In a market economy, we expect
“short- run” impacts mitigated in the
“long-run” – as people are prompted to be inventive
and opportunistic. Gary Becker and Kevin Murphy wrote in the
WSJ on Oct 29, 2001: “Prosperity Will
Rise Out of the Ashes.” It did.
Economic impact
modeling approaches are unsettled. Study findings vary greatly. Approaches involve measurement and modeling; both are controversial.
Modelers had hoped for simple relationships between structure damage losses and business interruption losses. The post-disaster studies done in recent years (disclosure: I have been involved in some of these) provide results that do not reveal any simple relationship.
What to do? Screen businesses in terms of plausible documented
back-up/continuity plans and credible supply-chain back-ups?
Can
insurers offer businesses with credible back-up plans premium reductions? How
to evaluate and screen
plans? “Do you have a supply-chain back-up plan
in place?” Incentive effects would be useful. This could be win-win-win (insurer, insured, society). There would be less moral
hazard if pre-commitment of the insured were demonstrated.
Until we learn how understand business interruption better,
an alternative involves focus on business interuption
loss mitigation plans. The quality
of a firm's production
back-up plans may be easiest to evaluate than an impact model. And insisting
on such plans informs
all involved
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