Toward a New Risk Architecture: The Question of Catastrophe Risk Calculus

Erwann O. Michel-Kerjan Toward a New Risk Architecture: The Question of Catastrophe Risk Calculus A CAUSE FOR CONCERN From Catastrophes to Mega-Disasters: A New Era Calls for a New Model THE CONFERENCE ORGANIZED BY THE NEW SCHOOL ON “DISASTERS: Recipes and Remedies” in New York in fall 2007 combined the contribu­ tions of many com plem entary fields pertaining to catastrophe manage­ m ent.' In this paper, I will discuss the challenge of the calculus ofrisk, but I would like to begin w ith a broader proposition—the need for a new risk architecture. In m any ways, the catastrophe risk m anagem ent field is at a crossroads today as we are faced w ith disasters of a totally new nature and scale. And while a trem endous am ount of research has been done to better understand disasters in past decade, there have been recent im portant events that have seriously challenged the established para­ digm. The year 2008 is the m ost recent illustration of m ore extrem e events to come. In the new era we have entered, good risk calculus is more about finding the right balance betw een art and science.1Not very long ago, disasters were considered to be low probability events because they did not occur often. In a sense, that assum ption was reassuring for the economist: the expected losses of these disasters (understood here as social research Vol 75 : No 3 : Fall 2008 819 the potential loss associated w ith a disaster m ultiplied by the probabil­ ity o f that event occurring) was often relatively low. But in the first few years of the twenty-first century, the world has faced a string of catastrophes of a totally new dimension: the September 11,2001 terror­ ist attacks; a m ajor blackout in August 2003 that deprived electricity to over 50 m illion North Americans in just a few seconds; and seven hurricanes th at hit the United States w ithin a 15-month period—to nam e a few just in the United States. And catastrophes are often even m ore destructive w hen they occur in poor or even developing coun­ tries: for instance, the Indian Ocean tsunam i in December 2004, or the m ajor earthquake in the Sichuan province in China in May 2008 that killed nearly 50,000, only a few weeks after a m ajor cyclone killed over 100,000 in Myanmar (Burma). In fact, there has not been a 6-month period in the past few years w ithout a m ajor crisis th at sim ultaneously affected several countries or industiy sectors. In the terrorist attacks of 9/11, a superpower was challenged on its own soil in an unprecedented way. After 9/11, the reality of international terrorism became clear, and national security took first priority on the US agenda. The event has had an enduring im pact on the rest of the world as well. Hurricane Katrina, a violent but long-anticipated hurricane, overwhelm ed a vulnerable coastline, m et an unprepared government, and inflicted lasting damage on a popula­ tion. A superpower failed to m eet the m ost basic needs of its citizens in crisis (White House, 2006). In the case of the US-Canada blackout, a massive failure of the electric power-distribution system dem onstrated how hum an error and short-term com petitive pressure resulting in poor risk m anagem ent can jeopardize our critical infrastructures: a 10-second event. The December 2004 tsunam i was responsible for the deaths of nearly 300,000 people in just a few hours because an alert system was not in place (although in this case, the economic im pact was mostly local). W hile the aforem entioned extrem e events all seem quite differ­ ent—different types of catastrophes, different countries, and different impacts on the rest of the world—they share some common features: 820 social research the speed at w hich they occurred and their large-scale destabilization or destruction.2We know from experience that these two characteris­ tics deeply affect decision-making and reaction capacity. The sudden can paralyze. The large-scale disorients...