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Catastrophic events as threats to society: Private and public risk management strategies

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  • Nell, Martin
  • Richter, Andreas
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    Abstract

    Dramatic events in the recent past have drawn attention to catastrophe risk management problems. The devastating terrorist attacks of September 11th, 2001 incurred the highest insured losses to date. Furthermore, a trend of increasing losses from natural catastrophes appears to be observable since the late 1980s. The increase in catastrophe losses triggered intensive discussion about risk management of catastrophic risk, focusing on three issues. First, considering the loss potential of certain catastrophic events, the insurance markets' capacity does not seem to be sufficient. An approach to address this capacity issue can be seen in passing certain catastrophic risks to investors via securitization. Second, after the events of September 11, 2001, the government's role as a bearer of risk became an increasingly important issue. Finally, as has been recently demonstrated by the floods in Europe of August 2002, problems of protecting against catastrophic threats do not only exist on the supply side but also on the demand side. Thus policymakers are considering the establishment of mandatory insurance for fundamental risks such as flood and windstorm. This paper will address aspects of these three issues. In particular, we are concerned with the extent to which state or government involvement in the management of catastrophic risk is reasonable. --

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    Bibliographic Info

    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 12.

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    Date of creation: 2004
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    Handle: RePEc:zbw:hzvwps:12

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    Keywords: catastrophic risk; risk management; public-private partnership;

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    1. Kenneth A. Froot, 1997. "The Limited Financing of Catastrophe Risk: An Overview," NBER Working Papers 6025, National Bureau of Economic Research, Inc.
    2. Sinn, Hans-Werner, 1986. "Risiko als Produktionsfaktor," Munich Reprints in Economics, University of Munich, Department of Economics 19879, University of Munich, Department of Economics.
    3. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
    4. Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 160-65, May.
    5. J. David Cummins & David Lalonde & Richard D. Phillips, 2000. "The Basis Risk of Catastrophic-Loss Index Securities," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 00-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 541-62, November.
    7. J. David Cummins & Neil A. Doherty & Anita Lo, 1999. "Can Insurers Pay for the "Big One"? Measuring the Capacity of an Insurance Market to Respond to Catastrophic Losses," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 98-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Doherty, Neil A & Dionne, Georges, 1993. " Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, Springer, vol. 6(2), pages 187-203, April.
    9. Epstein, Richard A, 1996. "Catastrophic Responses to Catastrophic Risks," Journal of Risk and Uncertainty, Springer, Springer, vol. 12(2-3), pages 287-308, May.
    10. Kenneth A. Froot, 1999. "The Evolving Market for Catastrophic Event Risk," NBER Working Papers 7287, National Bureau of Economic Research, Inc.
    11. David Durbin, 2001. "Managing Natural Catastrophe Risks: The Structure and Dynamics of Reinsurance*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 26(2), pages 297-309, April.
    12. Reimund Schwarze & Gert G. Wagner, 2002. "Hochwasserkatastrophe in Deutschland: ├╝ber Soforthilfen hinausdenken," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 69(35), pages 596-600.
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