1. Market and Contract Design for Catastrophic Losses by Doherty and Kleindorfer comments by Paul K. Freeman Columbia-Wharton Roundtable, April 12-13, 2002

2. Introduction n Review of discussion regarding contract design for ambiguous risk n Comments primarily based on experience as president of Environmental Risk Insurance Company

3. Topics of Discussion n Ambiguity Associated with Catastrophic Events n Strategies to cope with that ambiguity

4. Ex Ante Ambiguity n Knowledge About Risk: natural catastrophes and terrorism contrasted (data, outcome dependant on human behavior) n Covariant nature of catastrophe risk and accumulation risk: true for terrorism as it is for natural hazards?

5. Ex Post Ambiguity n Indirect costs are hard to determine (distinction between property loss and income loss) n What we thought we knew is wrong: environmental (joint/several and retroactive liability); natural hazard (Hurricane Andrew); terrorism (Sept. 11) n Litigation Risk

6. How Address Ex Ante Ambiguity n Better information and modeling of risk (catastrophe modeling and development of terrorist models) n Find non-insurance risk transfer models: mutualisation or portfolio strategies (capital market alternatives) n Risk prevention and mitigation activity

7. How Address Ex Post Ambiguity n Contract drafting (define key issues and set standards of behavior) n Address moral hazard n Set limits on coverage and watch accumulations n Pray

8. What This Means n If ambiguity is not reduced satisfactorily: no agreement reached (no insurance offered or acceptable alternative found) n What is satisfactory ambiguity reduction and the efforts the parties are willing to devote to its reduction is a function of parties risk and ambiguity aversion (model addresses this issue)

9. Next Steps n Be careful that we not draw too many lessons from short time frame about terrorist insurance n Both environmental and natural hazard risk insurance found its feet within several years after assumption changing events occurred.