When Risks Materialize

Introduction

Saying that I research insurance can be a conversation stopper. Most people react with a barely suppressed yawn. Many consider insurance boring, or confusing, or both. Then there are those with an active dislike for insurance, offering stories of a company’s misleading policies or failure to pay in a time of need. These reactions are understandable, as insurance policies in the United States, and the profitability model underlying them, can be off-putting and opaque. We purchase insurance grudgingly, hoping we won’t need it, or not at all, when immediate needs leave no room for future preparation.

I see emerging a different world of insurance, though. I see innovations that are meaningfully speeding disaster recovery and making financial resilience available to lower-income families that need it the most. I see insurance-based mechanisms that are helping prevent disasters, helping reduce their impact, and supporting safer and more sustainable rebuilding in their aftermath. I see support for expanded investments in nature. I see a tool to improve climate adaptation and to support a low-carbon, equitable, and nature positive economy. In Understanding Disaster Insurance: New Tools for a More Resilient Future, I hope to

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convince you that not only is insurance a critical foundation for our economy and human well-being, but that it can also be a strong force for social and environmental good.

In the coming decades, risk management will be central to economic and social progress. We are at an inflection point where our failure to take early and strong action on climate change and environmental degradation has locked us into a range of escalating risks. When coupled with our denser and more interconnected global economy, where risks can propagate around the world with shocking rapidity and new technologies are deployed at a breakneck pace, along with societies where political stability remains threatened, particularly in the face of these growing threats, risk management becomes more important than ever. Risk management is most successful when it carefully unites risk education and communication, risk reduction, and risk transfer (as you will see, insurance is just the most common type of risk transfer). While all three sides of that risk management triangle are essential, this book focuses on the risk transfer piece, the piece I believe to be the most misunderstood and underappreciated.

In this book, I will be discussing disaster insurance. Other lines of insurance play equally critical roles in human well-being. The pandemic, for instance, has highlighted for everyone the essential role of health insurance and life insurance. This book, however, is limited to exploring risk transfer for disasters and catastrophes: large-scale events that impact many people simultaneously. These types of events present unique challenges for insurance that require, at times, different solutions than do other risks.

The book begins in part 1 with a discussion of disasters, their economic and financial impact, and the role of disaster insurance. This first section introduces fundamental concepts in risk transfer and explains how disaster insurance works, why it is often difficult for insurers to provide, and how governments have intervened in response. This section