Featured Researcher: Howard Kunreuther

“The most satisfying thing about my work is that I am constantly learning,” says CREATE  researcher Howard Kunreuther.

Kunreuther, the James G. Dinan Professor of decision sciences and public policy and co-director of the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania began working with CREATE in 2004, the year of its inception.

With Wharton Risk Center colleagues Erwann Michel-Kerjan and Jeffrey Czajkowski, Professor Kunreuther’s work with CREATE in assisting the Department of Homeland Security (DHS) and  the Federal Emergency Management Agency (FEMA), is currently focused on improving the effectiveness of the National Flood Insurance Program by examining the appropriate role that insurance can play in reducing future losses while addressing issues of equity and affordability.

Seven years after flood loss claims from Hurricane Katrina burdened the National Flood Insurance Program with huge debt, Congress passed the Biggert-Waters Flood Insurance Reform Act in July 2012, a law intended to transition the program from subsidized rates to actuarial rates reflective of risk. A subsequent reform bill stimulated by concerns that risk-based rates would cost more than homeowners were able to pay reversed many intended changes, much to Professor Kunreuther’s chagrin.

“Risk-based premiums accomplish two things,” Professor Kunreuther says. “They provide information to residents and businesses as to how hazardous their area is. In addition, they encourage those at risk to invest in loss reduction measures when those measures are rewarded with premium discounts: future claims are now expected to be lower because the properties are safer. There is no economic incentive for insurers to offer premium discounts if the price of coverage is required to be highly subsidized.”  He feels that “special treatment should be given to those who cannot afford risk-based insurance premiums.  However, the form of the assistance should not be in the form of premium subsidies but through other alternatives such as means-tested vouchers as in the food stamp program.”

Professor Kunreuther’s interest in economics began as a student at Bates College in Maine. “I was fascinated by economics, as it dealt with real world problems using quantitative analysis,” he says. “However, I assumed that economics focused on human behavior and was surprised to find that it utilized rational models of choice to characterize how firms and individuals should act rather than studying how they actually make choices. As a result I found myself spending time with psychologists, geographers and sociologists to learn more about their research on behavior that could be incorporated into descriptive models of choice that could be contrasted with economists’ rational models.”

His long standing interest in how society can better manage low-probability, high-consequence events developed after he left graduate school and began studying the Great Alaska Earthquake of 1964. “Economists viewing behavior in the post-disaster period could not understand why food prices were going down despite shortages, and why rents were lower even though many people’s homes were destroyed and these victims were looking for places to live. I was intrigued by these data and wanted to learn more about what was driving this behavior.”

“Today the Wharton Risk Center and CREATE are dealing with problems that are extraordinarily important from the point of view of the individual, the firm, government and society that require innovative solutions involving cooperation from the private and public sectors.”

Professor Kunreuther’s long list of accomplishments include co-chairing the World Economic Forum’s Global Agenda Council on Leadership and Innovation for Reducing Risks from Natural Disasters and serving as a Coordinating Lead Author for the chapter on “Integrated Risk and Uncertainty Assessment of Climate Change Response Policies” in the 2014 Intergovernmental Panel on Climate Change (IPCC)  report. He currently serves on the National Academy of Sciences/National Research Council’s committees on Analysis of Costs and Benefits of Reforms to the National Flood Insurance Program, and the Roundtable on Risk, Resilience, and Extreme Events. His many books include At War with the Weather (with Erwann Michel-Kerjan), Learning from Catastrophes: Strategies for Reaction and Response (with Michael Useem) and Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry (with Mark Pauly and Stacey McMorrow).