Risk Management and InsurancePerspectives in a Global Economy

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                                              W. Jean Kwon, Ph.D., CPCU
                         School of Risk Management, St. John’s University
                                                      101 Murray Street
                                               New York, NY 10007, USA
                                               Phone: +1 (212) 277-5196
                                            E-mail: Kwonw@stjohns.edu
        Risk Management and Insurance: Perspectives in a Global Economy

6. Catastrophe Risk Assessment: Human
                               Factors



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Study Points

 Terrorism

 Critical infrastructure risks

 Environmental risks

 The role of the precautionary principle




                                            3
Terrorism




            4
Terrorism

 Terrorism is not new, but its magnitude is.
   • 777 different groups caused 19,856 terrorism-related events globally
     between 1968 and 2005 – 25,595 deaths and 66,665 injuries

   • Selected groups
      • The Revolutionary Armed Forces of Colombia
      • Basque Fatherland and Liberty
      • The National Liberation Army of Colombia
      • Hamas
      • Hezbollah
      • al-Fatah
      • The Taliban
      • al Qaeda

 Terrorism is solidly a world problem.

                                                                            5
Terrorism Defined

 An act of violence or threat of violence against individuals or
  property committed by one or more individuals acting on
  behalf on an organization for the purpose of influencing
  government policy or action to advance a political, religious
  or ideological cause

 Different from war or warlike operations




                                             Chapter 16 also about terrorism
                                                 related to MNC employees




                                                                               6
What is Terrorism? (Insight 6.2)

 It involves violence or its threat against people (as opposed
  to property).

 The violence is not an end as it is aimed at instilling fear or
  having a deep psychological impact on others.

 It is to accomplish political goals.

 Civilians or non-combatants are targeted.

 It is perpetrated by non-governmental actors or at least
  governments of questionable legitimacy.

                                                                    7
Terrorism – Use of Nuclear Weapons

 Building conventional nuclear
  weapons

 The Nuclear Non-Proliferation Treaty
  (NNPT)

 Building unconventional nuclear
  weapons
   • Dirty bomb

 Method of controlling the nuclear
  weapons risk
   • No national or global network exists
   • Increased public attentiveness as an
     important component of societal risk
     control of terrorist acts

                                            8
Terrorism – Use of Biological Agents

 Bioterrorism
   • The threat of biological weapons use by
     terrorists

 Categories
   • Contagious
   • Non-contagious

 Preventing and detecting a bioterrorism attack
   •   Limited number of methods available
   •   Quarantines
   •   Drugs
   •   High-efficiency air filters
   •   Development of databases linking medical
       facilities


                                                   9
Terrorism – Use of Chemical Agents

 The knowledge has been known
  for decades, and the equipment
  and ingredients readily available
    • Mustard gas since WWI
    • The sarin attack in Japan


 Preventing and detecting attacks
    • Many first responders said to be
      inadequately trained and poorly
      equipped                           Tokyo Sarin Attack – March 20, 1995




                                                                               10
Terrorism – Use of Conventional Explosives

 1995 Oklahoma City (U.S.)
  bombing

 Use of airplane and other modes
  of transportation

                                         Khobar Towers in Saudi Arabia – June 25, 2006
 Suicide bombers                                      www.loc.gov/rr/frd/images/khobar.jpg




                                    The Marriott Hotel in Pakistan – September 20, 2008

                                                                                              11
Terrorism – Observations

 Terrorism is not likely to be defeated completely in the near
  future, if ever.
   • The root causes of terrorism seem a long way from being addressed
     sufficiently.
   • Terrorism is simply too cheap.


 The fight against terrorism must continue and be financed.




                                                                         12
Critical Infrastructures




                           13
Critical Infrastructures

 Systems whose incapacity or
  destruction would have a
  debilitating impact on the
  defense or economic security of
  a nation
   • Highways, pipelines,
     communication satellites and
     network servers


 Causes of damages
   • Natural
      • 1906 San Francisco
        earthquakes
      • 1995 Kobe earthquakes
   • Human-made

                                    http://www.tsat.no/
                                                          14
Critical Infrastructures

 Impact of complex infrastructure system failures on
  institutions
   • Social
   • Economic
   • Political


 Interdependent effects
   • A disruption spreads beyond itself to cause appreciable impact on
     other systems, which in turn cause more effects on still other
     systems




                                                                         15
Understanding How Complex Systems Behave

 Variation in an interactive system, as in a biological
  community, reduces the vulnerability to single-point failures.

 Interactions between members of the same group or social
  framework, while enhancing communication and simplifying
  information transfer, can have disastrous consequences if
  the jointly held information is wrong.

 Selection deals with choosing successful strategies and
  rejecting those that lead to failure.




                                                                   16
Efficiency and Reliability in Systems (Figure 6.1)

                                           Trend




Self-organized                                     Managed


                                                             17
Environmental Risks




                      18
Environmental Risks

1. Climate change

2. Genetic engineering

3. Nuclear-generated electrical energy




                                         19
Climate Change




                 20
Climate Change – the Problem

 Greenhouse gases (GHGs)

 Global warming
  • UN’s Intergovernmental Panel on Climate Change (IPCC)
     • Global temperatures have risen about 0.6ºC since the 19th
       century and human activity has contributed to this result.
     • Insight 6.4

  • The trend of increasing global temperatures has continued into the
    21st century.
     • Figure 6.2




                                                                         21
Top 10 Countries in CO2 Emissions from Fossil Fuels

                                                                                                                             The 20 Hottest Years
                           7,000                                                                      25                          on Record
  Metric Tons (Millions)




                           6,000
                                   19.97
                                                                                18.92
                                                                                                      20




                                                                                                           Tons per Capita
                           5,000
                           4,000                                                                      15

                           3,000                  10.57                 10.17                         10
                                                          9.25                          9.36 9.5
                           2,000                                                                   7.81
                                                                                                      5
                           1,000           2.57
                                                                 0.98
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                                     Metric Tons in Millions             Tons per Capita




                                                                                                                                                    22
Top Ten Countries in CO2 Emissions (updated)




                                               23
Top Ten Countries in CO2 Emissions (updated)




                                               24
Climate Change – the Options

 To ensure that any increase in the world’s temperature is
  limited to between 2ºC and 3ºC above the current level over
  time

 To ensure that developed countries use energy much more
  efficiently and figure out how to make profits from the very
  problem of global warming
   • Less carbon-intensive fuels for power generation
   • Energy efficient buildings
   • Energy efficient transportation modes


                                                 The agreement made at COP15 is
                                                                 more stringent!

                                                                                   25
Climate Change – the Role of the Market

 Economists – The gains achieved in emission reduction
  through government mandates come at a needlessly high
  price.
   • Emission trading ranks highly for its potential (Chapter 4)


 Production costs include attendant negative externalities.
   • Externalities are only part of the battle in fixing market distortions.

   • The other half involves scrapping environmentally harmful subsidies.
      • Such subsidies do double damage.
          • They distort the markets.
          • They encourage behavior that harms the environment.


                                                                               26
Climate Change – the Role of the Market

 Many economists note that prices are also distorted
  because conventional economic measures (e.g., GDP)
  measure wealth creation improperly, as they ignore the
  effects of environmental degradation.

 Markets, even if they got everything right, must yield to
  public discourse and government policy.
   • As we learned in Chapter 2, markets are efficient but not always fair.




                                                                              27
Carbon Trade
(additional discussion (not in the book)




                                           28
Solving Climate Change and Global Warming?

   Eco-taxation
   Fuel switching
   Waste management
   Energy efficiency

 Carbon trading and sequestration projects offer the
  solutions to global warming




                                                        29
Carbon Credits

 Greenhouse Gas Emissions
   • Gases that contribute to the greenhouse effect by absorbing infrared
     radiation
   • Major emissions include
       • Carbon dioxide, methane, nitrous oxide, hydro fluorocarbons
         (HFCs), perflurocarbons (PFCs), and sulfur hexafluoride


 Carbon Credits
   • Each unit gives an owner the right to emit one metric ton of carbon
     dioxide (or other equivalent greenhouse gas) into the atmosphere




                                                                            30
Carbon Credits

 Evolution of carbon credits
   • Kyoto Protocol


 175 countries ratified
   • Annex countries and non-annex countries


 Emissions Limits

 Expires in December 2012




                                               31
How Is Carbon Traded?

 Cap-and-Trade Schemes
  •   Came into force in 2005
  •   Covers heavy industry and power generation
  •   Emissions are limited and then traded
  •   European Trading Scheme (ETS)
       • Largest companies-based scheme; includes 12,000 sites across
         the 25 European member states


 Voluntary Cap-and-Trade Schemes
  • Chicago Climate Exchange (CCX)
  • Interest in regional trading growing in America
  • UK has its own voluntary scheme
      • Companies cut emission in return for payments

                                                                        32
33
Problems with Cap-and-Trade Schemes

 Compared to a carbon tax system:
   •   More complicated means of achieving the same objective
   •   Seem to generate more corruption
   •   Administration and legal costs higher
   •   Impractical at level of individual household emissions




                                                                34
Effectiveness of Carbon Trading?

 Trading only works if emissions are sufficiently reduced to
  contain global warming and if trading is comprehensive, but:

 CO2 is only part, though (>70%), of all GHGs

 World’s largest CO2 polluter, China (22.1%), has no
  obligation to reduce emissions

 2nd largest emitter, US (20.7%), excluded itself in the past.

 Within trading schemes, such as ETS, whole sectors’
  emissions excluded.

                                                                  35
Climate Change Economics

 1997 Kyoto Protocol

 The meeting in 2007 in Indonesia

 The IMF meeting on March 28, 2008
   • To discuss the macroeconomic consequences of climate change
   • Countries which emit more that acceptable will face an appropriate
     price for the harm they ca

 Copenhagen 15 in 2009
   • Limit a rise in global temperatures to below 2ºC above pre-industrial
     levels
   • More than 50 countries, including the US and China, agreed to take
     action

                                                                             36
Genetic Engineering




                      37
Genetic Engineering

 A branch of biotechnology, which is a discipline that
  encompasses all innovative methods, techniques,
  processes and products using living organisms or their
  cellular constituents
   • It is not new.


 The debate
   • The benefits from genetically engineered drugs are easily conveyed
     to the general public and widely accepted.
   • Borderline areas involving individuals’ ethical standards and
     fundamental beliefs


 Uncertainty about residual risks                 Chapter 18 covers the Human
                                                               Genome Project.

                                                                                 38
Nuclear-generated Electrical Energy




                                      39
Nuclear-generated Electrical Energy

 441 commercial nuclear power reactors in 31 countries
   • Figure 6.3


 Operational safety
   •   Insight 6.5 (the Chernobyl Disaster)
   •   The China syndrome
   •   Reactor scram
   •   High-level wastes




                                              http://www.spiegel.de/img/0,1020,616547,00.jpg
                                                                                               40
China Syndrome

 A possible extreme disaster resulting
  from a nuclear meltdown
   • A meltdown in the US can each China….
   • Often, exaggerated!




                                             As in this 1979 Movie




                                                                     41
Electrical Power from Nuclear Generation




                                           42
Nuclear Power Plants (new)




  http://www.insc.anl.gov/pwrmaps/map/world_map.php


                                                      43
Nuclear Power Plants in Europe (new)




                                       44
Nuclear Power Plants in the US (new)




                                       45
Nuclear Power Plants in Russia (new)




                                       46
Nuclear-generated Electrical Energy – the Future

 Safety
   • The public must believe that existing and especially future power
     plants are safe.


 Economics
   • Governments continue to deregulate their power industries
     worldwide, resulting in more competition that, in turn, forces greater
     operational efficiency.


 Politics
   • In democracies, the future of any science is determined by society’s
     perceptions as manifested in political choices.



                                                                              47
Precautionary Principle

 An economic-based approach to making
  societal risk-related decisions would have
  policymakers rely on cost-benefit analyses,
  focused on willingness to pay.
   • Many governments, scientists and others find
     this approach unacceptable in assessing technology
     for which questions exist about whether it could
     materially harm the environment or human health.

 Precautionary principle
   • Where there are threats of serious or irreversible damage, lack of full
     scientific certainty about whether damage could ensue should not be
     used as a reason for postponing cost-effective measures to prevent
     environmental (or other) damage.


                                                                               48
Precautionary Principle

 The Treaty of Maastricht in 1992

 The 1992 UN Conference on Environment and
  Development in Rio de Janeiro
   • Adoption of 15 principles

 The Framework Convention on Climate Change, UN
  Biodiversity Convention

 The Biosafety Protocol

 The European Commission expanded it to ban foods that
  the public perceives as a health risk, even in the absence of
  scientific evidence of such a risk.


                                                                  49
Discussion Questions




                       50
Discussion Question 1

 Describe the precautionary principle and relate its differing
  degrees of support in the U.S. and the E.U. to the cultural
  theory of risk.




                                                                  51
Discussion Question 2

 Little disagreement exists today as to whether humans are
  contributing to global warming. Disagreement persists,
  however, about how important the consequences will be and
  what, if anything, to do about it now. Explain the pros and
  cons of this disagreement.




                                                                52
Discussion Question 3

 Some students were debating the issue of the “greenhouse
  effect” and its impact on the planet. (a) One student argues
  that the greenhouse effect was actually beneficial to the
  earth’s inhabitants. Do you agree? Explain. (b) Increases in
  the greenhouse effect attributable primarily to an increase in
  trace gases in the atmosphere have been linked to global
  warming. Discuss the impact of global warming on the
  physical environment.




                                                                   53
Discussion Question 4

 What effect, if any, would you expect changing
  demographics, as discussed in Chapter 7, to have on (a)
  losses from hurricanes, (b) the risk of terrorism, (c) social
  views about climate change, and (d) social views about
  genetically modified food?




                                                                  54

				
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