University of Southern California

CREATE Researcher Adam Rose Presents to the OECD: Business Interruption of Disasters

Date: January 7, 2013

OECD2.jpgWhen a terrorist attack occurs, much of the attention focuses on the physical damage.

But as Dr. Adam Rose has illustrated in his research, business interruption is often the costliest aspect. This is why the Coordinator for Economics at USC's National Center for Risk and Economic Analysis of Terrorism Events (CREATE) believes business interruption insurance is such a vital component of resilience to disasters.

Dr. Rose spoke recently on this topic at an (Organisation for Economic Co-operation and Development (OECD) meeting in Paris. Titled "The Future of Terrorism Risk and Insurance Markets," the second annual meeting gathered scholars, industry experts and government officials to discuss policy.

"One of the major purposes of insurance is not just to have somebody recoup their losses, but to get the economy back up and running," Dr. Rose explained. "Rebuilding a factory is not always enough. The company has lost profits over the course of the year, and it may not have any operating cash to work with. This restores the company's cash flow so that they can move forward."

From September 11th to catastrophic earthquake scenarios, Dr. Rose has published the definitive studies on the economic impacts of the biggest disasters this country has faced and could potentially face over the last two decades. In many of these cases, losses from business interruption exceeded property damage.

"The businesses interruption part is much more complicated than property damage because it is subject to behavioral conditions and policy," Dr. Rose said. "What resources we bring to bear, how much outside aid is forthcoming, and how quickly we rebuild are more complicated variables that you have to look into."

Dr. Rose added that additional clarification regarding business interruption insurance is necessary.

"If you bought a business interruption policy and you can get compensated for your losses, why should you scramble to get back on your feet?" he explained. "Or if you go to a temporary location you might be concerned about a clause that says you've recovered when you really haven't."

Additionally, Dr. Rose recommends that governments act as a safeguard for insurance policies in cases of cataclysmic events.

"The federal government has laws in place, such as the Terrorism Insurance Program Reauthorization Act of 2007, that have it serve as a backup when you got cases of large losses," he said. "That is something that needs to be maintained in terms of the government backing up the insurance industry. And that is something that might unfortunately be cut in the course of the current fiscal negotiations Washington."

A major challenge, according to Dr. Rose, is motivating lawmakers to pass legislation during times of calm.

"You have a big event and people get psyched up in terms of initiating a policy while it's on everyone's minds, and then after a couple of years if there is no additional event that takes place people start to think that this type of protection is unnecessary," he said. "That is very shortsighted."

Rose pointed to CREATE affiliated faculty Howard Kunreuther and Erwann Michel-Kerjan of the Wharton School as doing path-breaking research on human behavior in purchasing insurance protection and government policy implementation as complementing his own research on business interruption and resilience to disasters.

VIEW DR. ROSE'S PRESENTATION