Insurability of large emerging risks - January 2023
Author: Olivier Lopez
Professor at Sorbonne University, Director of the Institute of Statistics of Sorbonne Université (ISUP)
This Debate Paper discusses how to take up the challenges triggered by the emergence and proliferation of large risks, which, if not properly mutualized, will undermine the social links that are fundamental to our society. To put together efficient risk transfer solutions, innovative mechanisms need to be developed. None of them constitute a miraculous solution, but a careful combination of them may improve prospects.
The goal is to achieve an efficient sharing of the risk among the various stakeholders: policyholders, State (taxpayers), and insurance companies. An appropriate combination of self-insurance and outside insurance should be finetuned, especially for large corporations. For households and small companies, harmonious collaboration between the public and the private sphere should be pursued. In some cases, State intervention is unavoidable; it should be anticipated and done with the idea of protecting both public finances and the economic stability of the private insurance sector; an active prevention strategy with all stakeholders (insurers but also policyholders) is key in that respect.
Given the extreme catastrophes linked to current developments, the issue of scale can only be solved at the European level, which has the proper dimension to face risks that do not acknowledge borders. In any case, all strategies that can be invented should be based on enough information to anticipate developments and organize financial protection. Collaboration in information sharing should be thought of as collaboration between European States. Aggregated data are not sufficient to make a precise analysis, which is essential for reducing uncertainty. The proper level of information is probably more to be found in the information stored by private actors (industries, insurance) than in national statistics. The public European sector could play a key role in organizing this information sharing between all the stakeholders concerned by risk, respecting privacy, competition, and defense.
The extreme severity of risk that we now face makes this effort of collaboration (within sectors and with the other forces concerned by risk) essential in extending the boundaries of insurability.