Blue Collar Risk Management
History, tipping points and unexpected
consequences
Learning from the past – thinking about
the future
NCSE Seminar – January 2013
A word from our lawyers


Willis Re Inc. is a reinsurance broker. Willis Re Inc. is not a law
firm. We do not give legal advice and nothing herein constitutes
nor should be construed as legal advice. Such ideas are offered
for discussion purposes only and do not constitute legal advice.
It is believed that the information used in creating this
presentation is correct, but no representations are made as to its
completeness or accuracy, nor are any warranties made as to its
fitness for any purpose. You and your legal advisors must make
an independent assessment regarding all such matters.
Any comments or observations made herein are for academic
purposes only and are not for the purposes of reliance. Any such
comments do not reflect the views of Willis Re Inc. or its clients.
The art of catastrophe risk
management
Knowing you’ll never get it right
and being humble enough to
hedge your bets
Being smart enough to invest in
mitigation
3
The modern four riders of
the apocalypse
 Cognitive failure
 Information/intelligence failure
 Communication failure
 Political failure
Every manmade or natural
catastrophe has one or more of
these riders: e.g.,Asbestos, 9/11,
Katrina, 2011 Tohoku earthquake
and tsunami, 2012 Sandy
4
In addition to the wind blowing and
the earth shaking uncertainty and
risk all have history…
History as a
risk
management
tool
5
Lessons from the
Great Fires of the18th and
19th Century
Conflagration the “climate change” of the 19th Century
6
Urban Conflagrations destroyed
more property than any other
peril in 19th Century
 The industrial revolution created conditions that make the
peril of fire more lethal and destructive
 Cities and towns were no longer simply single or double
stories homes or merchant buildings
 Massive factories, warehouses and multi-story tenements
and great houses of banking and commerce
 Boston (for an example) burned in 1653, 1679, 1711,
1760, 1824, 1825, 1872
 Major conflagrations New York - 1835, Chicago – 1871,
Boston – 1872, Baltimore 1904 and San Francisco 1906
Source: Urban Conflagrations in the United States, William M. Shields, Ph.D page 1.
7
The modern four riders of
the apocalypse in action
“Nineteenth Century
Americans were well aware
of the combustibility of their
cities…American cities and
towns were, in brief, great
piles of dry wood, hay,
carpets, furniture, paint and
lumber, literally awaiting a
spark to set it all on fire”
Sources: Urban Conflagrations in the United States, William M. Shields, Ph.D page 5 /.
The Library of Congress,The Great Fire At Chicago,
http://lcweb2.loc.gov/service/pnp/cph/3f00000/3f03000/3f03700/3f03788r.jpg
8
October 8, 1871 massive
cyclonic storm from
California to Pennsylvania
2,400 sq miles
A Tipping Point
Pehtigo, WI
lost 1,200
people out of
1,700 people
(exponential catastrophic risk)
Source: http://lcweb2.loc.gov/cgi-bin/map_item.pl
9
The Great Fires of the 1870s were a
classic tipping point
 Stakeholders were frightened into a
common cause
– Creation of National Fire
Protection Association (1896)
– Welcomed international help
– Joined international fire safety
movement
 Urban
planning
 Building
 Fire
codes
resistive materials
 Telecommunication
of alarms
http://lcweb2.loc.gov/service/pnp/ppprs/00100/00113r.jpg
10
Tipping points may create
conditions that allow each
group to do what they do best*
• NGOs /political groups
•
•
Third parties • Influence groups
Plaintiff’s Bar
• Litigation
•
•
•
Government
•
•
•
•
•
Underwriting
discipline
Capital discipline
Enterprise risk
management
Spread of risk
Marketing & claims
•
Mitigation
Post disaster
relief
Building codes
Zoning codes
Environmental
protection
Uninsurable risk
•
Insurance
Industry
Regulation
•
•
Consumer
protection
Price & form
regulation
Solvency
regulation
11
A success story – today U.S.
urban conflagrations are
stories of legend
“ Public fire protection
has always maintained
close ties to the fire
insurance industry. This
fact is critical to
understanding how the
modern fire service
developed.”
Sources: Crucible of Fire, Nineteenth- Century Urban Fires and the Making of the Modern Fire Service, Bruce Hensler,
Potomac Books,Copyright 2011 Kindle Loc 138/ Library of Congress, Three firemen on fire engine drawn by three horses,
Washington, D.C. http://www.loc.gov/pictures/resource/cph.3c01598/
12
Part of the 19th Century solution to
conflagration was the use of asbestos
which led to another tipping point
13
The problem of tipping points and unexpected
consequences
case study: U.S. asbestos crisis –
$75 billion + (2000 new cases filed each year)
Asbestos
19th and 20th
Century’s
“miracle cure”
to
the problem of
conflagration
BIG
LAW
1965 Restatement
of Torts 2nd
A Tipping Point
Industrial
revolution
1940s
1950s
1960s
1965
1970/80s
The engine: The growth of casualty insurance products (especially personal lines)
The “Great Fire” crisis of the
19th Century was solved
when:
 A tipping point was reached


Stakeholders were forced to confront their cognitive biases
The government, the insurance industry and the regulatory
community worked together but each did what they do best:
–
The government created building codes that took advantage of
new technology/ science and created enforcement
mechanisms & incentives
–
The insurance industry created research facilities and
underwriting disciplines to successfully underwrite fire
insurance in the private market
–
The regulatory community protected the consumer, nurtured an
orderly market, addressed market discontinuities and enforced
solvency regulation
15
What extreme weather event or series of events
will be the tipping point for climate change?
And when?
16
Questions