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Insuring the Insurers: What Something Called "Faktor K" Could Mean for Big D

Insuring the Insurers: What Something Called "Faktor K" Could Mean for Big D

Writer and radio journalist Julia Barton, a regular reader of Unfair Park, tipped me today to a really fascinating piece published September 1 by BusinessWeek, called "The God Clause and the Reinsurance Industry." It's about an arcane industry located in cities far from Dallas, but Barton spied that the story was all about Dallas.

She grew up here, lives now in New York but is still a student of the Trinity River and its history, including the political controversies roiling around it now like dirty floodwater. This story, beautifully written by Brendan Greeley, a BusinessWeek staff writer, contains what we in the business sometimes call a "kicker," a line somewhere close to the end that delivers the knock-out punch. First I guess we have to make sure we know what reinsurance is.

It's insurance for insurance companies -- the insurance they buy to cover themselves in case they're wrong. Say a company sells fire insurance and they guess wrong: too much stuff burns down, and paying off on all the policies they've issued is going to bust them. Assuming all goes well, their reinsurance kicks in and covers some portion of their loss, so they don't go bust.

At the end of Greeley's piece, he asks the head of one of the world's great reinsurance companies about "tsunami stones" erected on the east coast of Japan to show high water marks from past storms over the centuries. In the exuberance of recent prosperity and the assurance that no tsunami has hit those marks for hundreds of years, the Japanese have built lots of expensive property at levels lower than the tablets. None of that new development would have taken place had the Japanese strictly adhered to the ancient warnings etched in the stones.

Greeley asks the reinsurance guy if it's possible that there is a value to forgetting. The reinsurance man answers: "If the stone is there the stone is there, but 500 years of upside, with the absolute certainty that it's going to be the generation after me, not me, that gets drowned -- that's human nature, isn't it?" All of this has less to do with Japan and more with us when you get to the part of the story where the reinsurance industry is struggling with a new problem related to regional idiosyncrasies.

The Trinity River in 1908
The Trinity River in 1908

A company called Swiss Re, a global reinsurance company headquartered in in Zurich, is trying to quantify a new risk category they're calling "Faktor K," in which K is for Kultur, a German word that means culture, sort of. In this case, however, it could almost stand for Katrina.

The losses from Katrina in New Orleans in 2005 were worse than what was predicted by algorithms dealing with the strictly physical environment. The levees were crappier than they should have been. The structures were cheesier and too obviously in the path of peril.

In other words, the insurance industry -- reinsurance, if you will, which makes or breaks itself by getting this stuff right -- is saying the same thing I have been soundly flailed for saying here over the last six years: that the people of New Orleans brought Katrina on themselves at least in part by electing feckless leaders, or by not voting at all; by going for cheap quick outcomes, whether it was a builder's profit or the low price a homeowner paid for his home; and by allowing the devastation of the coast itself through the despoiling of crucially protective wetlands, all in pretty obvious defiance of a risk that was staring them right in the face, none of which they will admit even now, preferring instead to blame it all on the U.S. Army Corps of Engineers, like the Corps ever did or ever will give a shit.

Whatever else they put on my own headstone, it's not going to say, "He put his trust in the Corps of Engineers and was fatally disappointed." I'd rather have it say, "A dumb-ass all his life, the poor schmuck got what he deserved."

The risk they are trying to quantify in Zurich is the risk of culture. Why do some cultures deliberately blind themselves to risk and then howl for help when the worst happens? More to the point, how can the reinsurance industry avoid getting stuck for it?

The story explains how the industry, after something like 9/11, insulates itself against new catastrophic risk that it had failed to foresee. Before the Twin Towers went down, the industry didn't really worry that much about property loss from terrorism, because it was too rare, and the costs were relatively cheap. In the post-9/11 world, you can't get insurance for property loss from terrorism, because your insurance company can't get reinsurance for it, because people like that guy in Zurich won't give it.

That's exactly where Faktor K is headed. They're looking at places like New Orleans, and I can guarantee you they're going to be looking at Dallas. And what will they see? Dallas. If its levee system fails, the scientific prediction is for property damage far out-stripping Katrina. Katrina was a rising-water flood in cheap-built neighborhoods. A Trinity levee failure would be a rampaging wall-of-water flood downtown.

The city's professional bureaucracy has spent all of its time and energy pooh-poohing the risk, petulantly blaming its problems on onerous new standards imposed by the U.S. Army Corps of Engineers. And, oh yeah, don't we all just know that the Corps has a reputation for being way-way over-protective? I guess you're free to think of the Corps as representing the typical Mommy State if your own mom spent most of her time out on the street hookin' it to support her crack issue. Me, I had a better mommy.

The Corps finally was forced by the Congress to tell us the truth about our levees two years ago. After swearing to us for decades that the Trinity River levees were just great, nothing to worry about, the Corps conceded in 2009 that out levees are actually useless. Useless. Not defective. Useless.

Think about that. It's like your doctor telling you: "OK, OK, the pills I gave you were not actually Wellbutrin. It was heroin. I'm a flawed human being, so slap me."

But is our elected leadership shocked, shocked? Have they set off the sirens, called a halt and notified us of the seriousness of the threat? Oh, hell no. They still just can't make up their little minds about it.

Sure, we could drop everything, call a special bond election and devote every ounce of energy and resource we can muster to fixing the levees. But what about this instead? What if we build a new highway that we don't really need out between the levees where it will weaken the levee system and then also make some manmade lakes for sailboats, and maybe a whitewater kayaking feature and maybe even solar-powered water taxis? Faktor K, man. Faktor K. Big-time.

It's a thing quite beyond flood control, hydrology or engineering. It's all about culture, and it's exactly what that guy in Zurich said it was: " ... the absolute certainty that it's going to be the generation after me, not me, that gets drowned."

People are waiting to see what kind of flood risk and insurance cost the Federal Emergency Management Agency assigns to property in the vast swath of the city that used to be protected by the levees. I'd just as soon go ask that lady in the street I was talking about a minute ago if she finds me attractive.

I'm waiting to see what the guy in Zurich says.


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