Risky Business

The insurance and reinsurance industries take on a variety of kinds of risk in exchange for a premium. The risk is traditionally determined by the past history of insured losses through an actuarial approach. In reality, some kinds of risks cannot be determined by such an actuarial analysis and require true forecasts. This is notably true of risks that are either rare or where the likelihood of occurrence changes through time. The most important of these are tropical cyclones and earthquakes and in some cases environmental pollution and product liability. As this industry has becomes aware of the value of the underlying science in these areas, it has forced them into creative interactions with the academic community. Shared risks and external regulations also give a unique value to public, peer-reviewed information in many of these contexts that enhances the possibility of mutually-beneficial links with academia. As insurance companies merge with other areas of the financial markets, it has also lead to new finance products that again require academic expertise to develop.

I will focus on climate science and insurance risk as the main topic of the discussion because of a unique pilot program that I co-founded in Bermuda. It illustrates the basic issues in joint projects between scientists and businesses where the "product" is public understanding rather than a patentable item. I will then present some of the new areas that we are currently developing at USC to expand this type of interaction into other scientific fields. The demand for academic expertise in these areas is great and it promises to be a valuable source of jobs for natural scientists in the future.

For additional background information, please see:
Michaels, A., D. Malmquist, A. Knap and A. Close. 1997. "Climate Science and Insurance Risk" Nature 389:225-227.