Every day we learn something new. A new fact or condition arises that changes our perception of risk and reveals the limitations of our intellectual models.
In February 2003, for example, Zogby International in Utica, New York, reported that by using satellite imaging they “discovered” over 1,000 new islands in Indonesia. This discovery will not radically change the cartographers maritime models. It merely confirms the daily experience of the expert mariners who ply their trade in the Java Sea: Their navigation charts are inaccurate and do not reflect their true risk.
So, too, through various events over the past several years, insurance underwriters have discovered many more catastrophe risks than their financial models had contemplated.
In corporate America directors and officers are discovering that the business maps or models they used throughout most of the late 20th century do not reflect the true extent of their business or personal risk. Some risks the business models deemed statistically improbable. Others were not even contemplated. With the benefit of hindsight they have proven to have both the substance and gravity to destroy decades of profit, ruin shareholders and destroy careers.
“Satellite imagery” of todays business environment can reveal thousands of new risk “islands” upon which any insurance executive could run aground: deflation; medical inflation; interest rate risk; reinvestment risk; accumulation risk; terrorism; regulatory risk; legislative risk; and an increasing array of diverse catastrophic risk.
Life underwriters also have to consider, for example, the increased catastrophic risks posed by the countrys changing demographics.
The demographic trend is for populations to concentrate in areas prone to hurricanes and earthquakes. In the last census Florida, Texas, Georgia and North Carolina all experienced population growth in excess of 20%.
Property and casualty underwriters, in addition to their life counterparts, recognize these population concentrations from Long Island to Florida and worry about the potential loss to life and property in the event of a major hurricane or a tornado.
The deadliest hurricane in U.S. history was the storm that destroyed Galveston, Texas, on Sept. 8, 1900. This storm killed more than 10,000 people. Galveston was a modern and progressive city that believed its geography protected it from the full fury of any hurricane.
The Galveston hurricane is merely an opening chapter in a surprising history of hurricanes that have punished the U.S. coast line.
Hurricanes are not natures only killers. Tornadoes, with almost no warning, can be equally deadly. The most deadly tornado on record was the March 1925 Tri-State tornado. This storm destroyed four towns and 15,000 homes. It killed 695 people. The “2003 World Almanac” lists 66 “notable” tornadoes between 1925 and 2002. A little simple math reveals that 24% of those tornadoes killed over 100 people.
With our “satellite survey” we have touched on the East Coast (hurricanes) and the middle of the country (tornadoes). It is important that we not fail to mention the West Coast and its earthquake potential. Life and workers compensation underwriters push out of their minds the potential impact of a magnitude 8 earthquake hitting San Francisco at 3 p.m. on a work day.
In October 1989 an earthquake measuring 7.1 on the Richter scale hit San Francisco and destroyed or damaged over 100,000 buildings, killing 67 people.
No place in the country is safe from natures savagery. We are also not safe from the downside of our own technological wonders. Technology, in the broad meaning of the word, often requires complicated and potentially dangerous mechanical, chemical or industrial processes that present a real catastrophe threat to the life underwriter.
The 1984 Union Carbide Corporations Bhopal disaster in which methyl isocyanate escaped and killed 7,000 people and injured over 200,000 should concern life underwriters when managing catastrophe exposure. In the United States there are over 60,000 chemical plants and 124 of them, according to the Army Surgeon General, contain enough dangerous materials that if released in an urban area could cause 2.4 million casualties.
The interplay between technology and man also presents another huge risk for the life underwriter. Technological advancements in all areas of human endeavor from transportation to building construction are creating leverage points where seemingly minor mistakes can cause massive loss of life. The trade press, for example, has reported on the Airbus A380 double-decker jetliner which will eventually have the capability of carrying 800 people.
The sheer size of this generation of aircraft should give any life underwriter concern as plane crashes may be caused by the simplest of mistakes. In 1996 the AeroPeru 757 airliner, as an illustration, crashed into the Pacific killing 70 people because the maintenance company washing the plane failed to take off the masking tape on the pilot tubes!
Simple human error can initiate a chain of events that can destroy any technological marvel. It is hard to believe, for example, that rubbish destroyed the French Concorde in 2000. A mere piece of debris on the runway caused the crash and killed 113 people.