Why systemic risk in catastrophe modelling is crucially important.
Science is gaining an ever-deeper understanding of the causes of global hazards, such as earthquakes, hurricanes, and volcanoes. But it’s also becoming clearer that these “catastrophes of nature” are incredibly complex events, affected by a lot of different factors. To be able to protect ourselves against them, we need to be able to predict their effects, and design our cities and our defences so that we’re protected against the worst of their effects.
Reinsurance companies, “the companies who insure the insurers,” play an important role this. By looking at past catastrophes, they try to model these events, predict what damage they might cause and, for example, how buildings need to be designed to withstand them. Safer bridges, flood defences for housing estates, and earthquake-resistant skyscrapers are in a large part due to those in charge of building these structures knowing what they have to do to keep their premiums affordable.
But what happens when we’re wrong? With such complex phenomena, we can never predict things with certainty – we make assumptions, and take chances. This is particularly a problem when everyone shares the same assumptions, or uses very similar models – if one person is wrong, nearly everyone is wrong, and the house of cards comes down. These are systemic risks, and can occur in any complex system – they played a role in the global financial crisis.
FHI’s Global Catastrophic Risk experts have teamed up with world-leading reinsurance company Amlin to gain an in-depth understanding of how we tackle these crucial risks, and how we can avoid disaster. As Amlin’s Chief Underwriting Officer Simon Beale says: “Insurance and reinsurance is about helping people continue with their lives or businesses, safe in the knowledge their risks are being held and managed.”
We live in a changing world, where globalisation, increased urbanisation and climate change present new and complex challenges to our safety. And natural hazards are being joined by new, human activity-related calamities – can we insure against pandemics, or even nuclear war? By tapping into the work being done by the Oxford Martin School’s Risk network, Oxford University will lead the way in coming up with strategies to combat systemic risks, and to build a society that is safer from large-scale hazards.