crises as catalyst in public health seminar series september 13, 2010
DESCRIPTION
Learning from Catastrophes: Strategies for Reaction and Response in Public Health Howard C. Kunreuther [email protected] Risk Management and Decision Processes Center The Wharton School, University of Pennsylvania http://opim.wharton.upenn.edu/risk. - PowerPoint PPT PresentationTRANSCRIPT
Learning from Catastrophes: Strategies for Reaction and Response in
Public Health
Howard C. Kunreuther [email protected]
Risk Management and Decision Processes CenterThe Wharton School, University of Pennsylvania
http://opim.wharton.upenn.edu/risk
Crises as Catalyst in Public Health Seminar Series September 13, 2010
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Loss (in $ Billions)
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Gross Loss
Summary of Key Points
Individuals focus on short-term horizons• Want immediate return from their preventive measures
• Often regard potential disasters as below their threshold of concern
Impact of this behavior• Failure to take protective measures prior to a disaster
• Cancel insurance if one doesn’t make a claim for a few years
Proposed strategy• Well-enforced long-term contracts
• Short-term economic incentives to deal with myopia 2
Outline of TalkPart 1: Linking Risk Assessment and Risk Perception with Risk
Management: A Conceptual Framework for Studying Risk 1. Risk Assessment and Vulnerability Analysis
2. Risk Perception and Choice
3. Risk Management Strategies
Part 2: Managing Catastrophic Risks in an Uncertain World 1. A New Era of Catastrophes
2. Guiding Principles for Developing Risk Management Strategies
3. Benefits of Protective Measures
4. A New Proposal: Multi-Year Flood Insurance
5. Encouraging Protection: An Example
6. Future Research: Multi-Year Health Insurance with Short-Term Incentives
7. Summary
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A Conceptual Framework for Studying Risk
Statistical Data Building
Scenarios
Risk Perception and Choice
Public Perceptions Expert/Layperson Differences Risk Communication
Risk Assessment& Vulnerability
Analysis
Modelingof Risks
Risk Management Strategies Public Private Partnerships
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Risk Management Strategies:Public Private Partnerships
Information Provision Incentives Regulation Standards Compensation Insurance Liability
Evaluation of Strategies Impact on Society Impact on Interested Parties
A Conceptual Framework for Studying Risk
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1. Risk Assessment and Vulnerability Analysis
Risk Assessment– Encompasses estimates of both the chances of a specific set of events occurring
and their potential consequences– Experts differ in their estimates of the risk– Find your favorite expert to support your position
Vulnerability Analysis– Characterize forms of physical, social, political, economic, cultural, and
psychological harms to which individuals and modern societies are susceptible– Millions of dollars have already been spent to reduce our vulnerability
Constructing Scenarios – What are the probabilities of specific events?– What are the potential consequences?
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Risk Assessment Questions to Ponder
• What are the chances that New Orleans will have a Category 3 or higher hurricane in the next 5 years, and what would be the resulting damage and health impacts?
• What are the chances that there will be another severe oil spill in the U.S. in the next 5 years and what would be the health and environmental impacts?
• What are the chances of a swine flu pandemic in 2011 and how serious would the consequences be?
• What are the chances that there will be a smallpox epidemic in the United States in the next five years, and how many people would be affected?
Using Exceedance Probability Curves to Depict Risk
Uncertainty in Probability
Uncertainty in Loss
95%
Mean
Probability p(L) that losses will exceed L
5%
Loss, L (in dollars)8
Risk Assessment and Vulnerability AnalysisOpen Issues and Questions
• How accurately can experts estimate the likelihood and consequences of damage, injuries and fatalities from disasters of different magnitudes and intensities?
• Can one characterize the types of uncertainties that currently exist in assessing risk and suggest ways to improve these estimates in the future?
• What are the expected costs and benefits of undertaking specific risk-reducing measures in disaster-prone areas and can one rank them on the basis of cost effectiveness?
• What are the interdependencies in the system (e.g. infrastructure damage affecting supply of electricity, water, telephone/telecommunications, and other services to residences and businesses) and what are their impacts on indirect damage, health and environment?
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• Individuals exhibit systematic biases in processing information and making choices
– Estimating likelihood of event is influenced by salience
– “It cannot happen to me” before a crisis or disaster occurs
– “It will happen to me” immediately after a crisis or disaster
– “I don’t have to worry” a few months after a crisis or disaster
• Individuals have difficulties learning due to biases and information processing limitations
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2. Risk Perception and Choice Basic Concepts
Explain this behavior:
• I bought my first set of battery cables only after my car wouldn’t start and I had to be towed. The towing charge was twice as much as the cost of the battery cables.
• Most homeowners in California purchase earthquake insurance only after they experienced a quake. When asked whether the probability of a future event was more likely than before the disaster most people responded “Less likely.”
• Until seat belt laws were instituted in the United States, most drivers refused to wear them. When asked why they did not, a typical response was, “I won’t have an accident.” This response is consistent with the well-documented finding that 90% percent of all drivers feel they are better than the average driver.
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Stigmatization and Social Amplification of Risk
The Alar Case• No scientific evidence that Alar was carcinogenic
Were based upon animal studies that were considered suspect because the doses used had been so large as to have been acutely toxic.
No evidence from epidemiological studies showing Alar to be a human carcinogen.
• The reaction by the public to Alar illustrates social amplification of risk
Media amplified the risk and effectively stigmatized the product
Millions of consumers stopped buying apples and apple products after CBS news story on “60 Minutes” stated Alar could cause cancer
Convincing my wife that children from birth to 3 could drink apple juice with Alar
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Risk Perception and Choice Open Issues and Questions
• What role do perceived likelihoods and resulting consequences play in how people view a particular risk that they may face, such as a severe hurricane or a flu pandemic?
• How important are emotional factors such as fear, dread and anxiety in how people perceive these risks and learn over time?
• What role do social networks and social norms play in influencing risk perception, choice, and learning with respect to low probability events?
• How can one best communicate information to those at risk so they are aware of what actions they can take prior to and after a crisis or disaster?
• What is the role of past experience and the media in influencing risk perception and choice?
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3. Risk Management Strategies Basic Concepts
Policy options for reducing losses and aiding recovery process– Economic incentives– Insurance– Well-enforced regulations and standards (e.g., building codes)– Assistance following a disaster or crisis
Relevant roles of public and private sectors in implementing hazard management strategy
Criteria for evaluating alternative strategies– Efficiency -- allocating resources to maximize social welfare– Equity -- concern with fairness and distribution of resources
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Risk Management Strategies Open Issues and Questions
• What type of economic incentives would encourage individuals to mitigate the risks of a disaster and purchase insurance prior to a disaster?
• How does the prospect of federal aid to victims affect protective decisions by individuals prior to a disaster?
• What are the appropriate roles of standards and regulations in reducing losses from large scale disasters and the impact of the event following the disaster?
• What types of financial backstops should be provided by the public sector at the state and federal levels for dealing with catastrophic losses following future disasters?
• How can one link different policy tools such as information provision, economic incentives, insurance, third party inspections, regulations and standards to achieve the desired objectives of a hazard management strategy?
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Outline of TalkPart 1: Linking Risk Assessment and Risk Perception with Risk
Management: A Conceptual Framework for Studying Risk 1. Risk Assessment and Vulnerability Analysis
2. Risk Perception and Choice
3. Risk Management Strategies
Part 2: Managing Catastrophic Risks in an Uncertain World 1. Cause for Concern: A New Era of Catastrophes
2. Guiding Principles for Developing Risk Management Strategies
3. Benefits of Protective Measures
4. A New Proposal: Multi-Year Flood Insurance
5. Encouraging Protection: An Example
6. Future Research: Multi-Year Health Insurance with Short-Term Incentives
7. Summary
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1. Cause for Concern: A New Era of Catastrophes
A radical change in the scale and rhythm of catastrophes
Natural disasters have caused large numbers of fatalities and destruction in recent years• Cyclone Nargis (Myanmar, May 2008) : 140,000
fatalities • Sichuan Earthquake (May 2008) : 70,000
fatalities and 5 million residents were homeless • Hurricane Ivan (Grenada, September 2004): $889
million in damage (365% of GNP)
Victims complain about receiving substantially less than the actual costs to repair or rebuild their damaged structures
Public sector and international organizations (e.g., World Bank) are committed to providing financial assistance to aid the victims of disasters 17
Worldwide Evolution of Catastrophe Insured Losses, 1970-2008
(Property and business interruption (BI); in U.S.$ billon indexed to 2007, except 2008 which is current)Sources: Kunreuther and Michel-Kerjan, At War with the Weather (2009) - data from Swiss Re and Insurance Information
Institute
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
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85
90
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Man-made catastrophes Natural catastrophes
9/11/2001 loss (property and BI) 9/11/2001 loss (liability and life)
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The 25 Most Costly Catastrophe Insurance Losses, 1970-2008
(17 here in the U.S., 12 of these since 2001) $ Billion Event Victims (Dead or missing) Year Area of Primary Damage
46.3 Hurricane Katrina 1,836 2005 USA, Gulf of Mexico, et al.
35.5 9/11 Attacks 3,025 2001 USA
23.7 Hurricane Andrew 43 1992 USA, Bahamas
19.6 Northridge Earthquake 61 1994 USA
16.0 Hurricane Ike 348 2008 USA, Caribbean, et al.
14.1 Hurricane Ivan 124 2004 USA, Caribbean, et al.
13.3 Hurricane Wilma 35 2005 USA, Gulf of Mexico, et al.
10.7 Hurricane Rita 34 2005 USA, Gulf of Mexico, et al.
8.8 Hurricane Charley 24 2004 USA, Caribbean, et al.
8.6 Typhoon Mireille 51 1991 Japan
7.6 Hurricane Hugo 71 1989 Puerto Rico, USA, et al.
7.4 Winterstorm Daria 95 1990 France, UK, et al.
7.2 Winterstorm Lothar 110 1999 France, Switzerland, et al.
6.1 Winterstorm Kyrill 54 2007 Germany, UK, NL, France
5.7 Storms and floods 22 1987 France, UK, et al.
5.6 Hurricane Frances 38 2004 USA, Bahamas
5.0 Winterstorm Vivian 64 1990 Western/Central Europe
5.0 Typhoon Bart 26 1999 Japan
5.0 Hurricane Gustav 2008 USA, Caribbean, et al.
4.5 Hurricane Georges 600 1998 USA, Caribbean
4.2 Tropical Storm Allison 41 2001 USA
4.2 Hurricane Jeanne 3,034 2004 USA, Caribbean, et al.
3.9 Typhoon Songda 45 2004 Japan, South Korea
3.6 Thunderstorms 45 2003 USA
3.5 Hurricane Floyd 70 1999 USA, Bahamas, Columbia
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Higher degree of urbanization
Huge increase in the value at riskPopulation of Florida 2.8 million inhabitants in 1950 -- 6.8 million in 1970 -- 13 million in 1990
19.3 million population in 2010 (590% increase since 1950)
Cost of Hurricane Andrew in 2004 would have been $120bn
Weather patternsChanges in climate conditions and/or return to a high hurricane cycle?
More intense weather-related events coupled with increased value at risk will cost more, much more.
Will Hurricane Nicole, Otto or Paulamake landfall in the U.S. in 2010? 20
What’s Happening? The Question of Attribution
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Source: Data from AIR Worldwide Corporation
79%
64%62%
59%54%
36%35%
34%29%
28%26%
23%13%
12%11%
9%5%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Insured Coastal Exposure as a Percentage of Statewide Insured Exposure as of December
2007 (Residential and Commercial Properties)
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$2,458bn $2,378bn
$895bn $773bn
$635bn $480bn
$224bn $192bn
$159bn $147bn $133bn
$92bn $86bn
$61bn $56bn $54bn $52bn
0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750
Total Value of Insured Coastal Exposure as of December 2007
(in $ billion; Residential and Commercial Properties)
Source: Data from AIR Worldwide Corporation
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AT WAR WITH THE WEATHER
A better understanding of how individuals decide whether or not to protect themselves against natural disasters.
A set of guiding principles for using insurance to deal more effectively with these events.
Key lessons from the financial management of natural disasters to be applied to other global risks such as pandemics, financial crises and terrorism.
Ideas for the private sector, and sustainable public policy solutions to protect trillions of dollars of assets and the residents at risk in hazard-prone regions.
July 2009 - MIT Press
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2. Guiding Principles for Developing Risk Management Strategies
Principle 1: Premiums reflecting risk Insurance premiums should be based on risk in order to provide signals to
individuals as to the hazards they face and to encourage them to engage in cost-effective adaptation measures to reduce their vulnerability to catastrophes. Risk-based premiums should also reflect the cost of capital insurers need to integrate into their pricing to assure adequate return to their investors.
Principle 2: Dealing with equity and affordability issues
Any special treatment given to homeowners currently residing in hazard-prone areas (e.g., low-income uninsured or inadequately insured homeowners) should come from general public funding and not through insurance premium subsidies.
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Insurance VouchersExisting Programs as Models
Food Stamp Program Mission: Vouchers to purchase food based on annual income and family size
Low Income Home Energy Assistance ProgramMission: Assist low income households in meeting immediate energy needs
Universal Service FundMission: Provide discounts to low-income individuals in rural areas so rates for telecommunications services are comparable to urban areas
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Insurance VouchersWho should subsidize low income
residents?General taxpayer – Everyone in society is
responsible
State government – Source of funding would come from state taxes
Insurance policyholders – All homeowners with insurance
Residents in coastal areas – Those in hurricane-prone areas
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Effects of Mitigation on a 500 Year Event
0
20
40
60
80
100
120
140
160
180
FL NY SC TX
State
Lo
sses
(B
illio
ns)
Savings from Mitigation
Remaining Losses
$160 billion loss
$82 billion saving with$82 billion saving withAdaptation measures Adaptation measures
in placein place
3. Benefits of Protective Measures On a 500-Year Event
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Why Individuals Do Not Invest in Cost-Effective Protective Measures
Short Time Horizons (Quick return on investment)
High Short-Term Discount Rates (Hyperbolic discounting)
Misestimating Probability (“It will not happen to me”)
Liquidity and Upfront Costs (“We live from payday to payday”)
Truncated Loss Distribution (Only responsible for small portion of loss due to disaster relief)
May Move in 2 or 3 Years (Can’t recover costs of adaptation)2929
Proposed strategy
Multi-year flood insurance contracts through the National Flood Insurance Program (NFIP)
Multi-year home improvement loans for mitigating one’s property
Insurance and loans are tied to the property, not to the individual
4. A New Proposal: Multi-Year Flood Insurance
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Multi-Year Flood Insurance Provides Stability to Homeowners
Rates would reflect risk (Principle 1) (FEMA needs to design better maps)
Insurance Vouchers for those needing special treatment (Principle 2) (Only for those currently residing in flood-prone areas) Homeowners would have knowledge that they are
protected against water damage from floods and hurricanes
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Characteristic of Protective Measures Upfront cost/Multi-Year benefits
Cost of Mitigation – $1,500 to strengthen roof of house
Nature of Disaster
– 1/100 chance of disaster
– Reduction in loss ($27,500)
Expected Annual Benefits: $275 (1/100 * $27,500)
Annual Discount rate of 10%
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5. Encouraging Protection: An Example
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Benefits over 30 years
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1 2 3 4 5 8 10 15 20 25 30
Upfront cost of mitigation
Expected benefits over time
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Illustrative Example Cost of partial roof mitigation: $1,500
Expected annual benefit of partial roof mitigation: $275 (1/100 * $27,500)
Annual payments from 20 year $1,500 loan at 10% annual interest rate: $145
Reduction in annual insurance payment: $275
Reduction in annual payments due to mitigation: $275-$145= $130
Rationale for Multi-Year Flood Insurance
Encouraging Mitigation with Multi-Year Loans
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Everyone is a Winner:
Homeowner: Lower total annual payments
Insurer: Reduction in catastrophe losses and
lower reinsurance costs
Financial institution: More secure investment due to lower
losses from disaster
General taxpayer: Less disaster assistance
Linking Multi-Year Home Improvement Loans
with Multi-Year Flood Insurance
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6. Future Research: Multi-Year Health Insurance
with Short-Term Incentives for Better Health
(joint project with Mark Pauly and Kevin Volpp)Question: How can we encourage individuals to adopt better
health habits?
Findings: (Volpp et al. 2008; Volpp et al. 2009) – Economic incentives induce people to stop smoking and induce
obese individuals lose weight
– When incentives are removed, some people resume bad habits
Proposal: Multi-year insurance with premiums reflecting risk, and health insurance vouchers for those requiring special treatment– Premium reductions if you adopt better health habits
– Premium increases if you don’t maintain better health habits
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Example: Encouraging Weight Loss in Obese Individuals
Current Status of Individual A
Weight 250 lbs; Health Insurance Premium $1,000
Economic Incentive System for Individual A
Lose 20 pounds 2011; Premium lowered to $800
Maintain weight in 2012; Premium remains at $800
Lose 5 pounds in 2012; Premium lowered to $750
Gain 5 pounds in 2012; Premium raised to $850
Note: Health insurance encourages better habits in much the same way that property insurance would encourage investing in cost-effective protection
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7. Summary
The Facts: Totally new era of “large-scale risks”; huge and still growing concentration of value in high-risk areas; indication of more devastating disasters in the future with property and environment damage and health impacts
The Reality: Individuals are myopic and misperceive risks, so they do not adopt cost-effective protective measures.
Research and policy questions: Is multi-year insurance coupled with short-term incentives a way to encourage adoption of protective measures to reduce future damage and health risks?What are the challenges and opportunities of developing specific proposals so they have a chance of being implemented?
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