Essays Detail How to Prepare for and Mitigate Risks of Future Catastrophes
Howard Kunreuther and his co-editors also highlight the importance of combining risk assessment with risk perception.
- Lori Chordas
- August 2021
The Future of Risk Management
Howard Kunreuther has long been studying the ways that society can better manage low-probability, high-consequence events related to technological and natural hazards.
Over the years, Kunreuther, the James G. Dinan Professor Emeritus, Operations, Information and Decisions Department at the Wharton School of the University of Pennsylvania, and co-director of the Wharton Risk Management and Decision Processes Center, also has explored how global challenges such as climate change and terrorism reveal the interdependent and interconnected nature of hazards. Disasters that occur in a geographic region can potentially have widespread effects across the world.
Kunreuther, along with Robert J. Meyer of the Wharton School and Erwann O. Michel-Kerjan of McKinsey &Co., recently published a book of essays highlighting past research, recent discoveries and open questions by leading risk management and behavioral science experts. Following is an edited transcript of an interview with AM Best TV.
What does the book say about how risk managers prepare for and handle future low-probability, high-consequence events?
Unfortunately, risk managers often fail to appropriately prepare for risks and hazardous events, perceiving many of these events as below their threshold level of concern. They feel that “extreme events are not going to impact me, my organization or government.” It's only after a disaster that they then recognize that it would have been a good idea to prepare for potential catastrophes by developing risk management strategies to reduce potential adverse consequences from these events.
What role can insurance play in preparing for and reducing those losses?
Insurance plays a very important role, as it is one of the few policy tools that can reward people for undertaking protective measures by reducing their premiums and provide funds to cover future losses.
But to be most effective, insurance rates must be risk-based to signal to people the degree of hazard they face. However, some households cannot afford risk-based rates, so the public sector could provide vouchers or tax credits to cover a portion of the cost of insurance.
What do you hope people take away from the book?
I hope people come away with an understanding that risk management addresses two central elements: One that we are all aware of is risk assessment—what do experts say about the risk? The second area, often not considered, is risk perception. People misperceive risk because of the cognitive biases and emotions, particularly with respect to low-probability exposures. If we can appreciate the importance of combining risk assessment with risk perception, then successful risk management strategies can be developed and implemented in companies, countries and, we hope, globally.
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