Adapting to Extreme Events: Managing Fat Tails

This issue brief by Resources for the Future suggests that improved management of catastrophic risks should be a part of adaptation planning at federal, state, and local levels. The report describes how actions can be incorporated into adaptation plans to reduce losses and improve the ability to insure these risks.

The paper describes how damages from natural disasters are characterized by "fat tails." The author explains this to mean that the expected size of an event larger than any event yet seen is much larger than the largest event experienced to date. This characteristic of fat tails means that the next event at least as bad as the worst experienced to date could be much, much worse. This logic is applied to U.S. disasters, factoring in the increases in frequency and magnitude of extreme events due to climate change. Implications to the insurance industry, the federal government, and taxpayers is discussed.

Risks associated with fat tails are described, such as the inability to rely on historical data, and escalating insurance expenses. Historical trends and costs of flood and other weather-related damage are reviewed, along with case studies and options for lowering costs. Finally, options for "thinning the tail," or lowering the actual risks, are discussed, such as reducing development in high-risk areas.

 

 

Publication Date: May 2010

Authors or Affiliated Users:

  • Carolyn Kousky
  • Roger Cooke

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  • Policy analysis/recommendations

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