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

Categories: Get Off My Lawn
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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.

trinityriver1908flood.jpg
Library of Congress
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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20 comments
TC
TC

"Katrina was a rising-water flood in cheap-built neighborhoods."

Well, someone tell that to the residents in the Lower 9th.

East Texas P1
East Texas P1

Jim:  Think about this hypothetical scenario.  The river is rising to the top of the levees and all the experts know it is just a matter of time before a catastrophic break in the levees occurs.  Would anyone have the cajones to make a man-made break on the southern / western levees to reduce pressure?  I would have to assume that property values / insurance losses would be less in Oak Cliff than in downtown.

JimS
JimS

This just in from Bloomberg:"Dallas authorities today vehemently denied reports that city crews were seen in the vicinity of the levee break shortly before the catastrophic explosion last night that released rampaging flood waters on large areas of the Dallas neighborhoods that are called "Oak Cliff" and "South Dallas," both downriver from thje downtown area. City Manager Mary Suhm said citizens who claimed to have taken photos of people in City of Dallas workshirts at the explosion site were "full of it," adding, "They got nuthin' on me." At the same press conference, Suhm announced the creation of a fund to be called the "Oak Cliff and South Dallas Entrepreneurship Trust." Funded with $10 million from the city's general fund and slated to begin operations tmorrow morning, the fund is designed to provide support for "persons reccommended to us by city council members" who need "start-up financing" while they are in the process of "thinking up ideas for businesses." Suhm said she hopes to "get whole ten mil' out the door by end of business tomorrow." 

Renegade
Renegade

Not $10MM-- $8.5MM.  JWP has to get his 15%.  

Paul
Paul

Meanwhile, JWP and his Warriors were preparing to picket City Hall doing the crosswalk shuffle chanting "no justice, no peace" until City Manager Suhm and Mayor Rawlins announced a $25 million contract to Wai-Waize for the procurement of squeegees and rolls of paper towelling to dry out South Dallas/Oak Cliff.

County Commissioner Dickey had vowed to work with the County Auditor to find out where the squeegees and paper towels are stored.  Additionally, she questioned why a squeegee cost $345 when she found them for $19.95 on sale at Lowes'.

The Dallas Morning News in a story on page 9 of the Metro Section, published an article that said that "Perhaps, maybe, sort of, we think, that it may not be a good idea to build a toll road in between the levees."

In good news, the "Dallas Wave" was washed away, thereby settling the question of whether or not to repair it.  City Manager Suhm also announced that the City had just completed a new study showing that a toll road inside the levees is a great opportunity for economic growth in South Dallas.  She said "With the levees gone, we can build the toll road and the new levees in a single project.  The jobs creation will be massive."  She also announced a new consulting project for $10,000,000 with Wai-Wize to locate qualified minority bidders for the project.

In late breaking news, the US Army Corps of Engineers released their report showing that the Trinity Floodway levee system was unsound.  The spokesman for the Corp cautioned that: "This is just a preliminary draft report.  We plan on taking these recent events into account to determine if any additional work needs to be done."

After the Corps report Congresswoman Eddie Bernice Johnson announced that she had submitted emergency budget legislation to fund a study by Wai-Waize to identify suitable minority contractors for the USACE study.

Due to continued success Wai-Wize announced its IPO.  The offering was oversubscribed by members of the Dallas Citizens Council.

8-D

AintNoSunshine
AintNoSunshine

Funny indeed, but not unimaginable, which is a sad commentary. The truth hurts! 

Facebook User
Facebook User

I think much of this could be solved with term limits and salary increases. By implementing 2 year term limits and a salary hike to $150K per year we could attract well educated citizens to take a two year break from their day jobs to help run this city. Today we have either the very rich or the very corrupt running for office. Lets get rid of both. Lets have the educated middle making the decisions for a while.

Anonymous
Anonymous

Let's just go back to the Greek system where they randomly assign the leadership by lot from the list of eligible voters. Put a 1 year term limit on the whole thing, and call it a day.People may be dumb and corrupt, but your average, randomly chosen Dallas citizen is probably about on par with the current council in both of those categories.

Montemalone
Montemalone

You won't be rid of the corrupt, they'll just take the $150K and add it to the rest.

plfarmer
plfarmer

After the flood, Jim changes his name to Max, and the Committee for Public Safety is formed, who will be the first ten for madame du guillotine.Jim, sorry Max, please provide us a list.

Paul
Paul

The risk factor is explained by what level of property is subject to inundation in the event of a Trinity River levee failure.  The amount and value of the property damaged depends on where the levee failure occurs.

I don't have a precise number for the values of the property protected by the Trinity Floodway levee system, but to suffice to say it is in the billions of dollars.  Yes Virginia, that is billions with a Carl Sagan "B".

At a flood risk of 1 in 500, the straight off of the top premium is $2,000,000 per billion of coverage.  It actually needs to be higher to account for reserves and expected loss ratio.

At a flood risk of 1 in 100 (IIRC, this is the current level of protection), the straight off of the top premium is $10,000,000 per billion of coverage and the same adjustments apply.

To see the areas at risk, check out the following link from a few years ago:

http://www.dallasnews.com/shar...

The amount of property at risk from a Trinity Floodway levee failure, regardless of the failure location is very very large.

If you consider the type of storm that could potentially cause a levee failure, there will be more problems than just flooded reclaimed bottomland.

In recent memory, 1990 and 1992, IIRC, the water level within the floodway levees rose to capacity.

Paul
Paul

PS: The risk factor of 1:100 or 1:500 or the Corps desired 1:900 is what the ReI's are waiting for.

If the CC does not react, this cost will drive out what few businesses and homes remain.

If we are not careful the CoD landscape will revert back to what it was before Stemmons reclaimed all of that "worthless bottomland".

BTW, Dallas is not the only city facing this problem.  Take a look at Sacramento, CA.

Montemalone
Montemalone

So long as politicians, and their businessman benefactors, can see no further than the tips of their own noses, nothing will ever change.

Greed is good, right?

ThatGuy
ThatGuy

If they examine our "K", we're "F'd"

RTR
RTR

No shit, if they examine our K we are F'd in our A hole. 

Lorlee
Lorlee

Whenever there was any flooding in Dallas, my mom would call to make sure I was all right.  I would tell her that I lived on one of the highest points in Dallas and if I was flooding, we all better be in arks.  Looks like I better start building. 

AintNoSunshine
AintNoSunshine

JimS -

Go ahead and build the ARK, if it doesnt get used by you and your harem, you can pass it on to your son, who will surely follow in your shoes. We owe it to Dallas to have another Schutze for the "next generation", and the Ark can assure us just that. 

Julia Barton
Julia Barton

Nice work for one morning +30 years of pain & perspective, Jim!

Oh, but I don't live in New York...yet.

Ed D.
Ed D.

If "Faktor K" isn't one of the off-brand breakfast cereals they're selling at Aldi, it should be.

Montemalone
Montemalone

I thought it was the latest rave drug.

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