Research on National Security

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Research on National Security at the Wharton
Risk Center
Advisory Committee Meeting Wharton School
University of Pennsylvania June 16, 2006
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(No Transcript)
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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 (2002-2005) 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 Centers Working Paper shows