing of catastrophic risks linked to natural
disasters. Of special note, this research effort is also complemented by
the involvement of three of the leading firms in the field of disaster modeling
as well as a technical advisory committee drawn from the scientific and
public policy communities.
The program's agenda spans a number
of research themes. These include:
- Understanding the scope and capacity
of the insurance and re-insurance sectors to finance risk from natural
disasters: Can insurers pay for the "Big One?"
- Identifying cost-effective, pre-disaster
mitigation strategies to help reduce loss.
- Examining the roles of regulation
and industry structure in support of market-driven solutions.
- Exploring the role of scientific
modeling in providing more effective measurement and pricing tools.
- Assessing the potential for the
capital markets to diversify catastrophic risks more efficiently.
- In securitization of CAT risk,
the most successful innovation to emerge in addressing moral hazard has
been the development of index-based hedges.
- The industry is much better capitalized
than it was prior to Hurricane Andrew, but funding "the Big One"
would still seriously disrupt the functioning of insurance markets.
- New evidence shows that it is
not necessary for an insurer to be large in order to hedge effectively
using index-linked contracts.
- Utilizing scientific risk estimates
and models effectively serves to reduce uncertainty and forms the basis
to develop common understanding between buyers and sellers of catastrophic
- Appropriate mitigation practices
can be demonstrated to reduce losses substantially, increase underwriting
capacity, and lower the probabilities of insurance insolvency from natural
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