WIN Magazine - Fall 2017 - 13

we have ever faced - and our greatest
risk-management failure.
Climate change was once managed as
an "externality" by risk managers and
quants - one so big that they could not
conceivably factor it into their pricing
models or risk-hedging strategies. Today,
climate change and the urgent need to
find solutions to it are no longer being
treated as an externality, but rather
something for which organizations and
countries must be prepared. Global leadership, consensus and, above all, agility
are needed to begin arresting the rate
of climate change and improving global
resilience to it. For sensible solutions to
emerge from governments around the
world, the economic costs of climate
risks can no longer be "transferred" away
by government subsidies and national
catastrophe insurance programs that
amplify moral hazard - which is risk
taking without risk bearing.
A broad commitment among the
world's governments and businesses to
quickly raise and diversify spending on
research and development on energy
technologies is urgently needed. While
this would clearly be costly, it is important to remember three things. First,
spending to reduce grave risks is reasonable and more cost effective than
the alternative. Second, some current
climate policies cost a lot more than
would a greatly expanded research
effort. Third, battling climate change
can actually raise money, the best example being well-designed carbon prices,
which can boost green power, encourage
energy saving, and suppress the burning of fossil fuels more efficiently than
subsidies for renewables. The real opportunity cost is for business leaders not to
seize this moment. A growing group of
entrepreneurs, with Elon Musk being the
most notable example, are waking up to
this opportunity by creating a breed of
Climate Robber Barons.
The first step toward financially derisking the impacts of climate change on
advanced economies is to change the economics. Shared government-sponsored

risk pools, such as flood insurance, misprice these increasingly commonplace
catastrophes. The result is that there is
little innovation in making human habitation more resilient (where financial
wherewithal is not a limitation) while
at the same time moving further inland
from flood-prone areas. So much of
humanity lives near major water ways,
oceans and shorelines that they enhance
our collective vulnerability. In advanced
economies, while government subsidized catastrophe insurance programs
help to ease the financial consequences
relatively quickly, they also stem the tide
of innovation and climate adaptation
that could have started when the first
flood programs where created in the U.S.
in 1968. Similarly, allocating tax dollars
to rebuilding flood-damaged areas takes
financial resources away from taxpayers
who do not live in such areas but must in
essence subsidize those who do.
During a time when the U.S. economy
was largely driven by agriculture and
interstate trade through waterways and
there was no extensive transportation
alternative by rail or road, the need
to be near major bodies of water and
flood zones was an economic imperative. Today, however, with an economy
that is highly diversified, coupled with
multiple modes of commercial transport and global trade, the economic
need to be a riparian society is no
longer essential.
Similarly, subsidies in wind-storm
insurance, which would contemplate
hurricanes, severe storms and tornadoes,
have debased advancements in more
wind-resistant or wind-proof housing.
By rebuilding homes to their prior state,
mostly of "brick and stick" construction,
these programs - year after year and
calamity after calamity - demonstrate
another moral hazard. The principle
of indemnity in insurance holds that
claimants cannot profit from a loss, thus
getting the same asset they lost, if the
asset was insured at all. This naturally
begs the question, how long before the
next insurance claim is filed by the same

claimant in the same home, and raises
the issue of how sensible it is to continue
building in disaster-prone areas.
At a minimum, public buildings in
Tornado Alley should be mandated per
the construction code to have protected
basements or safe rooms sufficient to
shelter the building's occupants (this
would imply a complex if impossible retrofitting process for existing structures).
That there has been little financial
incentive to adapt building standards to
predictable natural risks is partly driven
by the moral hazard created by statesponsored programs and by the general
theme in insurance that merely makes
insureds whole again. This gap in building adaptation is also partly driven by
the fact that when much of the building
and infrastructure stock was built - look
at the Oroville Dam as an example - large
scale or heavily localized climate risks
were not in the realm of possibility.

If the U.S. does not take a leadership
position in confronting the impacts of
climate risk at home, global admonishments about reducing emissions and
protecting natural resources will continue to fall on deaf ears. Just as Tornado
Alley goes through a predictable annual
drama of destruction and reconstruction, Florida and Gulf States undergo a
similar repetitive annual drama. Here
too, miscalculating not only the effects
but the reconstruction costs following
a storm, hurricane or flood continue to
plague the region.
During Hurricane Katrina, the entire
city, state, regional and federal response
apparatus froze in the face of what
was an entirely predictable calamity.
Government agencies did not freeze
for lack of resources or knowledge of
what to do and how to respond; they
froze for the lack of risk agility and the
capability to act with the type of speed
this era requires. Part of the failure to
act is that the system, much like public bailouts of banks, is "internalizing"
the consequences of external events.
F A L L 2017 | 13


Table of Contents for the Digital Edition of WIN Magazine - Fall 2017

Do Hurricanes Have a Silver Lining?
Underwriting Marijuana
The Cyber Insurance Conundrum
Writing Data Security Into Law
Gauging Risk, Reaping Reward
Simply Seamless
Moving to the Cloud: 3 Migration Strategy Models and the 6 R’s.
In the WIN-NER’s Circle
WIN Magazine - Fall 2017 - Intro
WIN Magazine - Fall 2017 - bellyband1
WIN Magazine - Fall 2017 - bellyband2
WIN Magazine - Fall 2017 - cover1
WIN Magazine - Fall 2017 - cover2
WIN Magazine - Fall 2017 - 3
WIN Magazine - Fall 2017 - 4
WIN Magazine - Fall 2017 - 5
WIN Magazine - Fall 2017 - 6
WIN Magazine - Fall 2017 - 7
WIN Magazine - Fall 2017 - 8
WIN Magazine - Fall 2017 - 9
WIN Magazine - Fall 2017 - 10
WIN Magazine - Fall 2017 - 11
WIN Magazine - Fall 2017 - Do Hurricanes Have a Silver Lining?
WIN Magazine - Fall 2017 - 13
WIN Magazine - Fall 2017 - 14
WIN Magazine - Fall 2017 - 15
WIN Magazine - Fall 2017 - 16
WIN Magazine - Fall 2017 - Underwriting Marijuana
WIN Magazine - Fall 2017 - 18
WIN Magazine - Fall 2017 - 19
WIN Magazine - Fall 2017 - 20
WIN Magazine - Fall 2017 - 21
WIN Magazine - Fall 2017 - 22
WIN Magazine - Fall 2017 - 23
WIN Magazine - Fall 2017 - The Cyber Insurance Conundrum
WIN Magazine - Fall 2017 - 25
WIN Magazine - Fall 2017 - Writing Data Security Into Law
WIN Magazine - Fall 2017 - 27
WIN Magazine - Fall 2017 - 28
WIN Magazine - Fall 2017 - 29
WIN Magazine - Fall 2017 - 30
WIN Magazine - Fall 2017 - Gauging Risk, Reaping Reward
WIN Magazine - Fall 2017 - 32
WIN Magazine - Fall 2017 - 33
WIN Magazine - Fall 2017 - 34
WIN Magazine - Fall 2017 - 35
WIN Magazine - Fall 2017 - Simply Seamless
WIN Magazine - Fall 2017 - 37
WIN Magazine - Fall 2017 - Moving to the Cloud: 3 Migration Strategy Models and the 6 R’s.
WIN Magazine - Fall 2017 - 39
WIN Magazine - Fall 2017 - In the WIN-NER’s Circle
WIN Magazine - Fall 2017 - 41
WIN Magazine - Fall 2017 - 42
WIN Magazine - Fall 2017 - cover3
WIN Magazine - Fall 2017 - cover4
WIN Magazine - Fall 2017 - outsert1
WIN Magazine - Fall 2017 - outsert2
WIN Magazine - Fall 2017 - outsert3
WIN Magazine - Fall 2017 - outsert4