Actuarial - Paula Jarzabkowski
Title: Paradoxes of Origination: Between not knowing and knowing too much
Abstract: The need to address uninsured disaster losses has prompted the generation of entities around the world, which we label Protection Gap Entities (PGEs). These PGEs transform uninsured risk into insurance-based products that can be transferred into global financial markets to provide capital for recovery following a disaster. They typically originate via the intervention of government actors when the problem of protection gaps becomes widely recognized as a societal crisis, provoking discussions on how to protect countries against uninsured disaster losses. To do so PGEs turn to market solutions that mobilize global (re)insurance capital in addressing growing or newly-occurred protection gaps. In this chapter, we ground the origination of PGEs in a problem in the sociology of knowledge.
The insurability of a risk rests on whether it can be made calculable in a way that allows the determination of a price at which it can be bought and sold on a market. Reliance on statistics as key calculative devices to determine the price of risk poses restrictions on which risks are insurable and which are not. Most obviously perhaps, the closer an event is to being a certainty, the less it is insurable. While a common mantra for insurance is that “the premiums of the many pay for the losses of the few” this concept of pooling risks among insureds predominantly applies when it is not possible to know in advance, deterministically, who will suffer which amount of loss in a given time frame.
The boundaries posed by the application of statistics explain the knowledge paradox at the heart of insurance. Insurance through markets is only viable in the grey area between knowledge so precise that losses of individuals are predictable deterministically or almost so; and knowledge so weak that not even aggregate losses can be reliably estimated. Too much knowledge and the risk comes too close to deterministic certainty, making it no longer insurable for those known to be at high risk of loss. Too much not knowing and the risk cannot be calculated, as potential losses cannot be predicted and thus prices cannot be set, making risk transfer impossible. These boundaries to the viability of knowledge mean that there is a knowledge paradox at the heart of insurance. In this chapter from our forthcoming book, we explore how PGEs endeavour to counteract the uninsurability arising from either too much knowing, or too little knowing, illustrating our argument with case studies of the origination of PGEs in different countries to address different perils.
Paula Jarzabkowski, Konstantinos Chalkias, Eugenia Cacciatori, Rebecca Bednarek