Transcript Slide 1

Research on National Security
at the Wharton Risk Center
Advisory Committee Meeting
Wharton School
University of Pennsylvania
June 16, 2006
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2
Complementary Fields of Research
(ex ante/ex post)
A. Critical Infrastructure Protection
CI: “services which are so vital that their incapacity or destruction would
have a debilitating impact on the social and economic continuity of the
country” (Transportation, Information and telecommunications, Water, Energy,
Electricity, Public Health, Banking and Finance, Chemical Industry, Postal and
Shipping, etc)
B. Terrorism Risk Financing
C. More Theoretical Research that Emerged from these
Issues
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A. Critical Infrastructure Protection (CIP)
The private sector owns 85% of US CI
Project 1 (2004-2006)
Analyze the trade-off private efficiency-public
vulnerability in the context of CIP;
focus on: vulnerabilities, resilience, interdependencies,
competitiveness, information sharing, new security
markets, national and international private-public
collaborations.
Joint research with Harvard and GMU
Research output: several WP/publications;
Seeds of Disaster, Roots of Response (Cambridge University Press)
Project 2. Global supply chain security and impact of information
sharing on risk sharing (Lockheed/DOT)
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B. Terrorism Risk Financing
Prior to September 11, 2001: terrorism included in all commercial
coverage
September 11, 2001: $35bn insured losses (2/3 paid by reinsurers,
mainly European)
Reinsurers stopped covering terrorism, insurers refused as well
September 11, 2002: the US was largely uncovered
Congress passed Terrorism Risk Insurance Act for 3 years (20022005) – Covers up to $100bn
Large uncertainty in 2005 as to whether TRIA will be renewed
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B. Wharton Risk Center Initiative
on Terrorism Risk Financing
10-month work (2005)
A 9-person team; 3 departments
Collaboration with a large number
of organizations in the US and
abroad
Support document for Congress and
other interested parties
“One of the best studies on
terrorism insurance and TRIA”
The Economist, November 2005
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C. More Theoretical Research
(with a lot of practical implications …)
• Traditional assumption in the economic literature of risk financing/insurance:
The insurer (the principal) proposes a series of contracts to insured (the agent), but is
unable to observe perfectly the risk of its insured who can.
Result: adverse selection (Rothschild/Stiglitz, 1976; Stiglitz, 1977)
• Problem:
Growing empirical evidence there is NO adverse selection in many insurance markets:
No positive correlation coverage/risk – There is even advantageous selection
• Research question:
What would happen if the insurer knew the risks better? (reserved asymmetry)
What would happen if the insured (a large company) had market/negotiation power?
New Risk Center’s
Working Paper shows:
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