Evaluating and Managing the Financial Risks of Extreme Environmental Events

A Warren Distinguished Lecture with
Greg Characklis

Environmental Sciences and Engineering
University of North Carolina at Chapel Hill

ABSTRACT
Extreme environmental events such as droughts, floods, heatwaves and violent storms result in global losses that approach $500 billion per year. These events often impact the costs and/or revenues of both public- and private-sector actors giving rise to financial instability that can be disruptive and influence decisionmaking in many ways. Understanding the nature of the financial risks posed in terms of the frequency and severity of losses requires integrated modeling of natural (e.g., hydrologic), engineered (e.g., reservoirs) and economic/financial (e.g., water/electricity markets) systems. Once these financial risks have been characterized, they must be managed, and this is often achieved via a combination of actions/tools that involve risk reduction (e.g., infrastructure), risk retention (e.g., cash reserves) and risk transfer (e.g., insurance). When it comes to the most severe events, risk transfer via more sophisticated financial instruments can be especially effective in enabling advanced risk management strategies that are both adaptable and cost-effective. 

This discussion revolves around describing approaches to characterizing financial risk in coupled natural-engineered-economic systems, followed by a description of several recent studies. Examples include evaluating strategies for managing the financial risk of environmental extremes on economic sectors such as urban water utilities, electric power utilities, inland navigation and the housing market.

SPEAKER
Greg Characklis serves as William R. Kenan, Jr. Distinguished Professor in the Department of Environmental Sciences and Engineering at the University of North Carolina at Chapel Hill, and Director of the Institute for Risk Management and Insurance Innovation, a pan-campus research and teaching unit.  His primary research interests involve assessing and managing the financial risks of extreme events through coupled modeling of natural, engineered and economic systems, research currently funded by NSF, DOE, USACE, and the state of North Carolina.

Characklis has served on the Editorial Boards of Water Security, Water Resources Research and Hydrology and Earth Systems Sciences. He has also served on the Boards of the Association of Environmental Engineering and Science Professors (serving as President in 2015-16), and the Consortium for the Advancement of Hydrologic Sciences Inc. (CUAHSI). In 2014 he was selected as a Fellow by the National Academy of Sciences’ Kavli Frontiers of Science, and in 2010 he was named an Aldo Leopold Leadership Fellow. Prior to joining UNC, Dr. Characklis served as Director of Resource Development and Management at Azurix Corp. (a subsidiary of Enron Corp.) where his responsibilities centered around assessing the technical and financial merits of water development projects. Before entering the private sector, he spent two years as a Fellow with the National Academy of Engineering in Washington DC. Characklis holds a Ph.D. and an M.S. in Environmental Science and Engineering from Rice University and a B.S. in Material Science and Engineering from Johns Hopkins University.