Governing ignorance: Emerging catastrophic risks-industry responses and policy frictions

Abstract

The growing interconnections between people, markets and networks together with the development of new technologies have increased the frequency and impact of large-scale disasters around the globe. Many of these events, defined as emerging catastrophic (or systemic) risks, have no previous record. At the same time there is a strong probability that their frequency and impact will increase in the future. This paper takes a governance perspective by assuming that policy actions should be designed to cope with ignorance and large-scale losses, being the primary features characterising such emerging catastrophic risks. Precisely, the governance activity should aim both at expanding the industries’ capacity to absorb losses and at acquiring more information about frequency and impact of such losses. However, it appears that some solutions may conflict with policy objectives. In particular, direct governmental interventions to compensate victims and stringent antitrust policy goals might block the development of a market for first-party property insurance for emerging systemic risks. This paper elicits crucial points that require further elaboration by policy-makers, thereby stressing the importance of providing a workable legal definition of such line of risk that embraces the precautionary principle.