>>fully integrating women in the workplace leads to prosperity<<
That NYT article I cited shows what happens when your culture can freely harness the best brains. The modern methodology for evaluating catastrophe risk was created by a woman...
In Nature’s Casino
By MICHAEL LEWIS
nytimes.com
excerpt...
Thirteen years before what would become Tropical Storm Katrina churned toward Florida — on Monday, Aug. 24, 1992 — Karen Clark walked from her Boston office to a nearby Au Bon Pain. Several hours earlier, Hurricane Andrew had struck Florida, and she knew immediately that the event could define her career. Back in 1985, while working for an insurance company, Clark wrote a paper with the unpromising title “A Formal Approach to Catastrophe Risk Assessment in Management.” In it, she made the simple point that insurance companies had no idea how much money they might lose in a single storm. For decades Americans had been lurching toward catastrophe. The 1970s and ’80s were unusually free of major storms. At the same time, Americans were cramming themselves and their wealth onto the beach. The insurance industry had been oblivious to the trends and continued to price catastrophic risk just as it always had, by the seat of its pants. The big insurance companies ran up and down the Gulf Coast selling as many policies as they could. No one — not even the supposed experts at Lloyd’s of London — had any idea of the scope of new development and the exposure that the insurance industry now had.
To better judge the potential cost of catastrophe, Clark gathered very long-term historical data on hurricanes. “There was all this data that wasn’t being used,” she says. “You could take it, and take all the science that also wasn’t being used, and you could package it in a model that could spit out numbers companies could use to make decisions. It just seemed like such an obvious thing to do.” She combined the long-term hurricane record with new data on property exposure — building-replacement costs by ZIP code, engineering reports, local building codes, etc. — and wound up with a crude but powerful tool, both for judging the probability of a catastrophe striking any one area and for predicting the losses it might inflict. Then she wrote her paper about it.
The attention Clark’s paper attracted was mostly polite. Two years later, she visited Lloyd’s — pregnant with her first child, hauling a Stone Age laptop — and gave a speech to actual risk-takers. In nature’s casino, they had set themselves up as the house, and yet they didn’t know the odds. They assumed that even the worst catastrophe could generate no more than a few billion dollars in losses, but her model was generating insured losses of more than $30 billion for a single storm — and these losses were far more likely to occur than they had been in the previous few decades. She projected catastrophic storms from the distant past onto the present-day population and storms from the more recent past onto richer and more populated areas than they had actually hit. (If you reran today the hurricane that struck Miami in 1926, for instance, it would take out not the few hundred million dollars of property it destroyed at the time but $60 billion to $100 billion.) “But,” she says, “from their point of view, all of this was just in this computer.”
She spoke for 45 minutes but had no sense that she had been heard. “The room was very quiet,” she says. “No one got up and left. But no one asked questions either. People thought they had already figured it out. They were comfortable with their own subjective judgment.” Of course they were; they had made pots of money the past 20 years insuring against catastrophic storms. But — and this was her real point — there hadn’t been any catastrophic storms! The insurers hadn’t been smart. They had been lucky.
Clark soon found herself in a role for which she was, on the surface at least, ill suited: fanatic. “I became obsessed with it,” she says. One big player in the insurance industry took closer notice of her work and paid her enough to start a business. Applied Insurance Research, she called it, or A.I.R. Clark hired a few scientists and engineers, and she set to work acquiring more and better data and building better models. But what she really was doing — without quite realizing it — was waiting, waiting for a storm.
Hurricane Andrew made landfall at 5 on a Monday morning. By 9 she knew only the path of the storm and its intensity, but the information enabled her to estimate the losses: $13 billion, give or take. If builders in South Florida had ignored the building codes and built houses to lower standards, the losses might come in even higher. She faxed the numbers to insurers, then walked to Au Bon Pain. Everything was suddenly more vivid and memorable. She ordered a smoked-turkey and Boursin cheese sandwich on French bread, with lettuce and tomato, and a large Diet Coke. It was a nice sunny day in Boston. She sat outside at a small black table, alone. “It was too stressful to be with other people,” she says. “I didn’t want to even risk a conversation.” She ate in what she describes as “a catatonic state.” The scuttlebutt from Lloyd’s already had it that losses couldn’t possibly exceed $6 billion, and some thought they were looking at a loss of just a few hundred million. “No one believed it,” she says of her estimate. “No one thought it was right. No one said, ‘Yeah, $13 billion sounds like a reasonable number.’ ” As she ate, she wondered what $13 billion in losses looked like.
When she returned to the office, her phones were ringing. “People were outraged,” she says. “They thought I was crazy.” One insurance guy called her, chortling. “A few mobile homes and an Air Force base — how much could it be?” he said.
It took months for the insurers to tote up their losses: $15.5 billion. (Building codes in South Florida had not been strictly enforced.) Fifteen and a half billion dollars exceeded all of the insurance premiums ever collected in Dade County. Eleven insurance companies went bust. And this wasn’t anything like the perfect storm. If it had gone into Miami, it could have bankrupted the whole industry. Clark had been right: the potential financial losses from various catastrophes were too great, and too complicated, to be judged by human intuition. “No one ever called to congratulate me,” Clark says, laughing. “But I had a lot of people call and ask to buy the model.”
After Hurricane Andrew came a shift in the culture of catastrophe. “This one woman really created the method for valuing this risk,” says John Seo. Clark’s firm, A.I.R., soon had more than 25 Ph.D.’s on staff and two competitors, Eqecat and Risk Management Solutions. In its Bay Area offices, R.M.S. now houses more than 100 meteorologists, seismologists, oceanographers, physicists, engineers and statisticians, and they didn’t stop at hurricanes and earthquakes but moved on to flash floods, wildfires, extreme winter storms, tornadoes, tsunamis and an unpleasant phenomenon delicately known as “extreme mortality,” which, more roughly speaking, is the possibility that huge numbers of insured human beings will be killed off by something like a global pandemic. |
