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Patricia Grossi (Editor) and Howard Kunreuther (Editor)

Catastrophe Modeling: A New Approach to Managing Risk (Huebner International Series on Risk, Insurance and Economic Security)

Book Description

Catastrophe Modeling: A New Approach to Managing Risk is the first book that systematically analyzes how catastrophe models can be used for assessing and managing risks of extreme events. It focuses on natural disaster risk, but also discusses the management of terrorism risk. A unique feature of this book is the involvement of three leading catastrophe modeling firms, AIR Worldwide, EQECAT, and Risk Management Solutions, who examine the role of catastrophe modeling in rate setting, portfolio management and risk financing. Using data from three model cities (Oakland, CA, Long Beach, CA and Miami/Dade County, FLA), experts from the Wharton School of the University of Pennsylvania examine the role of catastrophe modeling to develop risk management strategies for reducing and spreading the losses from future disasters. Given the uncertainties associated with terrorism the book points out the opportunities for utilizing catastrophe models to set insurance rates and to examine public-private partnerships for providing financial assistance in the event of a terrorist attack. "This book fills a critical need in setting forth the role of modern risk analysis in managing catastrophe risk. There is no comparable reference work for this important subject area. The book is well written and well organized. It contains contributions from many of the most distinguished experts in the fields of risk analysis and risk management. It strikes a good balance between the technical aspects of the subject and the practical aspects of decision making." "This book is strongly recommended for individuals who must make decisions regarding the management of impacts of catastrophe risks including those in both the public and private sector." Wilfred D. IwanProfessor of Applied Mechanics, EmeritusDirector, Earthquake Engineering Research LaboratoryCalifornia Institute of Technology "The authors have captured the essence of catastrophe modeling: its value, its utility and its limitations. Every practitioner in the catastrophe risk field should read this book." Franklin W. Nutter, PresidentReinsurance Association of America

Review

An excellent survey of disaster insurance premium estimation. The volume is written by a variety of contributors, but they follow an outline predetermined by the editors. The material starts with an introduction to natural disasters (hurricanes and earthquakes), then reviews the primary 'technique' recommended by the authors: using GIS databases and sophisticated computer models to predict disaster costs (disaster models). Unfortunately, the details of running these models are hard to communicate without giving the reader access to an interface of a sample model.

Despite this difficulty, there is an excellent chapter detailing the legal battles between the insurance industry and consumer advocates. The battle was fought after the Northridge, CA earthquake, and the GIS data and disaster models were the heavy artillery employed by the insurance brokers. The authors review difficult issues regarding 'fair premium price' determination for regulated retail insurance policies. The purchasers of disaster insurance tend to see the brokers collecting risk-free profits. The brokers counter that the Northridge earthquake insurance payouts exceed all the premiums paid in California for over 20 years. Elsewhere the authors mention hurricane Andrew insurance payouts exceeded all insurance payments ever collected in Florida.

The final chapter covers 'terrorism insurance', and represents an excellent survey of issues facing the insurance industry after September 11. One of the interesting issues raised in the mismatch between industry assessment of 'fair premium' and public assumptions that a 9/11 type disaster could not happen, again. At least this is what sale of terrorism insurance demonstrates.

The book will probably suggest more questions than it answers. In particular, the chapter on terrorism raises interesting issues about 'governmental' coverage versus 'private' coverage. At a certain level, victims of terrorism can expect taxpayers to 'aid' those suffering from the disaster. 'Aid' is another term for insurance, but 'coverage' is universal and payments hidden in various taxes. Coming up with fair 'retail terrorism insurance premiums' seems beyond the capabilities of the US insurance system. The problems are structural and won't go away any time soon.

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Rating:
2.5 out of 5 by Book123