Businessweek Decade of Disaster

Yesterday’s pervasive memorials to the tragedy of 9/11’s reflect on the many lessons and changes that turning point event had for recent history. The rise of patriotism, American global activism, culture of security, Islamic profile, nature of warfare. From my perspective, the most intriguing is the transformed perception of risk, especially extreme failures. A topic so rich that this week’s Business Week devoted its cover story ‘A Decade of Disaster Has Made Predicting Loss Impossible’ to the subject.

Businessweek piece explored the impact risk perception through the eyes of the most macro of macrocosmic risk assessors – the Re-insurance industry. In the accompanying podcast, author Brendan Greeley notes…

“What we need is a good catastrophe”

“The reinsurance industry has a business cycle like every other business cycle, but their business cycle is tied to catastrophe…Even though assessing risk soberly and coldly and rationally should be a defining characteristic of the insurance industry, it doesn’t really work that way. They get spooked and they get complacent just like the rest of us, just like all other markets…[The re-insurance industry] is basically waiting on a catastrophe, because catastrophes though they cause re-insurers to have to pay out tremendous losses, they also raise rates for the next several years.”

As it happens, one of the sector leaders, Guy Carpenter, had its Americas headquarters on the 26th floor of the World Trade Center.

“Lloyds the insurer comes up with what it calls ‘realistic disaster scenarios’. There was already a realistic disaster scenario in place that imagined two planes colliding over a city. So Lloyds employs people whose job it is to come up with terrible things that never should happen and are unimaginable, and even they could not imagine the series of events that happened on September 11th. And as a result, terrorism coverage, up until that year, was thrown in.”

“But even Lloyd’s lacked the imagination to anticipate September 11. ‘People find it hard to believe in a risk unless they can see it in their mind,’ says Trevor Maynard, head of exposure management for Lloyd’s. ‘When you try and describe a risk like this—some terrorists are going to teach themselves how to fly a plane, they will fly into property, the buildings will be weakened—by the time you get to your third point, peoples’ eyes are glazing over.’ “

The piece is a rich treatment of embracing failure through the lens of an industry who make it their entire business model to do so. The one thing missing from the cover collage (see above) is an image of a Black Swan, a nod to Nassim Taleb who probably could have drafted much of the article ten years ago.