Societal Risk Management

1
Societal Risk Management

• RMI 3500
• Perspectives on Risk Insurance
• Robert Klein

2
Topic Objectives

• Outline the characteristics of societal risks.
• Identify criteria for government involvement in
  societal risk management.
• Evaluate alternative approaches to managing
  societal risks.
• Examine social insurance programs, particularly
  social security.

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Societal Risks

• What constitutes a societal risk?
• i.e., What distinguishes a private risk from a
  societal risk, or is the distinction relevant?
• Candidates for societal risks?

4
Government Role

• When should government intervene?
• What determines the best form of intervention?
• Role determination of societal preferences?

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Reasons for Intervention

• Public Goods
• Information Problems
• access
• cost
• interpretation
• Externalities
• existence
• importance of property rights
• Market Power
• Other Problems

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Alternative Approaches

• Privatization of Risk Reduction
• Economic Incentives
• taxes, deposits, tradeable rights
• Regulation
• observable, standard, regulators know better
• Legal Liability
• Victim Compensation Funds
• Other Approaches?

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Illustration of Regulation Cost-Benefits
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Areas of Government Involvement

• National Security
• Nuclear Energy/Materials
• Occupational Safety
• Food, Drugs, Medical Devices
• Environment
• Traffic Safety
• Public Health

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Public Financing of Societal Risks

• Private Market Failures
• Insurer Information Problems
• Prices Fail to Capture Positive Externalities
• Insufficient Buyer Income
• Insufficient Buyer Risk Aversion
• economically infeasible premium
• correlated exposures
• exposure ambiguity

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Social Insurance Rationale

• Response to positive externalities?
• Public concerns about inequalities desire to
  provide economic security.
• Social insurance can use mandatory participation
  to redistribute income.
• Economies of scale

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Financial Guaranty Programs

• Deposit Insurance
• Pension Benefit Guaranty Coverage
• moral hazard funding problems
• Insurance Guaranty Associations

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Federal Insurance Programs

• Terrorism Insurance
• federal reimbursement of insurer losses from
  certified acts
• Nuclear Insurance
• commercial insurance, self-insurance, caps
• Political Risk Insurance
• Flood Insurance
• Crop Insurance
• Government as Ultimate Insurer