The Center’s work focuses on three major areas:
- Compensation for losses following catastrophic events
- Performance of insurance markets for catastrophic risk
- Identifying and preparing for catastrophic risks
Center leadership works with the Center’s advisory board to select the most promising research topics and outreach efforts and to expand or modify the research agenda as appropriate.
Compensation for Losses Following Catastrophic Events
This area of the Center’s work focuses on the advantages and different approaches for providing compensation following a catastrophic event. Alternatives include government financed or administered compensation systems, civil and criminal liability, insurance, and philanthropy. Examples of the types of projects that the Center may undertake include:
- Evaluation of government compensation programs. Government compensation programs have arisen after some catastrophes but not others. Work in this area could identify the factors that give rise to action and assess the performance of past compensation programs. It could also examine how the benefits of compensation programs vary with the characteristics of an event — such as whether damages can be recovered in court from a clearly culpable party and whether reasonably priced insurance was available pre-event.
- Liability for losses following catastrophic events. Work in the Center could describe the role of liability and the courts following catastrophes. Projects could analyze how court filings vary by type of disaster and country and the resulting transaction costs and time to disposition. Center staff could investigate the extent to which the establishment of administrative compensation systems reduces litigation and explore issues involving modification of tort rules post event.
- Coordination among compensation sources. The Center could build on previous RAND work that documents the complex web of assistance and compensation following disasters. Analysis could address gaps and overlaps in compensation and explore mechanisms for better coordinating the delivery of benefits from different sources.
Performance of Insurance Markets for Catastrophic Risk
Insurance offers many advantages in providing compensation and risk management incentives, but a key issue is the appropriate division of responsibilities between the public and private sectors. Private insurers are sometimes unwilling or unable to provide insurance for catastrophic events at premiums that approach expected loss. Government programs can underprice insurance with adverse consequences for government budgets and risk management incentives.
The Center examines the obstacles facing private insurers in providing coverage for different catastrophic risks and explore how they can be overcome. It also evaluates the experience with government intervention in insurance markets and the circumstances under which government involvement might be warranted. Projects addressing insurance for terrorism attacks and natural catastrophes could be initiated.
- Role of government in terrorism risk insurance. Center projects could address government involvement in the terrorism insurance market. The Terrorism Risk Insurance Act (TRIA) is set to expire at the end of 2014. A research agenda could be developed that would examine the state of the insurance market with TRIA in place, the consequences of allowing TRIA to expire, and ways in which the current program might be improved.
- Role of government in natural catastrophe insurance. There is much less consensus on the role government should play in natural catastrophe insurance markets. Some believe that the private market could insure the risk if market distortions were removed; others believe that limited capacity and the substantial risk premiums in the private market argue for a substantial government role. Center research could inform this debate by addressing a number of issues, such as whether private industry has the required capacity, how premiums compare to expected losses, and what reforms are needed to expand private-sector involvement. Regarding the proper role of government, research could examine whether government has a cost advantage in covering high-consequence, low-probability events as well as the experience with pricing in government-run insurance programs.
Identifying and Preparing for Catastrophic Risks
Government policymakers, businesses, and individuals are not adept at conceptualizing and planning for low-probability, high-consequence events. Prior to the 9/11 terrorist attacks, for example, few thought such events were plausible enough to prepare for. There is a need to explicitly consider potential catastrophic risks rather than ignore them. This line of research explores how we as a society can better identify catastrophic risks and their consequences. It also examines how planning by government, businesses, and individuals can be improved to better address such risks. Examples of projects that will be considered include:
- Identification of catastrophic risks and their consequences. Scenarios could be developed to illustrate a range of potential catastrophic events and examine how their consequences reverberate through society. Characterization of the range of potential impacts will be used to identify and assess risk mitigation strategies.
- Strategies for responding to a catastrophic event. The objective of this work could be to gain insight into the decision landscape in the months following major events. Existing systems that are likely to fail will be identified and the benefits of a range of potential economic policies explored. Strategic decision making games will be used to anticipate the types of decisions policymakers might be called upon to make and help plan in advance for contingencies.