Policy Issues in Insurance

1990-0821 (online)
1990-083X (print)
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This series addresses major concerns of economic, political and social actors in the insurance sector, and covers a wide scope of regulatory and supervisory issues, such as: investment regulation, solvency assessment, management of insolvency, insurance contract law, mandatory insurance, reinsurance, taxation of insurance products, accountability, convergence in the financial services industry, policy holder protection.

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Financial Management of Large-Scale Catastrophes

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05 Sep 2008
9789264041516 (PDF) ;9789264040786(print)

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Dramatic events, such as the earthquake that struck China’s Sichuan Province in 2008 and the devastation caused by Hurricane Katrina in the United States in 2005, have brought the financial management of catastrophic risks once again to the forefront of the public policy agenda globally. To address these issues and develop sound policies, the OECD has established an International Network on the Financial Management of Large-Scale Catastrophes. This publication supports the ongoing activities of the Network.

This book contains three reports focusing on different institutional approaches to the financial management of large-scale catastrophes in selected OECD and non-OECD countries, the role of risk mitigation and insurance in reducing the impact of natural disasters, and the importance of strategic leadership in the management of non-conventional crises.

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  • Foreword
    The growing impact of major disasters on OECD and non-member economies has stimulated a demand for an in-depth evaluation of possible strategies to reduce their large-scale damaging effects. Dramatic events such as the devastation caused by Hurricane Katrina in the United States in 2005, and the earthquake that struck China’s Sichuan Province in 2008, have brought the financial management of catastrophic risks once again to the forefront of the public policy agenda globally.
  • Part 1. Introduction
    This section of the publication provides a comparative review and stocktaking of different policy strategies and institutional approaches to the financial management of large-scale disasters in selected OECD and nonmember Asian countries drawing, inter alia, from the results of data collection activities pursued by the OECD in the recent years under the aegis of the Network project.
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  • Expand / Collapse Hide / Show all Abstracts Policy Approaches to the Financial Management of Large-Scale Disasters

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    • Comparative Review
      This chapter compares different policy and institutional approaches to the financial management of large-scale catastrophes, highlighting the importance of coordination between public and private sectors in the prevention, mitigation, and financial compensation of disaster losses. The comparative review is framed by a thematic concern revolving around the central question of ex ante and ex post approaches to managing the costs of catastrophes, and it focuses on key aspects such as the respective roles of public and private sectors, the types of perils and losses covered, and the pricing mechanisms.
    • Survey of Country Approaches
      This chapter is aimed at taking stock of the current institutional approaches to the financial management of large-scale catastrophes in selected OECD and non-member countries. It is largely based on the elaboration of data provided by several countries that responded to an OECD questionnaire survey.
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  • Part 1. Conclusions
    The comparative review and stocktaking conducted in this section of the publication show that there is a wide variety of policy strategies and approaches to the financial management of large-scale disasters, with different degrees of private and public sectors participation and responsibilities, and different types of explicit or implicit coordination mechanisms.
  • Part 2. Introduction
    Over the past few years, the losses from natural disasters have increased significantly both in OECD and non-OECD countries. In countries that benefit from warning systems and effective mitigation programs, consequences are often much lower than in emerging economies that are deprived of such capacity. In south-east Asia, the tsunami in December 2004 killed more than 280 000 people residing in coastal areas within just a few hours. A month after Cyclone Nargis made landfall in Burma in May 2008, as the deadliest natural disaster in the recorded history of the country, it was estimated that this severe cyclone had killed over 200 000 people. The same month the Great Sichuan Earthquake in China is estimated to have killed nearly 70 000 people and 5 million others homeless though this number could be as high as 11 million.
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  • Expand / Collapse Hide / Show all Abstracts Reducing the Impact of Natural Disasters: The Insurance and Mitigation Challenge

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    • A New Era of Large-Scale Natural Disasters
      This chapter discusses the evolution of insured losses from natural disasters over the past decade, the relationship between insured losses and total economic losses as well as the causes of this increase in damage. What are the key drivers of the sharp increases in both economic and insured catastrophe losses over the past 20 years? How has development in hazard-prone areas and climate change affected recent damages from hurricanes and flooding? What is the prognosis for the future?
    • The Role Of Cost-Benefit Analysis In Evaluating Mitigation Measures For Natural Disasters
      This chapter discusses the role of cost-benefit analysis in evaluating mitigation measures It analyses the types of mitigation measures that can reduce the physical damage from hurricanes, flood, and earthquake and the costs of these measures. The chapter also discusses the current operation of several insurance programs for providing coverage against natural hazards in the United States and other countries (France, Great Britain and Japan).
    • Risk Perception And Choice In Homeowners Adoption Of Mitigation Measures
      This chapter discusses how risk perception affects people and firms in their decisions as to whether or not to invest in protective measures. It also discusses the importance of social norms and interdependencies on their decision processes. Given the reluctance of individuals to invest in costeffective mitigation voluntarily there is a need to develop innovative strategies that involve public-private sector partnerships. Well-enforced building codes coupled with long-term insurance contracts and mitigation loans are important in this regard.
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  • Part 2. Conclusions
    The past 15 years have witnessed a series of large-scale catastrophes that have inflicted historic economic and insured losses throughout the world. Half of the 20 most costly insured catastrophes since 1970 occurred after 2001. Except for the terrorist attacks of September 11, 2001, all of them were natural disasters. In Chapter 1 we discussed why the growing concentration of population and structures in high-risk areas, combined with the potential consequences of global warming, are likely to lead to even more devastating catastrophes in the coming months and years, unless proper risk reduction measures are implemented now.
  • Part 3. Introduction
    Whenever the issue of new risks and emerging crises arises, the spectre of September 11 casts its shadow. But 9/11 is not the only issue. For instance, Katrina has altered the agenda of influential circles in Washington, which are now calling for an "all-hazards approach" less focused on the single problem of terrorism. More generally, we find ourselves today in a transitional period, marked by global discontinuities with respect to security and vulnerability on all fronts - environment, climate, demographics, public health, technology, social dynamics, economic tensions, geostrategy, violence. Whatever the field, we now see the curtain fall on an era whose mantra was "everything is under control" - the misleading guiding principle that dominated the approach to risk and crisis throughout the years 1980 to 2001. In other words, we have witnessed "the end of zero risk" (Lagadec-Guilhou, 2002), and we now need a new vision and new practices.
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  • Expand / Collapse Hide / Show all Abstracts Coping with Non-Conventional Crises: Strategic Leadership in a Chaotic World

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    • The New World Of Risks and Crises
      The break between the end of the 20th century and the beginning of the 21stcentury has been violent and disconcerting. Our world used to be relatively stable. Certainly, it could and did undergo serious breakdowns and crises: but those were charted, localized, manageable, and reparable within established frameworks. Now we are in the grip of events which lie beyond "normal" categorizations. We find ourselves thrown into a world that is losing its bearings, its balancing mechanisms and its internal borders. We are moving from the accidental - specific breakdowns within generally stable terrains - to the chaotic: a landscape that is profoundly and permanently de-structured, a matrix of security problems responding to laws that we do not understand. A world where crisis becomes the central operating mode, and which is generated by events, processes, and combinations that are increasingly off the scale. Two essential types of difficulties come together to produce today's crises: • Shocks no longer fit their customary frames of reference: we are witnessing difficulties that in terms of scale, complexity, and speed "burst the seams" of our understanding and our vision. • These shocks are arising against a backdrop of contexts and moorings that are also shifting with increasing speed, which only compounds our loss of bearings, management capacity, and the collapse of confidence. Hence, there can be no "technical" solution, however sophisticated, to these emerging crises. We must first assess the issues and then invent appropriate responses.
    • Operational Responses
      In the face of a threatening crisis, our intellectual and managerial tradition calls for us to prepare plans. Those plans set out actions and approaches that will be applied at each stage of the crisis. They are fine structures that involve a whole array of responses, in the style of a victory parade where everyone marches in step to an impeccable choreography. Unfortunately, reality rarely fits the plan's assumptions: warning signals are not recognized, managers disappear from the scene, tools do not work. The crisis unfolds on a battlefield fraught with difficulties, and not on a tidy avenue or square prepared for an orderly parade. As the experts continually point out, what matters is not so much the plan as the planning. If we do not heed this, we are bound for failure. This chapter reviews what our grand systems are most sorely lacking in: • An "emergency culture", an elementary crisis culture: these are known responses, and we must be aware of them. • And henceforth: the capacity to deal with unconventional crises that demand reinvented responses.
    • Strategic Initiatives
      management are indispensable, but they are not sufficient. In these turbulent fields, where paralysis is so common, we must overcome two kinds of obstacles. • The cultural block, which prevents us from a really serious examination of the actual challenges: we remain caught up in risk analysis systems and models for managing exposure and crises that are no longer in phase with current and coming realities. • The managerial block, which prevents us from taking indispensable initiatives for making stakeholders capable of action in these new fields. What we must do immediately is to give some strategic impetus to our systems, not only to overcome these blocks but to put ourselves in a position to be more creative, open and innovative. Our systems will then be able to cope with the challenges of our time, not through blind groping, but through intelligent, positive and determined action.
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  • Part 3. Conclusions
    This is the major risk we face today: to keep trotting out the line that "everything is under control", "don't be pessimistic and so don't ask any questions", while demanding that the citizens give up the idea of "zero risk", while complaining constantly about the "unhealthy litigiousness" of our societies
  • Annex A
    Major financial institutions play a critical role in the recovery process in the wake of a crisis. That role is even more important in what is becoming a chaotic environment: astronomical direct costs, cascading damages that are impossible to assess, beneficiaries that are impossible to reach, public institutions and essential operators that are profoundly destabilized.
  • Annex B
    During the night of November 1, 1986, a fire broke out in one of the Sandoz warehouses in Schweitzerhalle, not far from Basel, Switzerland. The warehouse contained 1351 tonnes of chemicals, intended mainly for agricultural use. Firefighters brought the blaze under control in the early hours of the morning. The warning issued to local people, to stay indoors and close the windows, was lifted around 7 a.m.. The incident was over and the "emergency" had been dealt with.
  • Annex C
    Hurricane Katrina struck the Gulf of Mexico coastline on August 29, 2005. It is estimated to have caused 1,300 deaths: it was the costliest hurricane in terms of human lives since 1928 (when the Okeechobee hurricane killed 2,500 people), and the third worst in American history (Galveston, 1900, 8 000 deaths)2. An essential point is that it presented two facets:
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