Decision Needs in the Insurance Industry
Researchers: Erwann Michel-Kerjan, Howard Kunreuther, Wharton School, University of Pennsylvania; Daniel Hoffman (formerly of Swiss Re); Granger Morgan, Carnegie Mellon University
Insurance is a way of spreading risk and encouraging investments in protective measures to reduce the chance of and potential losses from an untoward event in the future. It is one of the principal mechanisms used by individuals and organizations to manage risks.
In most developed countries, the insurance and reinsurance (companies that provide insurance to other insurance companies) industry constitutes an important pillar of economic development and stability. The industry, especially its reinsurance portion, faces at least three different types of risks associated with climate change.
First, extreme weather events such as hurricanes and earthquakes impact the insurance industry by increasing risks to health, life and property. Climate change is expected to worsen the situation by increasing the frequency and severity of these natural disasters and leading to the spread of tropical diseases due to warming temperatures. These direct effects of climate change will impact the insurance industry negatively.
Second, the industry manages a large amount of money, dealing with its own investments and acting as a third party administrator for others. The negative effects of climate change will in turn reduce the value of these investments, thus indirectly impacting the insurance industry.
Third, the industry will be asked to underwrite new technologies—including carbon sequestration, hydrogen vehicles, and carbon trading—that are introduced in response to policies designed to limit climate change. The financial risk associated with these technologies is unknown.
We plan to develop a set of decision-related tools for insurance managers who are faced with these direct and indirect effects. Sometimes, private insurance companies might not have the resources to cover certain areas or certain weather catastrophes. In that case, the government could help, but they would have to collaborate with the insurance companies who know how the market works. We are also analyzing the potential of such public-private partnerships and how they could be formed.
By collaborating with participants drawn from the private sector, academic community and international organizations, we hope to identify and revise a set of research needs. To do this, we are holding a series of telephone and face-to-face meetings and holding workshops with these individuals.