Chertoff Says Risk Must Be Managed in the 'Ungoverned Space'

Chertoff Says Risk Must Be Managed in the 'Ungoverned Space' | Risk & Insurance PHILADELPHIA--Homeland Secretary speaks at Wharton about how risk management in the future will mean walking the line between overmanaging and undermanaging risk, and about the government's failures in the past to do so.

By CYRIL TUOHY, managing editor

Globalization and the spread of technology have led to the dissolution of boundaries and created a new universe of "ungoverned space" more difficult to police than before, said Secretary of Homeland Security Michael Chertoff.

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Such ungoverned space has allowed criminals to launch cyberattacks across boundaries using technology networks, for example, and for terror cells to operate on a global scale. Both of these developments would have been inconceivable 30 years ago, said Chertoff.

"Globalization has broken down fixed structures, and legal and institutional models are not equipped to dealing with the amorphous nature of risk," said Chertoff, the nation's top civilian security officer, speaking Thursday to students at the University of Pennsylvania's Wharton Risk Management Decision Process Center.

SHORT-TERM COST VERSUS LONG-TERM SAFETY

The most efficient way to manage risk in an amorphous world is through a partnership between the public and private sectors, whether it be helping hurricane victims or coming to the rescue of financial markets teetering on the brink of implosion.

"There is no truly free market," said Chertoff. "The government has a role to play."

While the private sector may generally be more efficient at allocating resources to meet a particular risk, government action is necessary to balance short-term costs with long-term benefits--a strategy Chertoff called "aligning time horizons."

Having traveled to Port Arthur, Texas, site of major damage from September's Hurricane Ike, Chertoff said he saw how raised properties were barely damaged yet homes on the ground were flattened by the storm surge. Even in the face of this evidence, many homeowners said raising their homes was too expensive.

Thinking about such immediate cost, he said, was an example of a short-term strategy. Passing strict building codes requiring stilts would have saved many a home, he said, an example of government putting pressure on municipalities to follow a long-term strategy.

Similarly, the maritime shipping industry has vehemently opposed blanket searches of containers unloaded into U.S. ports because it would cost too much.

"Opening every container would eliminate the risk, but it would eliminate the trade too," said Chertoff.

But if federal investigators can collect enough information about containers likely to be dangerous, then the odds of thwarting an attack go up without a corresponding jump in costs.

"Overelimination of risk is just as much of a risk as underelimination," he said.

BALANCING THE AMORPHOUS WORLD

Striking the optimum balance isn't easy. Individuals and institutions tend to gyrate between aversion to risk and taking on too much risk. Weighing relative risk is almost always a losing battle from the start.

"We're either overweight and underweight," said Chertoff.

Illustrating the point, Howard Kunreuther, the Cecilia Yen Koo professor of decision sciences and public policy at Wharton, said homeowners will buy insurance after their properties have flooded instead of preparing themselves and taking policies before the flood. Once the flood recedes and years pass without a flood, homeowners swing the other way and insist on cancelling their policies.

Chertoff admitted that in the past eight years, the federal government had not always handled risks facing the nation properly.

"You'd have to say we misjudged the risk with respect to that attack," he said, referring to the Sept. 11, 2001, attacks.

As for New Orleans, he said the government hadn't done enough to invest in the protection of the city.

"You haven't lived until you have responsibility for weather events," he said.

Since Sept. 11, there have been no attacks on U.S. soil, and a number of large-scale attempts have been thwarted. But Chertoff came under criticism for the government's anemic response to Hurricane Katrina, which killed more than 1,700 people and caused $40.6 billion in insured property losses.

Chertoff accepted the invitation to come to speak at Wharton as part of a series of talks to mark the fifth anniversary of the creation of Homeland Security. This was the last speech in the series.

President George W. Bush created the Department of Homeland Security from divisions and departments scattered about other federal agencies as a way to more efficiently tackle risks facing the nation in the wake of the Sept. 11. Chertoff, a former federal prosecutor in New Jersey, was appointed in 2005 to head the department. He succeeded former Pennsylvania Gov. Tom Ridge.

October 17, 2008

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