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Comparative Emergency Management

Learn about risk transfer, sharing, and spreading mechanisms, including insurance, reinsurance, and risk pools. Explore advantages, limitations, and examples from the US and abroad.

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Comparative Emergency Management

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  1. Comparative Emergency Management Session 16 Slide Deck Session 16

  2. Session Objectives • Provide a Broad Understanding of Risk Transfer, Sharing, and Spreading Mechanisms • Explain the Various Risk Transfer, Sharing, and Spreading Techniques and Provide Examples from The United States and Abroad Session 16

  3. Risk Transfer • Also called: • Risk Sharing • Risk Spreading • Debated as a mitigation measure • Allows for the financial disaster consequences that do occur to be shared by a large group of people, rather than a large financial burden falling only on the affected individuals or communities Session 16

  4. Risk Transfer Roots • 1950 BC • Practice of “bottomry” • Costs of shipping losses shared among participants – e.g., all vessels in a fleet Session 16

  5. Modern Risk Transfer • Can be private or government administered • Primarily consist of insurance and reinsurance • Direct risk sharing more commonly found in developing countries • Informal agreements within social / familial groups • E.g., food sharing Session 16

  6. Insurance “a promise of compensation for specific potential future losses in exchange for a periodic payment” Session 16

  7. Insurance Considerations • Can be mandatory or optional • In 2008, over $4.2 trillion in premiums (17% increase over 2006) • US – represents 26% of the insurance market Session 16

  8. Common Types of Insurance • Automobile insurance • Homeowners / Renters insurance • Health insurance • Disability insurance • Life insurance • Flood insurance • Earthquake insurance • Terrorism insurance • Business interruption insurance Session 16

  9. Reinsurance Companies • Reinsurance companies insure insurance companies • Tend to be internationally based • Spread risk across greater geographical ranges Session 16

  10. Two Factors of Insurability • The hazard in question must be identifiable and quantifiable. • Insurers must be able to set premiums for “each potential customer or class of customers” • (Kunreuther and Freement, 1997). Session 16

  11. Insurance Problems • Catastrophic Disasters • Hazards for which information is scarce • Disasters that cover wide geographic areas Session 16

  12. Catastrophic Insurance Problems • Only those people who are likely to suffer the specific loss defined in the policy are likely to purchase that type of policy, creating the need for much higher premiums than if the specific hazard policy were spread across a more general population. • This phenomenon is called “adverse selection” Session 16

  13. Advantages of Insurance • Victims are guaranteed a secure and predictable amount of compensation for their losses • Insurance allows for losses to be distributed in an equitable fashion, protecting many for only a fraction of the cost each would have incurred individually if exposed to hazards • Insurance can actually reduce hazard impact by encouraging policyholders to adopt certain required mitigation measures Session 16

  14. Insurance Limitations • May be impossible to purchase in the highest-risk areas • Participation is often voluntary • Participation has been known to encourage more irresponsible actions • Many companies are pulling out of specific disaster insurance plans because the probability that they will not be able to cover catastrophic losses is too great • Catastrophic losses that cover a wide but specific geographic space within a country may result in inequitable premium increases if coverage areas are too general Session 16

  15. Risk Sharing Pools • Group members share risk internally • Often used by government agencies to cover public sector risk • Can work by allowing individual members to benefit from group buying power • Risk insured is specific to the needs of the pool • Can include other services, such as technical assistance or advice Session 16

  16. Weather Derivatives • Use investment instruments to mitigate risk • Used heavily by agricultural / energy sectors • Used to cover losses associated with cancelled / affected events Session 16

  17. Catastrophe Bonds • Disaster-based investment mechanism • Investors ‘bet’ that a disaster will not occur • Disassociated with standard financial markets • Require a trigger Session 16

  18. Cat Bond Triggers • Indemnity • Modeled Loss • Indexed to Industry • Parametric • Parametric Index Session 16

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