STRENGTHENING INFRASTRUCTURE RESILIENCE THROUGH INSURANCE AND ECONOMIC INCENTIVES

Transcription

1 STRENGTHENING INFRASTRUCTURE RESILIENCE THROUGH INSURANCE AND ECONOMIC INCENTIVES Gina Tonn Postdoctoral Research Fellow, Jeff Czajkowski Managing Director, Howard Kunreuther Academic Co-Director, Society for Risk Analysis Annual Meeting December 11, 2017

2 Costs of catastrophes and associated government relief funding are increasing Hurricanes Harvey and Irma (2017): $200-$300B in economic damage; $70B insured Hurricane Sandy (2012): $75B in economic damage; $30B insured $5B damage to New York MTA (<$1B insured) Infrastructure is a large component of federal disaster spending (>20% for hurricanes) KNOWLEDGE ACTION Critical InfrastructureFOR Resilience Institute

3 Costs of catastrophes are increasing Overall and insured losses in the U.S. (Figure From Munich Re) Increase due to: Higher degree of urbanization Substantial increase in value at risk Climate change and sea level rise Lack of holistic resilience framework to assess and manage risk?

4 Layers of Risk Transfer Public and private outlays for catastrophes are becoming unsustainable To manage and reduce losses (both insured and uninsured): Multiple layers of risk transfer Comprehensive and integrated view of risk transfer Self-Insurance/Mitigation Insurance Reinsurance and Alternative Risk Transfer Public Sector Backup

5 Project Overview Insurance and market-based incentives can strengthen critical infrastructure resilience, but barriers exist Our research: Identify these barriers (and opportunities) Focus on critical transportation infrastructure (transit, rail, ports, airports) Interviews with insurers and infrastructure managers Key themes and recommendations

6 Transportation Infrastructure Focus Responsible for movement of people and goods; Vital to the U.S. economy and way of life Owned publically and privately Subject to disruptions associated with natural disaster, infrastructure failure, accidents, terrorist attack Extent of damage and speed of restoration are critical determinants of how quickly a disaster stricken area recovers

7 Interviews Insurance Transit Infrastructure Seaport and airport Reinsurance Insurance Broker Environmental engineer Seaport and Airport Insurance Insurance Rail Air Transport Air Transport

8 Interview Topics Insurers Current insurance offerings Barriers to catastrophe insurance for transportation infrastructure Infrastructure Managers Insurance and risk transfer decisions Post-disaster recovery Measures to reduce future losses View of risk

9 Barriers to improved infrastructure resilience and insurance: Metrics to evaluate and reward infrastructure resilience Moral hazard associated with disaster relief Risk perception and behavioral responses Political will / funding challenges Insurance market capacity constraints

10 Key theme #1: Need for better data Data availability and accessibility needed for: Developing new insurance products Selecting risk management and resilience measures Accurately pricing risk-based insurance Data facilitate multi-year or dynamic insurance policies The cyber area is very new and insurers haven t developed the data for great modeling yet Insurance broker

11 Key theme #2: Need for resilience metrics Metrics are needed: For evaluating resilience measures To understand necessary or important insurance coverage types and amounts To incentive resilience through risk-based ratings/premiums Metrics development is a key component of our ongoing work Earthquake insurance premiums are based on regional risk, not site-specific Port manager

12 Key theme #3: Reliance on federal funding Moral hazard All public infrastructure entities interviewed indicated their belief that the Federal Government would step in to provide assistance during a catastrophic event Resilience improvements are more common in private infrastructure systems that can t rely on government as insurer of last resort For a future disaster, we d expect FEMA to step in and cover 75% of costs as they did for Sandy and Irene Transit manager

13 Key theme #4: Linking risk engineering and loss prevention with insurance premiums Risk engineering helps with: Understanding exposure Taking loss reduction measures Obtaining insurance coverage at an attractive premium Insurers have risk engineering tools that can help pinpoint most cost-effective resilience improvements Linking resilience to insurance premiums and coverage increases the incentive to undertake resilience improvements

14 Key theme #5: Insurance as a tool for resilience financing Financing resilience improvements is key to reducing future losses Federal funding/loans typically don t cover 100% of costs; difficult for managers to justify spending given limited budgets Loans for resilience improvements could be linked with reductions in insurance premiums so that discount offsets loan payment

15 Key theme #6: Emerging Risks Emerging risks present substantial challenges - uncertainty and data unavailability limit insurance and resilience measures Climate change Changes in risks associated with temperature extremes, storm and precipitation intensification, and sea level rise Uncertainty affects setting risk-based premiums and capital planning for infrastructure Terrorism TRIA coverage is restrictive Concern about insurance coverage and resilience for terrorismlike events

16 Key themes #6: Emerging Risks - continued Cyber Risk Number of cyber incidents increasing sharply Insurance is available, but coverage is limited Tools to assess cyber risk are still under development Transportation-related cyber incidents in the U.S. Differs from other risks in that a single cyber event could impact infrastructure globally

17 RECOMMENDATIONS DATA METRICS EMERGING RISKS MORAL HAZARD RISK ENGR. & INSURANCE RESILIENCE FINANCING

18 Recommendations Recommendation 1 Continue working towards revisions of the Stafford Act Theme(s) addressed MORAL HAZARD 2 Promote alternative funding vehicles for pre-event resiliency investment including those linked to insurance 3 Facilitate catastrophic risk data collection, availability, and analysis RESILIENCE FINANCING DATA EMERGING RISKS 4 Encourage the development of risk transfer/resilience metrics METRICS

19 Recommendations Recommendation 5 Support research pertaining to emerging catastrophic risks Theme(s) addressed EMERGING RISKS 6 Consider a redefinition of terrorism for coverage under the Terrorism Risk Insurance Act (TRIA) EMERGING RISKS 7 Inform infrastructure managers of the comprehensive operational benefits of catastrophic risk insurance coverage beyond a straightforward loss backdrop RISK ENGR. & INSURANCE RESILIENCE FINANCING

20 Conclusions and future work Barriers and opportunities exist for improved infrastructure resilience and insurance for catastrophic risk Recommendations seek to address these barriers to promote robust insurance market and resilience for infrastructure Current/future work: Financial/insurance metrics for infrastructure resilience Cyber risk perception and insurance

21 Thank you! Issue Brief: Infrastructure-Cat-Risk-Insurance_rev.pdf White papers: Identifying and Reducing Barriers to Infrastructure Catastrophic Risk Insurance Transportation Infrastructure Systems Insurance, Economic Incentives and other Policy Tools for Strengthening Critical Infrastructure Resilience: 20 Proposals for Action Contact information: