Assessing, Managing and Benefiting from Global Interdependent Risks: The Case of Terrorism and National Disasters

With the increasing globalization of economic and social activities, the world has now become so interdependent that actions taken today 5,000 miles away could affect you tomorrow. Conventional wisdom holds that one country or one organization has the capacity and expertise to manage future large-scale risks alone. However, in an increasingly global interdependent world, they have neither. A hallmark of the 21 century is that we have entered a new era of catastrophic risks, as illustrated by the evolution of economic and insured losses associated with a series of global events that occurred in just the past few years. The increase in insured losses from man-made (including terrorism) and natural disasters worldwide over the past 36 years (see Figure 1) graphically depicts the new era we have entered. From Table 1 we see that the 9/11 terrorist attacks inflicted $35 billion in insured losses. Claims were paid by over 150 insurers and reinsurers worldwide, illustrating how risks are today diversified over global markets. Four major hurricanes hit one of the most populated states in the U.S. (Florida) in 2004, and three major hurricanes hit the Gulf of Mexico the following year. The devastation due to Hurricane Katrina in 2005 has been unprecedented both in terms of human and economic losses. It is the most costly catastrophe in the history of insurance worldwide ($45.5 billion in insured losses) as shown in Table 1. Of the twenty most costly insured catastrophes that occurred in the world over the past 36 years (1970-2006), half of them occurred since 2001.