Introduction to the particular aspect of risk management focusing on catastrophe risk.

• The session opens by acknowledging the extensive discussion on risk and introduces the specific focus on catastrophe risk.
• Catastrophe risk is described as what businesses or investors face when encountering an event that can lead to their potential end.

Real-world examples illustrate how companies face existential threats and how they are valued amidst such risks.

• The Icelandic spa, Blue Lagoon, faces a threat from a volcanic eruption, prompting questions about business valuation under existential threats.
• 23andMe experienced a data breach, which posed a significant risk to the company's existence due to compromised customer genetic information.
• Climate change is discussed as an existential crisis affecting sectors such as fossil fuels, impacting investor decisions and pricing.

Different types of risks are categorized and methods to address them in valuation are explored.

• Risks are divided into categories such as economic, estimation, micro, macro, discrete, and continuous risks.
• Another categorization addresses incremental and catastrophic risks, with the latter being capable of significantly altering a company's trajectory or threatening its survival.
• Approaches to valuing catastrophic risks include examining insurability, sector-wide impact, market-wide impact, and the probabilities of occurrence.

Valuation strategies for catastrophe risks that are insurable are discussed.

• When a risk is insurable, the cost of insurance can be incorporated into cash flows, affecting intrinsic value.
• The challenge arises when risks are not insurable or when insurance does not cover all potential losses.

Approaches to valuing companies with uninsurable risks that do not threaten their existence.

• For uninsurable risks that do not lead to company failure, two valuations are done: one assuming the catastrophe does not occur and another accounting for the catastrophe.
• Probabilities are assigned to each scenario to determine the expected value.

Valuation strategies for uninsurable risks that could cause a company's failure.

• For catastrophic risks that can lead to company failure, valuation involves estimating the going concern value and the failure value, then taking an expected value.
• Probabilities of failure and potential recovery values in the event of failure must be estimated.

Valuation considerations for catastrophic risks that affect entire sectors or the market.

• Risks that affect entire sectors or the market may lead to adjustments in cost of equity, betas, and equity risk premiums.
• The approach is similar to valuing company-specific risks but with broader implications for discount rates.

How markets price catastrophic risks and the typical human responses of denial and panic.

• Markets often underestimate the risk of catastrophes when they seem unlikely, but may overreact when they become more imminent.
• Human responses to catastrophe risk often fall into denial or panic, influencing market behavior.

Fossil fuel companies' market performance in the context of climate change concerns is analyzed.

• Despite being targeted due to climate change concerns, fossil fuel companies have seen their market caps recover in recent years.
• The demand for energy from fossil fuels has not decreased significantly, and these companies continue to play a crucial role in the global energy supply.