From the first sentence of the first chapter of her new book – Understanding Disaster Insurance: New Tools for a More Resilient Future – Carolyn Kousky states: “When it comes to disasters, record breaking is the new normal.”
Kousky, associate vice president for economics and policy at the Environmental Defense Fund and a Triple-I non-resident scholar, does not engage in hyperbole when she writes:
“Recent years have seen the largest wildfires on record in places all over the world, from California to Australia. We’ve seen the earliest hurricanes, the strongest storms, the most storms in a year and the deadliest storm surges. We’ve seen record highs rain. We’ve experienced the hottest summers, hottest days and hottest nights. We’ve also seen a pandemic sweep the world, as well as the largest and most sophisticated cyber attack to date.”
If you’re a regular reader of the Triple-I blog and the Resilience blog on Triple-I’s Resilience Accelerator website, you’ve already gotten a taste of the “new normal” that Kousky describes. She is well qualified to explain these complex risks, having served as director of policy research and engagement and as executive director of the University of Pennsylvania’s Wharton Risk Center.
Kousky’s academic work delves deeply into disaster insurance markets, disaster financing, climate risk management, and policy approaches to increase resilience. She has published numerous articles, reports and book chapters on the economics and politics of climate risk and is frequently quoted in the mainstream and business media.
And she can write, which – as anyone who has pored over as many academic papers and insurance industry publications as I have can tell you – is a big difference.
Kousky has managed to produce something of a unicorn: a book on catastrophe insurance that anyone who cares to understand our increasingly interconnected and disaster-prone world can read and learn from. Rather than diving straight into the deep weeds of modeling, pricing, and reserving, Kousky begins by clearly describing the global disaster landscape, articulating the threats and their costs, and explaining what insurance is—and, perhaps most importantly, what it is not. – in terms the lay reader can easily identify with:
“By making regular premium payments – certain small losses – insureds are then protected against large losses by receiving compensation when these losses occur. In this way, you can think of insurance as moving money from the good times, when there are no disasters, to the bad times when a disaster occurs. You pay a little in good times to get money in bad.”
On what insurance is not, Kousky writes:
“Insurance is not risk reduction… It has to go hand-in-hand with investment to actually reduce risk. At the household level, it might be upgrading to a reinforced roof if you live on the hurricane-prone coast… When risk is reduced, insurance is cheaper, so risk reduction is a critical complement to insurance. We need both.”
As she gets into the higher grass of insurance market structures and operations, regulations, and technically complex aspects of risk transfer beyond insurance, Kousky gives the reader fair warning.
Insurance professionals may choose to skip some of the familiar industry stories and basics, but I found them interesting and—again, a tribute to Kousky’s writing—not at all painful. Her elaboration of the five “ideal criteria for insurability” and discussion of “thin tail” versus “fat tail” risks provide a useful touchstone for insurance generalists like myself.
“Insurability is not a yes/no proposition, but a spectrum,” Kousky reminds us, “from easier to insure risks, like car collisions, to hard to insure risks, like destructive earthquakes and hurricanes, to near-impossible to insure risks, like war .”
Unraveling and quantifying these hazards and developing strategies to manage them will be at the heart of risk management in a warmer, wetter, increasingly chaotic world.
Kousky’s book does a solid job of describing what is being done, what is working, and what is not; the challenges of insurance availability and affordability; the possibilities and limitations of risk transfer mechanisms; the importance of markets, public policy and individual initiative; and the promise of innovation.
That’s no small feat.