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Risk Management and Insurance: Perspectives in a Global Economy
6. Catastrophe Risk Assessment: Human
Factors
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Study Points
 Terrorism
 Critical infrastructure risks
 Environmental risks
 The role of the precautionary principle
3
Terrorism
4
Terrorism
 Terrorism is not new, but its magnitude is.
• 777 different groups caused 19,856 terrorism-related events globally
between 1968 and 2005 – 25,595 deaths and 66,665 injuries
• Selected groups
• The Revolutionary Armed Forces of Colombia
• Basque Fatherland and Liberty
• The National Liberation Army of Colombia
• Hamas
• Hezbollah
• al-Fatah
• The Taliban
• al Qaeda
 Terrorism is solidly a world problem.
5
Terrorism Defined
 An act of violence or threat of violence against individuals or
property committed by one or more individuals acting on
behalf on an organization for the purpose of influencing
government policy or action to advance a political, religious
or ideological cause
 Different from war or warlike operations
Chapter 16 also about terrorism
related to MNC employees
6
What is Terrorism? (Insight 6.2)
 It involves violence or its threat against people (as opposed
to property).
 The violence is not an end as it is aimed at instilling fear or
having a deep psychological impact on others.
 It is to accomplish political goals.
 Civilians or non-combatants are targeted.
 It is perpetrated by non-governmental actors or at least
governments of questionable legitimacy.
7
Terrorism – Use of Nuclear Weapons
 Building conventional nuclear
weapons
 The Nuclear Non-Proliferation Treaty
(NNPT)
 Building unconventional nuclear
weapons
• Dirty bomb
 Method of controlling the nuclear
weapons risk
• No national or global network exists
• Increased public attentiveness as an
important component of societal risk
control of terrorist acts
8
Terrorism – Use of Biological Agents
 Bioterrorism
• The threat of biological weapons use by
terrorists
 Categories
• Contagious
• Non-contagious
 Preventing and detecting a bioterrorism attack
•
•
•
•
•
Limited number of methods available
Quarantines
Drugs
High-efficiency air filters
Development of databases linking medical
facilities
9
Terrorism – Use of Chemical Agents
 The knowledge has been known
for decades, and the equipment
and ingredients readily available
• Mustard gas since WWI
• The sarin attack in Japan
 Preventing and detecting attacks
• Many first responders said to be
inadequately trained and poorly
equipped
Tokyo Sarin Attack – March 20, 1995
10
Terrorism – Use of Conventional Explosives
 1995 Oklahoma City (U.S.)
bombing
 Use of airplane and other modes
of transportation
 Suicide bombers
Khobar Towers in Saudi Arabia – June 25, 2006
www.loc.gov/rr/frd/images/khobar.jpg
The Marriott Hotel in Pakistan – September 20, 2008
11
Terrorism – Observations
 Terrorism is not likely to be defeated completely in the near
future, if ever.
• The root causes of terrorism seem a long way from being addressed
sufficiently.
• Terrorism is simply too cheap.
 The fight against terrorism must continue and be financed.
12
Critical Infrastructures
13
Critical Infrastructures
 Systems whose incapacity or
destruction would have a
debilitating impact on the
defense or economic security of
a nation
• Highways, pipelines,
communication satellites and
network servers
 Causes of damages
• Natural
• 1906 San Francisco
earthquakes
• 1995 Kobe earthquakes
• Human-made
http://www.tsat.no/
14
Critical Infrastructures
 Impact of complex infrastructure system failures on
institutions
• Social
• Economic
• Political
 Interdependent effects
• A disruption spreads beyond itself to cause appreciable impact on
other systems, which in turn cause more effects on still other
systems
15
Understanding How Complex Systems Behave
 Variation in an interactive system, as in a biological
community, reduces the vulnerability to single-point failures.
 Interactions between members of the same group or social
framework, while enhancing communication and simplifying
information transfer, can have disastrous consequences if
the jointly held information is wrong.
 Selection deals with choosing successful strategies and
rejecting those that lead to failure.
16
Efficiency and Reliability in Systems (Figure 6.1)
Trend
Self-organized
Managed
17
Environmental Risks
18
Environmental Risks
1. Climate change
2. Genetic engineering
3. Nuclear-generated electrical energy
19
Climate Change
20
Climate Change – the Problem
 Greenhouse gases (GHGs)
 Global warming
• UN’s Intergovernmental Panel on Climate Change (IPCC)
• Global temperatures have risen about 0.6ºC since the 19th
century and human activity has contributed to this result.
• Insight 6.4
• The trend of increasing global temperatures has continued into the
21st century.
• Figure 6.2
21
Top 10 Countries in CO2 Emissions from Fossil Fuels
19.97
20
18.92
5,000
15
4,000
3,000
10.57
10.17
9.25
9.36 9.5
7.81
2,000
2.57
0.98
Metric Tons in Millions
Ko
re
a
Ita
ly
0
UK
0
5
S.
1,000
10
Tons per Capita
6,000
The 20 Hottest Years
on Record
25
US
A
Ch
ina
Ru
ss
ia
Ja
pa
n
In
di
G
er a
m
an
Ca y
na
da
Metric Tons (Millions)
7,000
Tons per Capita
22
Top Ten Countries in CO2 Emissions (updated)
23
Top Ten Countries in CO2 Emissions (updated)
24
Climate Change – the Options
 To ensure that any increase in the world’s temperature is
limited to between 2ºC and 3ºC above the current level over
time
 To ensure that developed countries use energy much more
efficiently and figure out how to make profits from the very
problem of global warming
• Less carbon-intensive fuels for power generation
• Energy efficient buildings
• Energy efficient transportation modes
The agreement made at COP15 is
more stringent!
25
Climate Change – the Role of the Market
 Economists – The gains achieved in emission reduction
through government mandates come at a needlessly high
price.
• Emission trading ranks highly for its potential (Chapter 4)
 Production costs include attendant negative externalities.
• Externalities are only part of the battle in fixing market distortions.
• The other half involves scrapping environmentally harmful subsidies.
• Such subsidies do double damage.
• They distort the markets.
• They encourage behavior that harms the environment.
26
Climate Change – the Role of the Market
 Many economists note that prices are also distorted
because conventional economic measures (e.g., GDP)
measure wealth creation improperly, as they ignore the
effects of environmental degradation.
 Markets, even if they got everything right, must yield to
public discourse and government policy.
• As we learned in Chapter 2, markets are efficient but not always fair.
27
Carbon Trade
(additional discussion (not in the book)
28
Solving Climate Change and Global Warming?




Eco-taxation
Fuel switching
Waste management
Energy efficiency
 Carbon trading and sequestration projects offer the
solutions to global warming
29
Carbon Credits
 Greenhouse Gas Emissions
• Gases that contribute to the greenhouse effect by absorbing infrared
radiation
• Major emissions include
• Carbon dioxide, methane, nitrous oxide, hydro fluorocarbons
(HFCs), perflurocarbons (PFCs), and sulfur hexafluoride
 Carbon Credits
• Each unit gives an owner the right to emit one metric ton of carbon
dioxide (or other equivalent greenhouse gas) into the atmosphere
30
Carbon Credits
 Evolution of carbon credits
• Kyoto Protocol
 175 countries ratified
• Annex countries and non-annex countries
 Emissions Limits
 Expires in December 2012
31
How Is Carbon Traded?
 Cap-and-Trade Schemes
•
•
•
•
Came into force in 2005
Covers heavy industry and power generation
Emissions are limited and then traded
European Trading Scheme (ETS)
• Largest companies-based scheme; includes 12,000 sites across
the 25 European member states
 Voluntary Cap-and-Trade Schemes
• Chicago Climate Exchange (CCX)
• Interest in regional trading growing in America
• UK has its own voluntary scheme
• Companies cut emission in return for payments
32
33
Problems with Cap-and-Trade Schemes
 Compared to a carbon tax system:
•
•
•
•
More complicated means of achieving the same objective
Seem to generate more corruption
Administration and legal costs higher
Impractical at level of individual household emissions
34
Effectiveness of Carbon Trading?
 Trading only works if emissions are sufficiently reduced to
contain global warming and if trading is comprehensive, but:
 CO2 is only part, though (>70%), of all GHGs
 World’s largest CO2 polluter, China (22.1%), has no
obligation to reduce emissions
 2nd largest emitter, US (20.7%), excluded itself in the past.
 Within trading schemes, such as ETS, whole sectors’
emissions excluded.
35
Climate Change Economics
 1997 Kyoto Protocol
 The meeting in 2007 in Indonesia
 The IMF meeting on March 28, 2008
• To discuss the macroeconomic consequences of climate change
• Countries which emit more that acceptable will face an appropriate
price for the harm they ca
 Copenhagen 15 in 2009
• Limit a rise in global temperatures to below 2ºC above pre-industrial
levels
• More than 50 countries, including the US and China, agreed to take
action
36
Genetic Engineering
37
Genetic Engineering
 A branch of biotechnology, which is a discipline that
encompasses all innovative methods, techniques,
processes and products using living organisms or their
cellular constituents
• It is not new.
 The debate
• The benefits from genetically engineered drugs are easily conveyed
to the general public and widely accepted.
• Borderline areas involving individuals’ ethical standards and
fundamental beliefs
 Uncertainty about residual risks
Chapter 18 covers the Human
Genome Project.
38
Nuclear-generated Electrical Energy
39
Nuclear-generated Electrical Energy
 441 commercial nuclear power reactors in 31 countries
• Figure 6.3
 Operational safety
•
•
•
•
Insight 6.5 (the Chernobyl Disaster)
The China syndrome
Reactor scram
High-level wastes
http://www.spiegel.de/img/0,1020,616547,00.jpg
40
China Syndrome
 A possible extreme disaster resulting
from a nuclear meltdown
• A meltdown in the US can each China….
• Often, exaggerated!
As in this 1979 Movie
41
Electrical Power from Nuclear Generation
42
Nuclear Power Plants (new)
http://www.insc.anl.gov/pwrmaps/map/world_map.php
43
Nuclear Power Plants in Europe (new)
44
Nuclear Power Plants in the US (new)
45
Nuclear Power Plants in Russia (new)
46
Nuclear-generated Electrical Energy – the Future
 Safety
• The public must believe that existing and especially future power
plants are safe.
 Economics
• Governments continue to deregulate their power industries
worldwide, resulting in more competition that, in turn, forces greater
operational efficiency.
 Politics
• In democracies, the future of any science is determined by society’s
perceptions as manifested in political choices.
47
Precautionary Principle
 An economic-based approach to making
societal risk-related decisions would have
policymakers rely on cost-benefit analyses,
focused on willingness to pay.
• Many governments, scientists and others find
this approach unacceptable in assessing technology
for which questions exist about whether it could
materially harm the environment or human health.
 Precautionary principle
• Where there are threats of serious or irreversible damage, lack of full
scientific certainty about whether damage could ensue should not be
used as a reason for postponing cost-effective measures to prevent
environmental (or other) damage.
48
Precautionary Principle
 The Treaty of Maastricht in 1992
 The 1992 UN Conference on Environment and
Development in Rio de Janeiro
• Adoption of 15 principles
 The Framework Convention on Climate Change, UN
Biodiversity Convention
 The Biosafety Protocol
 The European Commission expanded it to ban foods that
the public perceives as a health risk, even in the absence of
scientific evidence of such a risk.
49
Discussion Questions
50
Discussion Question 1
 Describe the precautionary principle and relate its differing
degrees of support in the U.S. and the E.U. to the cultural
theory of risk.
51
Discussion Question 2
 Little disagreement exists today as to whether humans are
contributing to global warming. Disagreement persists,
however, about how important the consequences will be and
what, if anything, to do about it now. Explain the pros and
cons of this disagreement.
52
Discussion Question 3
 Some students were debating the issue of the “greenhouse
effect” and its impact on the planet. (a) One student argues
that the greenhouse effect was actually beneficial to the
earth’s inhabitants. Do you agree? Explain. (b) Increases in
the greenhouse effect attributable primarily to an increase in
trace gases in the atmosphere have been linked to global
warming. Discuss the impact of global warming on the
physical environment.
53
Discussion Question 4
 What effect, if any, would you expect changing
demographics, as discussed in Chapter 7, to have on (a)
losses from hurricanes, (b) the risk of terrorism, (c) social
views about climate change, and (d) social views about
genetically modified food?
54