# Hindsight is Foresight Foregone

It’s not that we can’t see the future; it’s that we don’t bother.

Granted, none of us can predict it, nor do I presume that some magic algorithm applied to some special pile of Big Data can ease the Fog of the Future.

In part, it’s laziness. Here in the USA, we’re predisposed to the here and now and me, and the rest will sort itself out.  As indeed it does.  But often not as we hoped.

In part it is because we know from abundant experience that too many pious prognostications by proselytizers of progress have turned to sink-holes of time, effort and money.  So why bother.

In management we have evolved the discipline of ‘risk management’ which is part institutionalized experience and part pseudo-science.  ‘Risk management’ is somewhat of an oxymoron like ‘military justice’, ‘artificial intelligence’ and ‘virtual reality’. It trades on a figment of truth to create the illusion that it is more than it is.

Risk management has some level of foundation in its effort to deal systemically with known and knowable risks, but today’s world is increasingly subject to unknowable risks for which there is no statistical basis of quantification of either loss, cost of prevention or remediation.   But that’s not the real problem.

Many in my profession of accounting and auditing gravitate to the  ‘risk management’ mantra, and strive to incorporate it into their mission statement. After all, if you can’t be a ‘risk taker’, being a ‘risk manager’ or a ‘risk something’ is the next best thing. It’s sexier than mere accounting and auditing.  And besides, there’s plenty of precedent for the need for ‘risk management’ given the losses that businesses have incurred for themselves, and more frequently for others in their carefully contrived relationships.

But, truth be told, even the growing cadre of risk management acolytes have trouble peddling their wares to the C suite where hype and hope too often trump (no pun intended) reality and even the crudest calculations of probability.

Let’s take a few examples out for a test drive:

•  Does anyone see any problem with Jeff Bezos and Elon Musk and Larry Paige and the other space cadets filling the skyways and byways with their latest magical brain-farts without benefit of adequate regulation and incubation for proof of concept within laboratory controlled settings, much less in the free-fire environment of that freaky place we call the ‘real world’?
• Is the latest episode of the Theranos melodrama really a surprise?  Or was it the highly probable outcome of a flaky premise sold to incredibly greedy people willing to believe and suspend critical judgment?
• And let’s not beat unduly on Theranos. It’s just one of a number of Unicorns in the magical kingdom of Silicon Valley and other tech redoubts where people with more money than brains can throw it at the wall, hope that something sticks in the lottery of high-tech chance,  and praise themselves that their failures are really essential tuition and down-payment for future greatness.  In their magical kingdom, failure is virtue.  In the real-world, failure gets you fired.
• Where is China going, and where is it taking us?  The West lost that gambit four decades ago with an essential, but ill-conceived opening of relations.  The drive of corporate greed for access to a billion consumers overtook any attempt of western governments to modulate the normalization in a manner that would minimize the foreseeable disruptions we have experienced economically and strategically.  Accordingly, China has grown into an unruly adolescent (in modern world terms, its considerable historical lineage notwithstanding).  Given its desperate economic and environmental constraints, and it’s likely belief that its salvation is in expansion, military conflict with its neighbors and the West seems inevitable in the near to intermediate term.  Trump and China should easily understand each other: a coercive bully that believes he\it has a right to dominance on its terms without obligations to others. I suspect that this is in part an act China has found it can get away with because, unlike with Trump, no one has yet drawn a firm line in the land, the water or the air that they are prepared to defend (although we are beginning to with questionable allied support). Corporate executives are now marveling at how they could possibly have lost their technological edge (which they often willingly gave away in many cases for access to that one-billion consumer market)  and now are losing the market itself in a tightly controlled totalitarian environment where the ‘rule of law’ is more a farce than even a mere political fig leaf of cover.  Who’d a thunk?
• Was the Shell Oil retreat from the Arctic really a surprise,  or merely unfettered stupidity colliding with reality?  When we have so much evidence of failure to properly engineer and install  and monitor and regulate and mitigate such ventures in much less hostile and much more stable environments, what would make any prudent executive or government think that Arctic exploitation would be just another hole in the ground?  Did BP’s experience give anyone in Shell’s HQ pause for concern?
• How about them GMOs?  Scientists are complaining that the average clod on the streets is unjustifiably suspicious of the risks of GMOs.  But when we look at the recent history of our ‘conventional’ food supplies, the engineering of obesity, the evisceration of regulatory oversight and quality control, is there not reasonable cause for concern by the public of what will next be foisted upon them in the guise of progress at their ultimate risk and cost?  This is actually a case of the person on the street exercising ‘risk management’ in the suspicion that those in the Corporate suite will not. At least, not in the consumer’s behalf.
• And then there’s fracking; a mindless grab for resources beyond any exercise of prudence, with costs to society measured only in financial terms to date, with studied ignorance of the collateral environmental, social and economic costs beyond the measure of defaulted securities.

There are a number of simple questions that executive management could ask itself and save a lot of grief when contemplating a new venture or circumstance, or coping with an existing or intractable situation  (like Palestine):

• Has the situation ever happened before, and what can we learn from it.
• Are there any parallels, if not direct precedents, to this situation that can give us a clue of dynamics and outcomes?
• Do we understand the context (historical and present circumstances) of our intended act, and do our assumptions take that context into account?
• Have we tested our assumptions about what should happen if we take this action?
• Have we defined performance standards for our expectations that will give us quick feedback if we’re going off the rails of our expectations.
• Have we asked ourselves how the opposition/competition/stakeholders/regulators are likely to respond, and have we taken appropriate steps to address reasonable concerns.
• What could possibly go wrong, and what’s the worst that could happen….?
• ….and if it does, what are we prepared to do about it?

These are so simple, they don’t even deserve to be sexified as ‘risk management’.  They’re basic management, or even common sense.  Yet the frequency with which they are ignored and often even disdained by the supposedly educated meritocracy has numbed us of any sense of amazement.  Rather, it has implanted a cynicism and contempt and suspicion of all forms of authority: legal, moral, scientific, political, religious, social that accounts more for the rise of Trump, Sanders and Br-Exit than any conventional political explanation.

We could go on, but I’ll trust the point is made, if not accepted.  In the corporate, government and personal world, risk-taking trumps risk management more often than not, and often with predictable consequence.

It’s not that our capacity for foresight is so bad.  It’s that we don’t bother to seek answers we know we’re probably not going to like. And when they’re thrust upon us, we often find ingenious ways to ignore them rather than to deal with them.

So, to say that hindsight is 20/20 because we have the benefit of knowledge that is not previously available is at best half the truth.  As often as not, we just don’t give a damn.

*  *   *

Word of the day:  de-escalate.

Onward

20160710

# Cyberwar’s Pearl Harbor

In the aftermath of the most recent invasion of our national data ecosystem, it might be worth contemplating where all of this might go from here, just in case anyone in a position of responsibility (as distinguished from a responsible person, because the two are not necessarily the same) might care to prepare for the possible, if not the inevitable.
We’ve heard a lot about attacks on our major financial and governmental institutions of late. No bank left behind. Suspicion that the Chinese are attempting to emulate the NSA by building a massive database with which to conduct further espionage, define the power hierarchy, and possibly co-opt key players with blackmail. The same kind of stuff the NSA might do abroad or at home, because, hey…what’s the difference. But I suspect that harvesting information overload is not the prize objective; and China, though never to be discounted, is a major threat, but not the primary threat.
Let’s get a little crazy here and contemplate a worst case scenario from which we can scale back.
First, who are the threats for conducting cyber warfare? The most obvious and capable are Russia, Iran, and China. At the risk of offending the Dear Leader’s self-esteem, we’ll forget about North Korea. Although cyber-vandalism is a game even the kids can play, cyber war takes some real chops, and needs to be scalable to effect, like any good marketing strategy.
And in what order of priority? My vote is Iran, because if the nuclear talks fail, it may be facing what it regards (whether we would agree or not, but that’s irrelevant) as existential threats from an extended embargo. An agreement might take them off that top spot, but they would no doubt continue to hone their options in this arena, particularly given their other ambitions in their neighborhood where we may stand as an obstacle.
Next up: Mad Vlad. Apparently getting more aggressive by the day. If things get out of hand in the Ukraine, or if he provokes further instability in the former satellites in the same manner he has in Georgia and the Ukraine, and if somebody miscalculates in a moment of confrontation (has that ever happened before?) then Vlad could decide to go Big Casino and pull what he considers to be a game changer.
Finally, there’s China. More paranoid than Vlad, and in a far more precarious situation economically and politically than we may know, it may fear that a strategic threat to its seeming dominance (such as the South China Sea) could trigger internal unraveling that would make its vulnerability apparent and invite attack. It may want to have in its back pocket a preemptive capability that can neutralizes strategic risk.
Which gets us to the question of ‘The Prize’. What is The Prize in Cyber Warfare? Is it data? Or dominance? And if it is dominance, how is that defined and achieved?
In nuclear war, dominance is defined as turning strategic areas of an adversary’s war-making capability into giant ashtrays. In cyber warfare, not necessarily. It is much easier and more beneficial to cripple than to destroy.
So, if dominance is the objective, how is it achieved? Not by stealing government HR files, or my medical records, or our bank records,. Rather, by strategically crippling the electric grid and other supporting energy and transportation infrastructure. Next, by crippling critical communications infrastructure.

Why is the energy network the prize? Because it drives everything else. Bring down energy, and you bring down the military, its supply chain and everything it depends on. Bring down energy and you bring down social stability and cohesion, and you force your adversary to focus inward to restore stability while knee-capping his capacity to project outward.
If the energy sector in general, and the electric grid in particular is the prize, why haven’t we heard more about incursions into their domain, as we have with financial and retail and health services? Precisely because it is the prize. What we know of past incursions in other sectors is that they have occurred gradually, laying penetration infrastructure well before the extraction, probing defenses and responses. It is safe to assume that they are doing the same thing with the energy sector and electric grid.
Logic would suggest that an adversary is not going to reveal its capabilities prematurely with token attacks. That is probably what the banks and Home Depot and Target are good for. Test grounds for generic attacks and to reveal responsive capabilities. Diversions from the real area of interest. Save the best for last.
How might such an attack evolve? Let us consider that Russia, a player on the front line of a warm conflict that could easily go hot, would be the logical first-mover. Consider that Iran, a client state with some degree of strategic dependence on Russia, might be a willing ally in such an attack, since rendering the Great Satan strategically impotent would be a major gain to its own strategic ambitions. And, while not necessarily chummy, Russia and China might agree that denuding the US of short to intermediate term strategic economic capability, and thus military capability, would give them sufficient time to achieve hegemony over their own spheres of influence in Europe and Southeast Asia for the long run.
Of course, there is the question of what capabilities the US has to deal with such an attack.

A. Do we have the intelligence to foresee it in time to prevent it?
B. Do we have the means to prevent it if intelligence informs us in time?
C. IF neither A or B, what is the likely extent of damage that can be done?
D. If nominal or critical damage is done, what is our capability of response?

Ask yourself how well A and B have worked so far, either at the national or private level. At the private level, studies of recent break-ins suggest an appalling degree of managerial incompetence or indifference to knowable and preventable risks by private companies. Not unusual in the history of managing the security requirements of data resources.
And the role of the US Government? Well, if it can’t protect itself, how well can it protect anyone else? And if it could protect anyone else, the typical response from industry seems to be that it regards the US government as much an enemy as The Enemy. This may speak to private enterprise’s fear of revealing to the government things that it desperately does not want the government to know (assuming the government does not know them already).
If damage is likely, what kind of damage can be expected and with what impact? If critical control points of the electric system can be compromised to inflict critical damage on key generation and transmission points, particularly in a coordinated attack that creates cascading failures, one can imagine an unpleasant day in paradise. But we don’t have to imagine. We can recall two Northeast black-outs, as microcosms of what could occur nationally. We can recall the aftermath of Storms Irene and Sandy on communications and energy infrastructure in the Northeast. To the degree that major transformers could be fried, that major rail centers could be damaged by derailments, that major pipelines or their control centers could be done harm, short to intermediate term harm could be accomplished for adversaries to achieve their strategic objectives of crippling our capacity to project or sustain military force in areas of strategic importance. They would not have to fry the entire grid. Just enough to make an impact at critical pressure points.
And what damage could we do in return? No doubt we have the means to inflict comparable damage at some scale. Stuxnet proved that with the Iranian centrifuges. But our society is much more complex and integrated than Russia or China or Iran. In relative terms, it is probable that these potential adversaries would inflict much more relative damage on our day-to-day capabilities than we would on theirs, particularly given their autocratic nature.
Further, they will have neutralized our capacity to operate in their neighborhood far more than we will have neutralized their capacity to operate in their neighborhood. And that is the strategic gamble, the game changer, the prize. China would achieve de-facto control over Korea and Taiwan without firing a shot, and achieve effective allegiance to its will of the entire Southeast Asian rim from Malaysia to Japan. Is that important to us? Russia wouldn’t have to worry about us meddling in Europe, east or west. Do we care? Iran and its surrogates can pick off its adversaries at its leisure, escalating a war of attrition against Israel, to continue keeping the little people’s attention diverted from the real problems at home as they march onward in the name of Allah.
Would such a cyber war cause us to go nuclear? Not likely, and that’s what makes a cyber war a more credible threat. No other means can inflict as much damage with as great a possible payback, and as little risk in return. Not that there’s no risk; but, in the abstract, it is less frightening.
One of the ironies of a cyber war scenario is that the internet, a distributed communication infrastructure originally designed to be survivable to nuclear attack on any number of its nodes, is now the vehicle for attacks that can be simultaneously distributed in source and destination with devastating possibilities. And the core of that irony is that the western nations have used the internet to consolidate control of their operations, making them more vulnerable.in this context.
In such an attack, Google and Facebook would become worthless, no matter how many solar arrays they plant to make their server farms impervious to fluctuations of the grid. Amazon, not far behind. They would become worthless because their market exists on a grid based infrastructure. Their market, their reason for existence, is no greater than the grid its stakeholders depend upon. And in a post-cyber war society, the trivialities of social want that these and other highly centralized companies feed upon for their corporate sustenance will evaporate in the heat of more pressing concerns.
If this is indeed a real threat, what is the cure? Investing in information technology security and training on an unprecedented scale would be a good start. Reconfiguring the grid to be better partitioned for containment and more distributed in source and composition of power generation to diminish vulnerabilities from concentration would also be helpful. This will take a little longer, …like a lot longer. But the sooner we start and the farther we progress, the better. It might be good for all entities which depend heavily on communications and electrical networks to ask themselves how they would operation with either down for a month or two. Not that that would be the time frame of a post cyber attack recovery, but it’s a good start to get one in the mood. This will also compromise some of the economies of scale that companies strive for, but those seem to be elusive at best on a good day, and often more illusion than reality.
Is the scenario I’ve painted plausible? Recent history suggests that we have yet again unleashed tools and strategies for which we have not adequately anticipated and prepared for the blow-back. See ‘atom-bomb’ for historical perspective. Our delusional embrace of our exceptionalism likely induces complacency yet again in our leadership. Not the President necessarily, but the full complement of grand poobahs who must make things happen.
And what would the utilities and national security planners say to my ruminations? “Utter nonsense”. Damage will be nominal, at worst. The utilities are on top of it and have given the threat priority attention. And no adversary would dare launch a major attack on our infrastructure for fear of devastating reprisal. Like 911.
Why didn’t I think of that before? Could have saved a lot of pixels.
Don’t worry. Sleep well.
Onward.
20150607

# Science, God and James Inhofe

In a moment that caught undeserved attention,  a week ago the US Senate voted 98 to 1 to recognize the reality of climate change.  This Pyrrhic victory for the believers of climate change was made notable by the ‘yes’ vote of James Inhofe, Senate Denier-In-Chief, and coincidentally, Chairman of the Senate Environmental and Public Works Committees, both of which will be heavily engaged in the phenomenon.

As we have come to learn, Senator Inhofe’s vote was less an epiphany than a shallow effort to co-opt the issue by placing the issue in God’s hands and casting it as merely a manifestation of God’s Plans for just another splendid day in Paradise.  So, here we are.  Is it science or God’s Will?

Yes,  it is true. Since the Planet was slapped together in the Cosmic Workshop, we have always had climate and it has always been changing.  Thank you Mr. Inhofe!.  Your high school science teacher and minister must be proud of you.  But the issue remains: are we getting more than our millenium’s fair share, and are we major contributors, and therefore, major actors in influencing its direction.  Not to take anything away from God, mind you.  He (or she, it can still be argued)  did a marvelous job.  But something is seriously out of whack and deserves attention it is not getting, either from the All Mighty or from us.

I know that Senator Inhofe is a private plane pilot, and the record suggests that his piloting skills sometimes place too much reliance on the assumption that God is his co-pilot. With that in mind, I am deeply  skeptical about his judgment as he pilots (or hijacks) Senate policy on the environment and climate change.

This issue of Science versus God in the matter of climate change seems to be slowly tilting in the favor of science as a growing number of people, including Evangelicals, recognize the undeniable:  that our environment is altering at a rate unprecedented in our experience across the total range of ecologies and factors. And the net result is not positive.  So,  let’s try to distill knowledge down to some rudimentary facts, and not get lost in the minutia that drives too many discussions.

–  Depending on one’s source of information, The Planet has been in business for between 5,775 and 4.54 billion years,  give or take a million or two for rounding.

–  Depending on one’s source of information, Version 1.0 of humankind has been operational for between 5,775 years and 1.7 million years.  If you take the longer value of planetary existence, people have been messing around with the neighborhood for 0.0374% of the Earth’s existence, and most of that with little or no impact.

–  It is estimated that the Planet’s carrying capacities for humanity during much of this time up until the beginning of the twentieth century did not exceed 1.75 billion people.  Population is projected to reach 9 billion by 2050. The earlier number reflects the technologies in place to support the population. The latter number is made possible by the technologies that have proliferated in the twentieth century, when the budding industrial age of the prior two centuries achieved full blossom and ubiquity, thanks to the maturing of the oil industry.

–  The Industrial Revolution began around 1750, with the benefit of coal to fuel it.

–  Joseph Fourier, some seventy years later and more by coincidence than by consequence, proposed the Greenhouse Effect theory.

–  John Tyndall in 1859 confirmed the Greenhouse Effect theory in laboratory experiments.

–  Coincidentally, in 1859 the first commercial oil well began production in Titusville, Pennsylvania.

–  In 1896, 52 years BG (Before Gore) Swedish chemist/physicist Svante Arrhenius produced the first mathematical model to calculate possible effects of  Global Warming from greenhouse gases.  He viewed the impacts as largely beneficial to mankind, mostly through enhanced agricultural impacts.  His model understated the impacts to follow, but he cannot be faulted for that as he probably did not calculate the impact of the first automobile produced in 1889, nor did he get the memo of Henry Ford’s master plan for mass mobility, which achieved reality in 1913 with the first plant to mass-produce automobiles.

– It takes between 2,000 and 10,000 years for Mother Nature to cook a barrel of crude oil.  (God could probably do it faster, but appears not to be in that business, or Exxon-Mobil would not be so worried about where to replace its diminishing conventional reserves.

–  It is estimated that the total global inventory of conventional reserves at the beginning of commercial exploitation was about 3 trillion barrels.  ( Conventional reserves are the easy stuff, excluding the unconventional stuff made available by fracking that makes such a mess and is causing increasing rumbling.  If Coca Cola was in the oil business, it would brand  conventional reserves ‘Crude Classic’).

–  Of that, it is estimated that we have depleted one-third or 1 trillion barrels by the year 2000.

–  Of that, it is estimated that half was depleted in the last half of the twentieth century.

–  The United States has 5% of the world’s population, and used 25% of the world’s annual consumption of energy as of 2000.

–  The coal and oil that is consumed is carbon that was in essence ‘sequestered’ until combusted. The consumption of that carbon in such relatively large proportion in a veritable nanosecond of geological time can only rationally be viewed as a human ‘forcing’ of the climatic norms that have more slowly evolved over thousands of years.

–  We know the chemistry of carbon consumption.  We know the physics of its effect on the atmosphere.

–   We know what caused Los Angeles’ smog in the latter half of the twentieth century,  and we know that we were capable of intervening to reduce it.

–  We know what causes algae blooms in lakes and rivers, and other forms of industrial pollution, and we know how humans can cure what humans create or contribute to.

–  We detected the depletion of the Ozone layer, and with the aid of science, bent political will to do something to reverse the process.

With these facts of history and science as context, for Senator Inhofe and other political and thought leaders to deny the human role in mitigating conditions and consequences to which it contributes is an act of colossal stupidity or craven indifference*.   (*See also: Concerted Ignorance).

*   *   *

So much for science and history and facts.  Let’s spend a moment with God.

I am a person of faith, but I happen not to subscribe to any particular brand of religion.

I would like to think that there is a benevolent God who is watching over me and has a plan in which peace and prosperity and well-being are secured for myself and humanity in general.  Unfortunately, I have not found evidence of it.

I see the universe as a place in which magnificent beauty and brutality exist side by side in the interplay of forces that shape and evolve it….by whatever plan and whose ever hand.  I do not presume to understand it, nor do I expect to before my clock runs out.  So I navigate the unknowns with the best I can hobble together of wisdom and insight, much of which I have accumulated as the byproduct of my mistakes.  Nonetheless, I am grateful that I and others are capable of doing so because,  by whatever means, we have been endowed with the capacity to reason and learn and self-actuate within the boundaries of our resources and the random roll of the cosmic dice that is the nature of the universe.

The Judeo-Christian theology to which Senator Inhofe professes to subscribe recognizes the reality of human intelligence and free will.  After all, it is that free will and the exercise of choice (though often not intelligence) which makes us capable of sin, the raw material for all the religions to sell salvation through their particular franchise with God.

So, if I were to presume to argue the case for climate change responsive action from the vantage point of Senator Inhofe’s toe-hold on reality, I would argue this.  A God which has given the children made in his image the capacity for rational thought, and is observing them squandering it yet again, must surely be displeased, and disinclined to accept the responsibility that Senator Inhofe, and Ted Cruz and Bobby Jindal and Marco Rubio and a vast array of other numb-nuts would like to dump in his lap.  I imagine that an all-knowing, all-powerful God, whom the Bible suggests had little hesitancy to rain down bolts of lightning upon the richly deserving, could exact some terrible punishments on the criminally indifferent for the trespasses they are wrecking upon His realm.

I’m waiting.

And while he’s at it, could he take out ISIS as well?  It would save a lot of unnecessary hardship.

Onward.

20150208

# Climate Change: An Affirmation – With Regret

This week was for me a culmination in my ten-year journey as a student in the matter of Climate Change.  Having entered this journey as a tangent to a coastal land use  study project, I have endeavored to ensure that what we learned in a workshop of 2004, November 19 translated into policies and actions that might protect us from unnecessary risk, and still allow us to exploit the limited opportunities of possible advantage.

When I emerged from that workshop ten years ago, I perceived two distinct threats.  The first was the array of threats posed by natural forces, aided and accelerated by contributing human actions of unintended consequences; i.e. our destabilizing of the environment’s carbon component with collateral environmental and economic consequences.

The second and more troubling threat was the prospect that the human response, the managed response, to this natural challenge would be as muddled and incompetent as we have too often witnessed in execution of our wars, our economies and our political institutions.

In my small parcel of this planet, in the matter of community planning for storm resilience and sea level rise sustainability…that second threat has now been realized in the essence of a Resilience Plan that is little more, in my opinion, than a thinly disguised fig leaf of protection for business as usual with no credible plan for substantive action, but a veiled accommodation for continued investment in vulnerable shoreline property that is pouring long-term money into the sea in pursuit of short-term profits and another hit of  shoreline tax revenue, for which the cost of withdrawal will likely be greater than the near-term benefit.

The attendance for the meeting was large at about 100, compared to prior efforts. The presentation of the plan was classic bureaucratic bilge.  Our Skeptic in Chief regaled the audience with our wonderful accomplishments to date and the fact that we are revered by other communities and our region for our progressiveness, which in truth is comparing the little we’ve done over ten years to the nothing that others have done.  In truth, we’ve done a lot of planning, but very little implementation. And of the action we’ve taken over those ten years, eighty percent of it occurred since Storms Irene and Sandy when Mother Nature slapped us into some measure of reality, taking hypotheticals to ground zero.

Then followed the presentation of the report.  In fairness, the report contains much useful information about policy options and present and future conditions to which they might apply.  But it lacks the critical elements of a plan: a list of specific actions, timelines for implementation, critical trigger points and criteria for contingent actions, and the defining objectives that the preceding are intended to achieve.  In other words, it is not a ‘plan to act’.  Though the Plan’s horizon looks out to the end of the century, which many assume to be a long, long way away, the conditions that it anticipates addressing need concerted attention beginning now.

The most glaring faults in the report, and the reveal of its true intent can be found in two hypothetical illustrations of future action in two areas of town that will be subject to eventual inundation. One is an industrial area in which the report suggests in one breath that current industrial uses, including fuel storage, may need to be relocated eventually due to threats of storm surge and eventual sea level rise.  But in the next breath,  it proposes replacing industrial use with possible new residential construction in an area with no particular aesthetic appeal, and the same risks facing industry.  Short form: we need to protect business property, but it’s o.k. to put people at risk.  Who would benefit from this cerebral methane emission? Developers who would take their profits up front, if someone was dumb enough to buy these houses, and leave the risks for the buyers to realize and lament at some future time.  And the Town can brag about added tax revenue, until the costs come in down the road in some future administration.

The other proposal doubled down on absurdity.  It addressed a road where approximately thirty houses will be subject to probable surface inundation by 2050, and a remaining nineteen may survive under tenuous terms of storm risk on bad days and sustainability of livable conditions on good days. For this area,  the authors applied their prescriptive magic to suggest retreat in stages that would expend resources unwisely to sustain the ultimately unsustainable for as long as possible. Call it Denial-to-Resignation strategy.

But then, the end result of this three stage retreat to reality is to create on land abutting the now undefendable yet another area of new construction that will be equally undefendable and put new people and new capital at exactly the same risks of human loss and premature decline as sea level rise continues to progress.  Einstein’s definition of insanity in action.

It’s not as if the flaws of this strategy are in any way hypothetical.  While this report was in development, and the implications for this particular street were well-known (in fact, have been for seven years), a local developer has bought three existing houses on this street for tear-down and new construction.  One has been completed and is now on the market….for 1.4 million. Lovely house. Wonderful water views. Quality construction. It should retain economic value for 100 years under normal conditions, passing value from one owner to another during that period. But if projections are correct and the area floods regularly by 2050 at the latest, or possibly as early as 2030, the value of that property is likely to drop like a stone. Added to that is the cost during the interim of insurance at painful premiums, even recognizing that it is built to today’s FEMA NFIP standards, which are inadequate going forward as sea level rise progresses, and irrelevant to sea level rise. So who benefits? The developer, if he can find a sucker (uninformed buyer) to purchase the property. He takes his profits and walks away, leaving the buyer, and possibly the Town holding the long-term bag of risks. That is totally possible because the developer is not required to disclose future events that have not happened. The realtor is not obliged to do due diligence in disclosure about anything but historical events, and rightfully so as assertions about future climatic events are beyond a realtor’s professional scope of competence and obligation. It is the Town government’s obligation, knowing what it now knows about future possibilities, to place relevant disclosures with appropriate caveats about what future conditions this parcel may be subject to, and what contingent government actions might result, such as condemnation in the event that the property becomes uninhabitable and a risk to human health and safety. Protections for home buyers of vulnerable property should be no different in principle than protections for car buyers and consumers of prescription drugs. But builders are not subject to lemon laws. In the case of property, protection against abuse, where regulation exists at all, should be with the local or county government and at the very least in the form of a warning label, like prescription drugs, that advises of possible ill effects to your well-being under certain conditions of use. But The Plan does not propose such a procedure to begin avoiding knowable future risks, nor does our local leadership appear remotely willing to bite that bullet. What should happen is that the government should institute a disclosure requirement in the property record that clearly states the risks to prospective buyers and lets them make their own informed decisions. Instead, the government prefers to align itself with the interests of developers and sellers and its own myopic pursuit of near-term tax revenue. Its bigger fear should be of the unsuspecting buyer who later discovers what the government knew but has refused to disclose. This is worse than concerted ignorance on the part of government. Possibly, in my opinion, worse than criminal negligence. If allowed to continue, it will have severe repercussions. So, we will see if this first installment of institutional idiocy finds a market, and the next two properties in queue follow. Caveat emptor. * * * Next came public comments. The discussion was diverse in point of view with some preponderance of skepticism about the seriousness of the threat. Our chief denier in residence, who I call Mr. Sunspots, delivered his usual assault on the theory of climate change. A more reasoned citizen questioned the scientific basis for the report and its lack of citation in the plan. Ironically, when asked by the moderator if the chief scientific advisor on the panel would like to defend or explain the science, he demurred. Not helpful. The more troubling moment for me came when a resident of the street subject to probable inundation stated that he had purchased his property on that street five months ago without full knowledge of risks and the prospect of a possible future condemnation. Members of the report panel vigorously denied that the report was recommending condemnation. I was astonished. The report explicitly notes abandonment of certain roads as a possibility. It specifically notes that failure to sustain acceptable quality water and waste management may be conditions for condemnation when sea level rise threatens the sustainability of the property. It’s there in the policy definition of the report. The three stage exhibit of accommodation strategies for that particular road make it the poster child for the strategies. To deny the obvious was stunning. This speaks to the ultimate problem of moving climate change adaptation strategies forward with a largely skeptical public. If the government is unable or unwilling to justify and defend its science, to put forth unflinchingly the steps it is preparing to take based on that science, and to speak unequivocally to the possibilities we face, then we have no prayer of addressing this critical issue in a timely and effective and optimal, or even minimally sufficient, manner. We are dooming ourselves by our own willful stupidity and cowardice. * * * We recently learned this week of the success of the European Rosetta mission to a comet. It determined that such interstellar cosmic vehicles do carry organic material which might spawn life on other space rocks like ours. There have been growing exhortations among the cognoscenti (Stephen Hawking) and technorati (Elon Musk) that we must resume our interplanetary exploration of near space and prepare to colonize on other planets in order to preserve our species from a possible catastrophic cosmic hit on the Home Rock. I agree that we are destined for destruction, but I am comfortable with the prospect that we can do it to ourselves far quicker than the prospects of getting slammed by a high velocity space snowball. Allow me to entertain the fantasy that there is indeed extraterrestrial intelligence out there, monitoring our every move as diligently as the NSA and Google, and possibly reading this blog. This is my message: Quarantine Earthlings until we are cured of our idiocy. Don’t allow us to infect the rest of our solar system with our toxic, contagious culture of self-destructive values. Don’t let us off Home Base until we prove that we can manage ourselves. And if by chance we should get whacked first? Well, I guess that contains the problem by other means. Unless, of course, we get cue-balled into a trillion pieces; in which case all bets are off. Onward….maybe. 20141123 Prior postings of possible interest: Resilient, Sustainable or Unsustainable? Imperfect Knowledge or Concerted Ignorance? End Game: Flood Insurance and Coastal Retreat Trianuglating the Flood Insurance Vortex # The Grid: News of its Death Is Premature The latest claptrap ricocheting off the walls of the business and environmental media echo chambers is word of the inevitable decline and death of the electric grid…or not. It is more likely to succumb to neglect, along with the rest of our infrastructure, than to technological displacement by renewable technologies any time in the foreseeable future. Nonetheless, the subject is a tug-of-war between two rival camps of idiocy. One is comprised of the fossil fuel feudalists and their various front organizations who are fighting the growth of renewables at any scale as a perceived threat to the inevitable decline of cheap and easy carbon. The other camp is a combination of visionaries and eco-huckster capitalists who believe in a Disney World (both capitalist and fantasy) future but ignore the social and economic inertia that impedes reasonable progress at best, and their wildest dreams, to be sure. The utilities themselves in varying degrees are more inclined to be on the side of the Feudalists than the Fantasy folks. The following quote is indicative of the kind of siloed, echo-chamber consensus that propagates the illusion of inevitability: “Utilities are afraid that solar power will be to the electrical grid what PCs were to mainframes, or e-mail to the Postal Service: a technology that will simply kill its predecessors. Coal and nuclear power are both doomed, and the profit-making power grid with it. That’s all to our benefit.” The writer may not realize this, but personal computers have not dispatched the mainframe; they have merely augmented it. The Mainframe of yore has morphed into the server farm of now; Big Iron still lives. If it didn’t, there wouldn’t be The Cloud and Big Data. And, while information is more widely distributed than in the ’70s through the internet, ironically it is every bit as centralized and concentrated as previously. Just ask your government, or Jeff Bezos, or Eric Schmidt or Mark Zuckerberg. And email has assuredly impacted the Post Office, but it has not rendered it to the dust bin of history yet, nor is it likely to in the near future. Congress has reserved that privilege to itself. The Post Office can still evolve, adapting its network to new and evolving needs, if allowed. But the same sclerotic forces that would kill renewables are doing their best to slay the postal service and any other institutions of social and economic unification. The electric grid is most definitely in transition, but it is by no means a ‘dead man walking’ for the next half century for three very simple reasons. 1) The technology to replace it with renewable energy is not there, will not be sufficiently developed by the end of this decade, and will take three to four decades or more to propagate to scale. 2) Much of the generation of renewables will be on industrial scale wind, wave and solar farms (the equivalent of mainframes, if you will) in places of best advantage, for transport to places of greatest need. Hence, the grid, on some scale, in some configuration, lives. And some power consumers will never have the means to deploy stand-alone renewables without augmentation from the grid. 3) The ultimate system will be a hybrid of distributed and industrial scale generation integrated in a truly intelligent grid because neither option by itself will meet a variety of circumstances than can compromise each. The Grid is The Net, It will evolve technologically, but it is unlikely to be replaced. The fact that phone companies are seeking to dis-own their land lines as subscription declines is not the death of the telephone network; it is simply moving to wireless technology, but it is still a centrally managed and financed network. What is disconcerting in this nonsensical rumination about the inevitable death of The Grid is that it distracts us from the real issues affecting the grid and its constituent utilities: an orderly technological, financial and regulatory transition to a differently configured and operational reality. The notion of ‘going off the grid’ for most of us is more a fantasy than a future. For those of you with solar panels on your house, ask yourselves: if your system was wiped out by a hurricane, along with many others in your town, how quickly would you be able to replace your panels and get back to business? Alternatively, how long would it take the utility to re-string lines to your house? Aside from storms, how many office buildings are likely to meet their own needs from home-grown renewable generation any time in the intermediate term future? Can we get Metro-North to run its trains on anything but industrial grade electric generation in the intermediate term? And finally, much as many of us would welcome the demise of coal, it is notable that a growing number of thought leaders in the climate change community are becoming resigned to the need for carbon sequestration technology, given the growing consensus that coal will be with us much longer than our fondest hopes would allow, for a variety of reasons. Among the major concerns that the utilities and everyone else should be concerned about are: – resurrection of the grid that is from its current state of decay due to deferred maintenance; – armor the grid against cyber-attack or otherwise mitigate the risks of conventional sabotage; – armor the grid against probable extremes and transitions in climate; – create a grid that is more modular in design and thereby more scalable and adaptable to the various fluctuations in energy generation, distribution and utilization technology and patterns of usage: – evolve a more enlightened management capable of managing a more sophisticated grid; – evolve a more sophisticated citizenry willing to accept that this is an infrastructure that we will all depend on in varying degrees, and therefore we must all support. The Grid is not dead or at death’s doorstep. But we must not let it linger in agony, or its agony will be our own. Onward. 20140427 # Flood Insurance, Information Arbitrage, and Transparency Every truth offers the potential of a deception. Every deception succeeds on an element of perceived truth. Truth and Deception: the two sides of the coin of Perception. * * * NBC recently published two stories on revisions of FEMA flood insurance maps here and here. The stories are clearly works in progress, and should probably not be taken at face value, or dismissed out of hand. But, to whatever extent they reveal some significant truths about how flood maps are being revised to affect insurance premiums, they are disturbing and deserve attention and the bright light of transparency. Here’s the essence of the stories, but please read them in full: Certain ‘consultants’ claim to have superior information on certain flood plain properties, AND key contacts into FEMA that can facilitate the revision of flood maps to reflect that information, with the benefit in many cases of lowering flood insurance premiums for those selected properties. The inferences of NBC’s stories based on a review of some portion of the revisions to date are: – the use of this information and the special contacts into FEMA deny all property owners of the area the benefit of appropriate assessment and speedy response by their government; – the purportedly ‘more accurate’ information in some cases does not reconcile with ‘facts on the ground’ to justify more favorable determinations for some petitioning properties than for others; – In some cases, local coastal flood plain management officials have opposed FEMA’s acceptance of such revisions as being contrary to the facts they know, the projections of sea level rise and storm intensity that they must responsibly manage to, and sound public economic and land use policy. Nevertheless, their objections are over-ruled by FEMA. – the anticipated consequences of these conditions is that development is being encouraged and sustained where it should not be, with the result that others will pay higher premiums than they should, and society at large will continue to bear unnecessary costs for beneficial treatment of a few. * * * Before we consider the above, let’s review a few realities about the current FEMA situation. 1. Yes, FEMA data is imperfect and outdated, even in some of its newly released maps, and an adjustment process is necessary as errors are identified in the interest of fairness to property owners. 2. FEMA maps, even the newest, do not take into account the escalation of sea level rise in the future, as projected by NOAA, and therefore understate the forward-looking rising risks of flooding to properties that may be outside the flood plain today, but likely will not be tomorrow. 3. FEMA maps are not expected to reflect sea level rise data for another five years, but in the interim they will continue to encourage people to invest in raising structures that may ultimately be subject to routine inundation from sea level rise during the useful economic life of those properties, regardless of the statistical probability of occasional severe storm damage which has been the traditional threat. 4. FEMA, like many government bureaucracies, suffers from under-investment in the best available data and information technologies to compile, analyze and communicate information to the public it is commissioned to serve. 5. Much of the legislation currently fermenting in Congress is targeted only at deferring or redirecting the unpleasant impacts of the escalating premiums reflecting escalating economic risks to shoreline properties, but they do nothing to alter the weather dynamics that will drive those risks, and likely will add escalating new costs to the current deficit. Proposed deferrals of premium increases will only kick the economic pain for property owners and the general public further down the road, and compound it. 6. The premise of ‘actuarially based rates’ going forward is more a term of art than science, as actuaries do not predict the future; they project its possibilities from a body of reliable historical data. With respect to sea level rise and storm frequency and intensity projections of the future, we are, if you will pardon the pun, in uncharted waters. Thus, before we get into the issues raised by the NBC reports, FEMA’s efforts and the Biggert -Waters National Flood Insurance Reform Act have two strikes against them with the ball coming in fast, high and inside. * * * If we add to the above the possibility suggested in NBC’s reportage that FEMA and the National Flood Insurance Program is being manipulated to benefit the few at the cost of the many, then we have a yet more disturbing situation. As I read NBC’s reports, recollections of two recent national experiences echoed, giving the stories a ring of truth. The first comes from the early ’00s when the press revealed the scandal of big name brokerage firms knowingly peddling crap stocks to unwary mom-and-pop investors, as well as some supposedly more sophisticated institutions. The second is the sub-prime mortgage scam, which again prayed on the ill-informed at huge cost to the entire society. These two events are benchmarks of the kind of industrial grade deception that are possible in our society when our government forgets to whom it appropriately owes its allegiance. It may be that someone has a ‘secret sauce’ of better flood projection information than FEMA, in which case the government should make every reasonable effort to acquire it for the general benefit of all the public. But if that ‘secret sauce’ is nothing more that ‘favored access’ for the few, then what we have is a failure of due process, if not a fraud. Some will counter that those with superior information in a competitive society have a right to protect their interests and profit from their better knowledge, as is the case in the investment world. Financial arbitrage is really at heart information arbitrage; having better information about risks and opportunities than ones competitors, and the ability to act on it. There are variations on this theme; some legal, some not, like insider trading, interest rate rigging, steroids,…..maybe even manipulating decisions on flood maps. Who knows. * * * So, what’s the problem here? Purchasing flood insurance is not like purchasing crap stocks or taking out a sub-prime mortgage on a discretionary purchase of a residence. Many people who are subject to flood insurance have a couple of lousy choices, of which the purchase of flood insurance is one, and is often made mandatory for economic reasons that are not discretionary. If it turns out that many are paying sucker rates made higher by federal favoritism to the chosen few, that is a fraud on the rate-payers. It is also a fraud on taxpayers/voters in general who expect their government to conduct itself in a manner that is equitable to all, and transparent. Needless to say, those expectations have been seriously offended over recent decades, but they are the foundation of the reliable functioning of our society. That foundation is showing too many cracks of late. Flood insurance and FEMA’s role in defining and managing disaster areas and responses is a critical function in national resilience which will become progressively more so as we move forward. We will continue to depend on national scale mechanisms of planning and response to give us the capacity for resilience that can effectively manage the magnitude of events that we have seen and are likely to see. Coastal flooding is but one of the hazards that we are facing, along with wildfires, drought, epidemics, grid failure and other events that transcend the means of local authorities to respond. FEMA is but one of the many agencies that we will expect to fill those roles. If we cannot trust the integrity of their processes, and the efficacy of the sacrifices by us (taxes, insurance premiums, utility rates) that are necessary to sustain those processes, our resilience as a nation will fail, and we will all suffer. The people who are benefiting from the alleged favoritism are at best receiving a short-term benefit at the expense of the broader community. In the long run, we will all suffer the costs of direct loss, and the collateral costs of lost trust in our institutions. Before that happens, it would be beneficial for the flood mapping and insurance process to receive a top-to-bottom scrutiny to assure its efficacy, identify its weaknesses, recommend investment appropriate to its challenges, and restore public trust that these mechanisms are in fact working in the public interest, and not for private interests at public expense. This requires more than an internal review by FEMA’s inspector general. It deserves a review by the Government Accountability Office (GAO), which reports to Congress. And, while the GAO is assessing the validity of NBC’s allegations, it might also be helpful for it to weigh in on the proposals for modifying Biggert-Waters, to assure that the same kind of favoritism is not being legislated through be backdoor. The Great Communicator had it half right: Verify. Onward. 20140309 # Triangulating the Flood Insurance Vortex “For we are all, like swimmers in the sea, Poised on the top of a huge wave of fate, Which hangs uncertain to which side to fall, And whether it will heave us up to land, Or whether it will roll us out to sea, We know not, and no search will make us know, Only the event will teach us in it’s hour.” Mathew Arnold, Sohrab and Rustum The above quote came to mind as I watched the latest hearing of the Connecticut Legislature’s Task Force on Sea Level Rise and Preserving Long Island Sound, dealing specifically with changes in the Biggert-Waters Flood Insurance Reform Act and its collateral damage to shoreline real estate. Yes, I’m referring to Biggert Waters, not Storm Sandy. The Task Force, under the leadership of Rep. James Albis, has done a commendable and thorough job to date striving to understand the environmental and economic challenges facing the Connecticut shoreline, and hearing from as diverse a collection of stakeholders as possible. The January 15th hearing endeavored to get a handle on one of the most challenging issues in the portfolio: flood insurance. Much useful perspective was gathered, but through it all was a thread of magical thinking that somehow the Private Sector might intervene to make this all…better…if not good. Not. The hearing began with a presentation by George Bradner, Director of the Property and Casualty Division of the Connecticut Insurance Department, providing a summary of Biggert Waters provisions and a review of insurance loss history over the past forty years. He noted that since 1978,468 million in flood insurance premiums were collected in Connecticut, against which $484 million in claims have been filed, resulting in a loss ratio of 103% for the period. But if you take out Sandy’s contribution of$244 million in claims, the loss ratio improves to 54%, and might attract private sector insurers.

…or gamblers posing as insurers who believe that Sandy was a one-off.

As Mr. Bradner correctly notes, insurers must make money over the long-term in order to absorb those infrequent but catastrophic events that are an inherent part of the insurance industry’s raison d’etre.  But it has been precisely those events that have caused insurers to retreat to safer grounds in other property and casualty lines outside of flood insurance.  So why are he and others at the hearing hopeful that the private sector can be seduced into filling the coverage gap, or the affordability gap?

Well, because a couple of firms in Florida and Connecticut and other states in the Excess and Surplus markets have tip-toed into the flood insurance market to compete with our favorite Uncle.  But, as Representative Rosa DeLauro’s representative, Lou Mangini, noted, persons who sign on to such policies face exposure to much higher rates if the private underwriter later chooses to bail, and forces them to go back to NFIP as the insurer of last resort, which is what the government is and does.

So, if I may translate this into the vernacular, There is no free lunch, but we’re still looking and praying.  We have potentially lucrative insurance markets that should be of interest to the private sector if we can convince them to ignore the infrequent catastrophic losses that will wipe out their better days.  After all, one bad season in thirty-six years ain’t so bad.

But what if the next one comes sooner?

Again, as Mr. Mangini points out, the National Flood Insurance Program was solvent as of 2004, but from then until 2011 it racked up $18 billion in debt…..before Sandy. So, what lesson on the cyclicality of catastrophic loss should the private sector draw from recent history in contemplating its future? I suspect that the private sector insurance industry will approach flood insurance as it has managed health care. It will cherry-pick the best risks, weed out or abandon the worst, and leave them to the tender mercies of the NFIP and the US taxpayer, who is becoming increasingly unsympathetic in the face of multiple collateral challenges. Following a ‘greater fool than I’ meme so typical in business, the individual players in the insurance industry will collectively contract their market and concentrate their book of risks,…to their detriment. And ours. That gets us back to affordability and what I referred to as Darwinian Economic Displacement in a prior post. If there is no free lunch, and no private sector sugar daddy, then a lot of folks on the shoreline will find themselves under water, physically and fiscally. One of the functions of insurance is to spread risk not only for themselves but their insureds, and to provide financial liquidity in times of crisis through timely and substantive settlement of claims. But a number of participants, most notably First Selectman Michael Tetreau of Fairfield, noted that it was not merely a case of funding the coverage, but making the mechanisms of claim processing and reconstruction responsive to need. Indeed, Sandy has reminded us that Best intentions are too often not followed by best performance, creating an endurance contest between insured and insurers as challenging as between the insured and the storm itself. Michael Barbaro, representing the Connecticut real estate industry, but speaking from his own personal professional experience, noted that Biggert-Waters has cast a pall over any shoreline property within flood zones and potentially subject to flood insurance. To a separate comment by Mr. Mangini that the 23 bills currently before Congress are at best short-to-intermediate term solutions, and a long-term solution is not likely for four years at the earliest, Mr. Barbaro stated that such uncertainty for so long will only do further damage to an already fragile market, and by extension to municipal tax bases dependent on that market. One might infer from that comment that if only the situation of flood insurance can be made more amenable to our wishes and means, things would settle back a little closer to normal. But that ignores the other shoe waiting to fall: what are Mother Nature’s intentions? (My working hypothesis: Mother Nature is a centipede and she’s wearing combat boots. Just my opinion. I could be wrong.) One of the problems with the premise that modifying Biggert-Waters to our wishes will re-set the clock to better days is this: neither FEMA, nor the NFIP, nor the retail insurance industry are forward looking in their risk assessments. They are fighting the last war. They are looking backward at historical loss data, and not looking forward at possible future trends which may depart materially from recent and long term history. If future events unfold as scientists suggest, both the footprint and financial impact of future storms could escalate significantly. Translation: even today’s premiums may prove insufficient in such event, and much more property could be affected than is presently designated. And, in certain cases, raising structures will prove irrelevant, and a fool’s errand in hindsight. Among the many pointed observations in this discussion were those offered by Mac McCleary of Connecticut’s Department of Energy and Environmental Protection. He offered that, whatever the defects and imperfections of Biggert-Waters, we would be well advised to view it as the harbinger of things to come, and prepare ourselves. He further urged the chair to engage the reinsurance industry and Connecticut’s wealth of risk assessment expertise to better assess what lies ahead for us. Mr. McCleary, who is among the more pragmatic executives in the agency, noted that the agency is aggressively studying all suggested avenues of addressing risk exposure and loss remediation; even the half-baked-not-ready-for-prime-time possibilities, because there are no easy, obvious solutions to the multitude of thorny issues confronting us. In other words, to borrow an oft used and overused phrase: ‘no low-hanging fruit’. True statement. Among the half-baked ideas that are still in the oven and rising is a plan to fund proactive efforts at risk mitigation for home owners and businesses: a$2 million fund intended to provide up to $300,000 per applicant to raise structures or otherwise mitigate risks from storm surge before the fact. A commendable concept, and worthy of expansion. But at$60,000 to \$100,000 on average to raise a shoreline residence, the current state funded program would touch at most thirty homes. Milford had eight times that number that might have benefited from the program before Sandy, and many more that survived Sandy, but could become the next debris field with the Son of Sandy.  The hope, again, is that the private sector (banks, mortgage companies, insurers) can be induced to join the fund in their enlightened self-interest, expanding its reach and impact. Keep hope alive.

But even Mr. McCleary, the pragmatist, spoke to the hope that the insurance industry might find ‘arbitrage opportunities’ in the market that will invite them in. I would suggest that such opportunities, if they are taken, will be interim advantages to the industry, but of little long-term benefit to property owners and mortgage companies and communities in the long-term in extending coverage or making it more affordable.

*   *   *

A few observations on the insurance industry.

Most people think of the insurance industry as being in the business of providing risk underwriting and loss financing  (claim settlement) services.  Not true.  Insurance services are a front for the primary business of insurance companies: investing the premiums that are generated. It’s not about risk; it’s about positive cash flow and net return. The P&C business in particular has been historically cyclical, riding the waves of the economy and, yes, environmental cycles of loss that have substantial historical precedent, and therefore a degree of predictability.  In fact, many P&C insurers routinely run a modest loss on the underwriting side of the house, but make it up on the investment side of the house, and therefore acquit themselves for the year with a net profit that their shareholders consider acceptable.

And what do insurers invest in?  Real Estate, like Miami condos, and Kansas farm land and petrochemical infrastructure, and capital plants in Bangkok, and stocks and bonds of various blue-chips like utilities and agribusiness and home builders and municipalities and all sorts of enterprises whose performance is ultimately dependent upon—the environment. They do so successfully  by carefully understanding and balancing HISTORICAL underwriting and economic (investment) cycles, balancing and diversifying their portfolios of underwriting and investment risk in order to dodge, or significantly mitigate, the BIG HIT that could render their corporate logo an artifact in the Corporate Hall of Fame.

The retail insurers, the Travelers and Cignas and All States and State Farms and other street level purveyors of protection, do have a card up their corporate sleeves: reinsurance through such global firms as Swiss Re and Munich Re and the like. The retail insurance trade ‘re-insures’ the policies the retailers sell the public to further dilute the risk they hold on their books. The re-insurers further spread their assumed risks among themselves so that no one of them is left (hopefully, fingers and toes crossed) holding the whole bag of a catastrophic loss, like maybe Fukushima?

In the past ten years of my observation, and probably longer, there has been an interesting divergence of perspective on the subject of environmental (climate change and other) issues. For the most part, the retailers have continued to perceive  the CC issues as no different from traditional hazards, and within the competence of their history-oriented statistical tools.  The reinsurance industry? Not so sure.  ‘We’re gonna need a better business model!’

Because of their global reach and global exposure, and because they backstop their little brothers and sisters of the street trade, reinsurers must take a particularly long long-term perspective, and with good reason.  It’s o.k. if Bangkok and much of southeast Asia is getting whacked in a particular year as long as North America and Europe and most other parts of the world are doing business as usual, including paying premiums.  But what if the whole world is going toastados at once, And it’s not a cycle, but a trend?

Hence, the reinsurance industry’s quiet but substantive presence in the study of climate change in recent decades, and with good reason. Because reinsurers have global reach, they have global exposure.  They, like their little brothers and sisters of the retail street trade, must have deep pockets to endure infrequent but catastrophic losses. Because, unlike their little brothers and sisters, there is no backstop for the reinsurers, except the government, maybe.  (AIG, The Sequel?)

I don’t believe the reinsurance community shares the view of their retail brothers and sisters that it’s just another day in underwriting paradise.  But they have been discrete and circumspect in expressing their views on climate change to date, even as they study it aggressively.  At some point, they will make their views explicit in underwriting standards and rates, and their little brothers and sisters of the street trade will be forced to pay attention, as will we all.  Economic gravity, trickle-down if you will, does work.  Selectively.

This is why Mac McCleary is right about the Cassandra effect of Biggert-Waters, and overly optimistic about the potential of the private insurance industry to play the role of the cavalry.  The private insurance industry will cherry pick its risks and retreat when necessary. At best, it may be the front-end servicer of government-insurer-of-last resort programs, as it currently is for NFIP.  But in the intermediate to long-term, the private sector will not add capacity, and will not reduce rates.  Because it can’t.  At best, it will stimulate economic prioritization of private sector decision-making in defining the risk-reward prospects of personal and commercial investment–Darwinian Economic Displacement.

*  *  *

As for me, I’ve defined my own personal benchmark for determining when the retail insurance industry and the rest of the FIRE (Finance, Insurance, Real Estate) industry encounter a come-to-reality moment.

There is a distinction that still is not appreciated between properties that are subject to periodic storm flooding, and those that are subject to eventual and permanent routine daily inundation from sea level rise.  Intermittent storm flooding may remain insurable for some at some price.  But, as I have previously noted, routine inundation probably is not, according to the norms of insurance underwriting (possibility of loss is insurable; certainty of loss is not).  However, there is a window of opportunity for insurers relative to properties subject to ultimate inundation in twenty to fifty years.  It is conceivable that insurers might write policies (at some price) to protect such properties, and their collateral loans, from premature compromise by sea level rise ahead of projections.

Such a policy would be significant in two respects:

–  It would evidence the insurance industry’s acceptance of climate change and a phenomenon (in sea level rise) the consequences of which it has yet to address to my knowledge.

–  It will put a time-line to its critical impact, a prerequisite for underwriting the risk.

With the introduction of such a policy, sea level rise and climate change more generally will have transcended the debate of passionate lunies on the left and right, and will be ratified by the most staid of Establishment institutions.

End-game of debate.  As for evolving reality, the beat goes on.

Meanwhile, good luck riding the wave, Dude.

Onward.

20140216