California is facing several potentially devastating natural and human made risks. How does California, the government, how do private enterprises, individuals and communities deal with these threats? In our first contribution in the Special California Series, we have asked Mr. Alex Kaplan, an insurance expert of the second largest reinsurance company of the world, Swiss Re, to respond to some crucial questions. A short biography of Mr. Kaplan follows the following interview.
JRCC: Dear Mr. Kaplan, you are Senior Client Manager at Swiss Re and an insurance expert with substantial activities in California, can you give us a short introduction about the most important natural risks facing California?
Alex Kaplan: Purely from a catastrophic hazard perspective, earthquake is always the most evident in California. Of course, the State hasn’t experienced a significant quake in over 20 years. More recently, they’ve been dealing with climatic-associated risks, such as substantial drought risk, which may prove to be just as expensive as a large earthquake. Wildfire risk in the State is substantial and the costs are rising exponentially as over 60% of all new homes in the US are built in the “wild land-urban interface.” As a result, California spends on average $350m per year on wildfire suppression. Given the size of the State and the lives and assets at risk, the State really can’t afford to ignore any of these hazards.
JRCC: To what extent are these risks insured? Can you name and define the insurances covering these risks and give us the percentage of people and/or goods and infrastructure insured?
Alex Kaplan: Unfortunately, there isn’t a single, straight answer to this. The reality is that in California only 11% of residential properties are insured for earthquake risk. For commercial properties, the rate is much higher, but likely insufficient, particularly in the public entity space. Governmental entities are dramatically underinsured for earthquake risk. Infrastructure is largely uninsured. In the aggregate, a rough estimate is that 50% of large catastrophes would be covered by private insurance in an advanced economy, like the US. That said, the potential economic impacts from the uninsured portions could be staggering. We need to focus more attention on the broader financial impact to society, particularly as risks become increasingly interconnected.
JRCC: The insurance coverage for one particular risk with a potential devastating impact and a high probability of occurrence, the risk of a major earthquake in an urban area in California such as San Francisco or Los Angeles, is very low. How do you explain this phenomenon?
Alex Kaplan: I believe the greatest challenges we have in this regard are two-fold: risk perception and risk ownership. It’s clear that when it comes to catastrophic shocks individuals, enterprises and especially governments underestimate their exposure. We need to constantly improve our communications of these risks and how people and entities react to them before disaster strikes whether that be from hardening their homes to insuring their financial exposure. Regarding risk ownership, we seem to have developed a culture over the last several decades that regardless one’s personal exposure that someone else will pay for the damage. FEMA disaster declarations in absolute numbers have tripled since the 1970s. Over the last several years, FEMA has exceeded their budget three-fold on an annualized basis. We cannot assume that the trend of disaster assistance will continue in its current form; it is unsustainable. Simply put, expecting a bailout from the government is not resilience. We must own our risk.
JRCC: What do you think should be done in order to convince more people to get an earthquake insurance?
Alex Kaplan: By nature I think we all have a tendency to “lower our guard, “so to speak, the further we get from a historical event. We have to remember that these events have long-lasting impacts. So, a consistent engagement of the community to communicate the risk is key. We also have to be sure the industry is offering solutions to truly meet the needs of its customers. I don’t believe there is a single culprit for the poor take-up rate, but affordability is certainly one. Can we offer solutions that may address a different need during a crisis? In the absence of a higher take-up rate amongst individuals, I do believe that governments can and should insure their exposure to address both the direct and indirect costs of a disaster. For example, if 88-90% of residents are uninsured, what is the chance that they continue to have the capacity to pay taxes or consume goods and services within that city? Governments can certainly protect against this exposure.
JRCC: Natural risks have a direct impact on other risks such as those we commonly define as human made risks. Which are the human made risks that you would classify as very important in California?
Alex Kaplan: I’m not a casualty expert, but I would point out from a broader societal perspective, the exposure of the agriculture industry in California is a national concern. California is the 5th largest agriculture producer in the world, so the drought they are facing now should be on everyone’s agenda. Man-made wildfires also come to mind. The theme here is that California’s climatic exposures have a tremendous implication to the broader economy and we better spend some time implementing risk reduction measures.
JRCC: Risk communication should come from all stakeholders facing a certain risk. Are there examples of joint public-private risk communication campaigns in California?
Alex Kaplan: Communicating the risk is important, but communication tied to action is critical. One initiative that comes to mind, which I believe is world class is the seismic retrofit financing program run by the City and County of San Francisco. This program doesn’t just help people understand their risk, but provides them with the tools to change their future. This allows property owners to finance seismic improvements with competitive rates and is seeing great success.
JRCC: In the absence of individuals taking up insurance for their risk, what else can be done?
Alex Kaplan: Globally, approximately only 30% of the costs of disasters are insured. The remaining 70% falls on the back of society. The overwhelming majority of that uninsured risk falls on government. There is a strong trend of public entities partnering with the industry to transfer this risk off the back of taxpayers and into the private market. Swiss Re has taken a lead in this arena in developing innovative solutions to address the unique needs of governments to soften the long-term impact of these inevitable events. Just as we place attention on physically improving our risk, governments should also be developing comprehensive pre-event financial plans to reduce the duration and challenges of recovery.
JRCC: Mr. Kaplan, thank you very much for this interview.
Alex Kaplan is Vice President of Global Partnerships for Swiss Re developing and executing innovative risk transfer solutions to help governments, international financial institutions and NGOs at all levels manage their financial risks to help society create effective responses to major challenges, including natural catastrophes, climate change and food security as well as infrastructure, healthcare and longevity.
Kaplan joined Swiss Re in 2008 as Vice President of Regulatory Affairs representing Swiss Re’s commercial interests before governors, state insurance regulators and legislators as well as members of Congress and appointed members of the Federal government.
Prior to joining Swiss Re, Kaplan served as the Deputy to the Assistant Secretary for Legislative Affairs for the United States Department of the Treasury under Secretary Henry M. Paulson in August 2006. His responsibilities included managing the Office of Legislative Affairs for the Assistant Secretary and advising on all personnel, policy, and legal issues. Kaplan focused on leading Treasury nominees through the U.S. Senate confirmation process; advising on a wide array of Treasury policy matters; and contributing to the Treasury Secretary’s strategic planning.
From 2002 to 2006, Kaplan served as the Manager of Government Affairs of the Organization for International Investment (OFII), a Washington D.C.-based business association representing US subsidiaries of foreign companies. Prior to joining OFII, Kaplan was a Senior Staff Assistant on the Committee on Ways and Means in the U.S. House of Representatives working on tax and economic policy.
Kaplan holds a Bachelor of Arts degree in Economics from Hobart College in Geneva, New York.
About Swiss Re:
The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Dealing direct and working through brokers, its global client base consists of insurance companies, mid-to-large-sized corporations and public sector clients.
08/06/2015 JOURNAL OF RISK AND CRISIS COMMUNICATION