ChallengesFacingtheInsuranceIndustryinManaging.pdfVIP

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Financing of Catastrophe Risk Volume Author/Editor: Kenneth A. Froot, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-26623-0 Volume URL: /books/froo99-1 Publication Date: January 1999 Chapter Title: Challenges Facing the Insurance Industry in Managing Catastrophic Risks Chapter Author: Paul Kleindorfer, Howard Kunreuther Chapter URL: /chapters/c7950 Chapter pages in book: (p. 149 - 194) 4 Challenges Facing the Insurance Industry in Managing Catastrophic Risks Paul R. Kleindorfer and Howard C. Kunreuther The private insurance industry feels that it cannot continue to provide coverage against hurricanes and earthquakes as it has done in the past without opening itself up to the possibility of insolvency or a significant loss of surplus. This concern stems from a series of natural disasters in the United States since 1989 that have resulted in unprecedented insured losses. Figure 4.1 depicts the magnitude of the catastrophic losses experienced by the insurance industry in the United States from 1961 to 1995. The graphic change from 1989 is obvious. Prior to the occurrence of Hurricane Hugo in 1989 (insured losses in that year were over $4 billion), the insurance industry had never suffered any losses from a single disaster of over $1 billion. Since that time, it has had ten disasters that have exceeded this amount (“Catastro- phes” 1996). Hurricane Andrew was the most severe disaster that the insurance industry has experienced to date. It swept ashore along the Florida coastline in August 1992, causing insured losses from wind damage that topped $15 billion.’ Had Paul R. Kleindorfer is the Universal Furniture Professor of Decision Sciences and Economics and professor of public policy and management at the Wharton School, University of Pennsylva- nia. Howard C. Kunreuther is the Cecilia Yen Koo Professor of Dec