Catastrophe and Risk Management

October 4th, 2005 by

Garrison Keilor, host of the Prairie Home Companion on Public Radio, recently responded to the debate over teaching evolution in high school by stating that he has seen little evidence of evolution or of intelligent design in the way the affairs of this country are being managed. Which brings us to the convergence of two obliquely related items: the aftermath of hurricanes Katrina and Rita and the pending decision on the renewal of the federal Terrorism Risk Insurance Act (TRIA). (See our previous blogs here and here.)
Our colleague Peter Rousmaniere addresses TRIA’s revewal in the current edition of Risk and Insurance. He points out that the issue is not simply a matter extending TRIA. You’ll find some people favoring extension, while others are ready for the private market to take over. Peter says this debate misses the point: neither option addresses the magnitude of the risks confronting us. Currently, we lack a viable model for addressing the impact of catastrophes — whether manmade or the acts of terrorists — on our country.
If Katrina and the subsequent evacuation of Houston taught us anything, it’s that we are woefully incapable of emptying out major urban centers even with a few day’s notice. When I saw the long lines of unmoving cars stalled out on the freeways heading out of the city, two things come to mind: “Pack up the BMW and head north” is not an adequate evacuation plan. And a lot of urban Americans don’t even own cars in which to sit, unmoving, alongside thousands of their fellow citizens.
Enhancing TRIA
Rousmaniere asks us to consider three critical factors in the TRIA renewal debate:
First, TRIA must hold insurers accountable for their actions. By categorically reinsuring every carrier at a certain level of loss, the Act eliminates incentives for prudent planning and risk mitigation. The incompetent carrier and the carrier which invests in detailed planning are treated the same.
Second, the Act does not address coverage. As a corollary to number one, the Act does not require insurers to take on potential “hot spots” in terrorist attacks. There are high profile “trophy” targets across the country, which somehow must be insured.
Third, TRIA is silent on the issue of risk management. The Act does not require insurers to undertake any prevention or mitigation investments. It’s worth mentioning, of course, that carriers oppose any such requirements. It seems that everyone is content to sit back and see what happens. If disaster strikes, we’ll load up the Beamer and head out, right?
“Intelligent Design”
If you are curious about the process for really understanding potential catastrophes and the response options, I highly recommend a study done by the Wharton Business School entitled “Tria and Beyond.” You won’t find a lot of answers here, just a lot of very intelligent questions and a nicely framed discussion. You might even call it “intelligent design” — something we could use a lot more of as we contemplate the unnerving possibilities of the road ahead.