By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
It's not an easy debate to step into: How Americans should prepare and pay for natural and man-made disaster. You have cynical policyholders and slabbed homeowners on one side, the defensive insurance industry on the other, and paid-for attorneys, relentless activists and competing politicians all over. With their new book "At War With the Weather," Wharton Professors Howard C. Kunreuther and Erwann O. Michel-Kerjan at once take them all on and try to bring stakeholders together.
At first glance, insurance buyers might get the stinking suspicion that these authors are part of Team Insurance. After all, the Wharton risk masters Kunreuther and Michel-Kerjan dedicate much ink to dispelling the myth that insurers are trying to gouge coastal property owners with exorbitant rates.
But only the most bitter insurance-hater will fail to come away from the book's conclusion convinced that the authors have all stakeholders' interests at heart.
Yes, it's bad to sneak a peek at the finale of a good book, but in this case, that's where the authors reveal the real reason for them to write it: a chance for them to suggest how to overhaul the handling of large-scale risks like hurricanes, earthquakes, pandemics, terrorist attacks and such.
The book, according to the authors, is a reaction to the cataclysmic events of this decade, starting with Sept. 11, 2001, through the chronology of the anthrax attacks, the New York blackout, the 2004 and 2005 hurricane seasons, and today's financial debacle. They are "literally afraid" that the past is prologue for what we'll see in the next five to 10 years in terms of natural and man-made mayhem.
"Really what you have in that book is a reflection of the best experts in the field," Michel-Kerjan told Risk & Insurance® during a phone interview with him and colleague Kunreuther. "What can we do to help decision-makers do a better job?"
Other contributors to the book include some of the biggest names in risk academe, like Neil Doherty, Martin Grace, Robert Klein and Mark Pauly.
CAN WE WIN THIS WAR?
The trick in their book's title is that it lures you in, making you assume the authors will provide the blueprint for Man to finally conquer that jerky Mother Nature. Man build where he want, what he want, how he want!
But no, as the authors reveal at the conclusion (again, spoiler alert), their book is really about how we are at war with ourselves, about how poorly we handle catastrophes.
As the authors write on the last page of the book, "The paradox in waging a war against the weather and other extreme events is that we might very well be our own worst enemy."
Kunreuther and Michel-Kerjan refer to it as "natural disaster syndrome." Homeowners and businesses that fail to harden their properties before an event yet cry to carriers about their claim after. Folks who move into floodplains, then demand the Army Corps of Engineers build a dam. Developers and business owners who overbuild in overexposed areas where nothing more than a bungalow and a hammock should have been placed. Whole communities deluded with the false optimism that they won't be the ones hit, be it by a quake, a cane, a bomb or a bug.
"NIMTOF" is one of Kunreuther's favorite ways to put it. "Not in my term of office."
The biggest NIMTOFs can be found, where else, in Florida, headquarters of borrowed time.
"Our poster child is Florida," Kunreuther said, adding that the Sunshine State has done everything wrong in a number of ways.
The real kickers, not just in Florida, are politicians who not only make NIMTOF a way of life but know they are doing it and don't care. These are the kind of opportunists (commonly attracted to public office, like raccoons to trash) who'd rather be the "hero" handing out cash after a storm than the "taxman" who asks constituents to pay today for the storm tomorrow.
"The fact that politicians can benefit from their generous actions following a disaster raises basic questions as to the capacity of elected representatives at the local, state and federal levels to induce people to adopt protection measures before the next disaster," the authors write.
Hear, hear. Off with their heads if they choose to put our lives and economy at risk with such myopic maneuverings.
BACK TO THE END OF THE BOOK
Of course, Kunreuther and Michel-Kerjan don't call for blood in their book. In private, they can be as passionate as anybody railing against our overdeveloped coasts and unsophisticated disaster preparedness. But in their text, they try to bring all stakeholders together with reasoned and substantiated analysis.
Their primary recommendation is the Boy Scout's motto: Be prepared!
"Try to think long term, try to avoid the notion that this event isn't going to happen to me now," Kunreuther told us.
To nudge everyone in this direction away from NIMTOF, the authors suggest that we implement long-term homeowners policies, on the scale of most mortgages today, which would encourage investment in mitigation measures to protect the property.
The author's two other main principles are: allowing insurers to charge premiums that reflect risk and dealing with affordability issues.
For the latter, they recommend a sort of food stamp program for homeowners. Insurance buyers in need of financial assistance would get vouchers from the government, not artificially suppressed rates.
For the former principle, how's an all-hazards insurance policy that would allow insurers to charge appropriate rates depending on the region and the nearest, greatest hazard? Such policies would also clean up a lot of post-CAT legal messes: e.g., the wind-water debate that still makes policyholders hate insurers across the Gulf.
At the very least, remove the regulatory shackles on wind policies, the authors say. With the number-crunching and data tables that fill a good number of the pages of the book, the authors show that, if homeowner insurers were just allowed to charge risk-based rates, they would be able to bring in enough capital to cover all hurricanes without reinsurance, with the one exception of a 500-year-event in Florida.
Some of Michel-Kerjan and Kunreuther's other recommendations are already being bandied about by lawmakers, public policy groups and insurers, such as a coastal hurricane zone where rates would be regulated at the federal level, an auction of federal reinsurance contracts, and a system of state and national catastrophe funds.
Perhaps the biggest takeaway from the book should be the authors' anxiety that the tables have turned in favor of Mother Nature (and men bent on destruction). It's not a matter of climate change or the impending end of the Mayan calendar in 2012. No, as you'd expect from Wharton folks, it's a numbers game in our interconnected economy.
"When one expands the lens to include a state or country or the global community, catastrophic risks have a much higher likelihood of occurring," they write.
Perhaps the biggest downside is that the book fails to reach out to corporate and public risk managers. Sure, sure, this catastrophe question on the surface is largely a homeowners thing. But shouldn't an energy company in Houston or a hospitality company in Florida be concerned about employees moving inland en masse because they can't afford insurance--or because their homes were leveled by storm surge and there's no money to rebuild?
Still, risk managers (along with their brokers and insurers) can get something out of the book, at the very least to load up on the professors' excessive data to bring to the next C-suite meeting with the aim of convincing bosses of the need for further CAT risk mitigation and demonstrating where not to build that new facility in Florida.
Don't let the at times academic, textbook tone get in your way. The book does have "key findings" and conclusions for each chapter for speed readers.
At the very best, the book should be a call to arms for risk managers and the organizations that represent them to get involved in the local and national catastrophe debate, if they are not already. And to, please, stop being a NIMTOF.
September 1, 2009
Copyright 2009© LRP Publications