Howard Kunreuther a Professor of Decision Sciences and Business Economics and Public Policy at the Wharton Business School, describes the type of risks associated with extreme events. He describes an extreme event as “an event that has a very low probability of occurrence, but …can create very serious consequences.” Three examples of an extreme event include flood risk, terrorism and earthquakes.

Professor Kunreuther says few people may have insurance to protect themselves before an event, but after an event the number of polices sold increases dramatically. Before Hurricane Sandy, Professor Kunreuther says 80% of people did not have flood insurance. Since then, a large number have now purchased coverage.

Prior to 9/11, all commercial property policies covered terrorism. After 9/11, the insurance industry decided not to offer that coverage. Professor Kunreuther says that’s when the Federal Government came in with TRIA to provide a backstop. With TRIA, terrorism insurance is being marketed because insurance carriers are protected against a large scale risk.

According to Professor Kunreuther, “there is some recognition that, for the very extreme losses, the public sector will have to come in.”

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