March 8th, 2016

Risk Awareness

Posted at 1:00 AM ET

Identifying, prioritizing, selecting, executing and monitoring results of risk management projects are essential. As noted by the US Government Accountability Office in their post Hurricane Sandy review, an investment strategy would help the Federal Government enhance resilience for future disasters. Unless a clear risk-return framework is established, the opportunity to reduce publically held exposure will be challenging and the inertia around the status quo could endure until loss events occur that force reactionary funding from the public sector (1).

Unless mandated, there is little motivation to spend pre-loss dollars on risk mitigation or financial hedges. This is apparent time and time again in the way flood, wildfire and earthquake exposures are addressed in many regions of the world. Utilizing a variety of tools such as tax credits, cost sharing, risk pooling, risk mitigation and other incentives, individuals can be prompted to be more proactive (2).

There is also a prevailing myth that government relief will be adequate for a resilient recovery. However, this is often not the case. If more citizens recognized that government cannot possibly protect their property to the level needed to restore them to pre-disaster levels, they would be more engaged in actively seeking alternatives. The need for risk awareness and education is obvious. Both the public and private sector can play leadership roles in building community awareness of exposure to extreme events and their consequences. As noted in a prior posting, the United Nations Environmental Program Principles for Sustainable Insurance Initiative has launched the Global Risk Map, a publicly accessible online tool that highlights the economic devastation caused by tropical storms, floods and earthquakes over the past 115 years and helps identify areas of greatest vulnerability. The map achieves this by assessing relevant data on natural disaster events, social and economic exposure and resilience, risk modeling and insurance penetration and density. This high level view of risk is a starting point but it should culminate at the local level to appreciate and mitigate the risk.

Risk awareness and education is a starting point, but by itself is not a solution. For instance, forty years of educational effort to promote awareness of flood risk in the United States has had little impact on insurance purchasing as evidenced by a 1 percent take-up rate outside of designated flood zones where mandatory purchase of flood insurance exists (3). Education and awareness is important, but cost effective insurance solutions and risk mitigation incentives are required to make meaningful progress towards community resilience.

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Note:

1. US General Accountability Office: Hurricane Sandy, An Investment Strategy Could Help the Federal Government Enhance National Resilience for Future Disasters, 2015.

2. National Academies Press: Building Community Disaster Resilience Through Private-Public Collaboration, 2011.

3. Rand Corporation, 2006.

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