Catastrophic responses to catastrophic risks


Socializing risks from catastrophic losses is difficult even in an ideal political environment, owing to different estimates of low probability risks, solvency constraints, dangers of moral hazard, and high loss correlation. However, these intrinsic contracting problems do not justify invalidating ordinary insurance contracts or forcing insurers to cover catastrophic losses. Yet, political pressures forcing insurance subsidies now induce inefficient decisions in siting and construction, with high expected social losses. Ordinary contract solutions are always imperfect, but superior to the regulatory maze. Unfortunately, patterns of legislation and court decisions are running in the wrong direction.

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Epstein, R.A. Catastrophic responses to catastrophic risks. J Risk Uncertainty 12, 287–308 (1996).

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Key words

  • Catastrophic risk
  • contra proferentem
  • coverage formulas (exposure, manifestation, triple-trigger)
  • pollution exemption
  • socialized losses