Category Archives: Disaster Preparedness

Federal Reserve’s Randal K. Quarles and the I.I.I.’s Sean Kevelighan talk resilience – financial and otherwise

 

By Lucian McMahon

“It’s a mistake to try and think of resilience from the point of view of trying to predict what can happen and then to respond to a predicted event, because you won’t know what’s going to happen,” said vice chairman for supervision and member of the Board of Governors, Federal Reserve System Randal K. Quarles at the Insurance Information Institute’s (I.I.I.) 2019 Joint Industry Forum. “The important thing is to ensure that you have measures in effect […] that promote resiliency no matter what might happen.”

Left to right: Sean Kevelighan and Randal Quarles

Resilience is more than prevention

In his conversation with the I.I.I. CEO Sean Kevelighan, Quarles stressed that financial stability depends on resilience, the ability to absorb system shocks no matter their source. “Wherever the shock might come from, it’s important that the institution or system is resilient to shock,” he said.

Cyberrisk is a perfect example. Quarles noted that a lot of the discussion around cyberrisks is about prevention. But he argued that prevention is only one part of cyberrisk resilience. “A key element to resilience is to assume that something will happen, and then determine how you have constructed a system that can stand back up, withstand, and respond to that shock.”

The U.S. economy appears to remain resilient during recent events

Quarles noted that the data on the real economy remains strong. Job creation continues. There’s been an uptick in the labor force participation. The economy is growing without unconstrained inflation.

But what about the recent stock market fluctuations and the ominous financial news coming out of Europe and Asia? “I think recently financial markets have been reacting to a few things,” Quarles said. “Mostly it’s doubt in the strength of continuing global growth. Some of the data that’s come out of China and Europe would suggest a little bit of less growth in the near term.”

Nonetheless, Quarles pointed out that markets might be more attuned to downside risks. He is confident that the core fundamentals of the economy remain strong. “The fundamental fact is that the financial sector is much more highly capitalized, has more liquidity, than it had before the crisis. Our assessment of risk to stability in the current environment is moderate.”

Quarles acknowledged that certain global events (particularly recent threats to trade openness) could impact the financial sector. The Fed, however, is alert to it. Quarles remains optimistic. “The hope is that a lot of these current events, current issues, will be way stations on the way to a more stable, more politically-supported open economy. It’s in everyone’s long term interest.”

In other words, the hope is that the economy is more resilient to shocks than it had been in the past.

I.I.I. Joint Industry Forum Town Hall: How Insurance Can Help Build Resilient Communities

By Sean Kevelighan, CEO, the Insurance Information Institute

 

For centuries, the insurance industry has helped communities and individuals rebuild after losses and catastrophes. But as the threats of natural catastrophes grow, the industry is well-positioned to do more than just help rebuild shattered lives. We can help lessen the impacts of natural catastrophes before they even happen. At the I.I.I. we call it “resilience” – stronger homes, better emergency response, better risk management tools.

I am pleased to say that the insurance industry is already leading the way forward in helping to build resilient communities. At this year’s I.I.I. Joint Industry Forum, Mitch Landrieu, former lieutenant governor of Louisiana and two-term mayor of New Orleans, led a townhall discussion on resilience – what it means and how insurance can help.

Landrieu was joined by some of the top insurance experts in this space: Phil Klotzbach, research scientist, Department of Atmospheric Science at Colorado State University and I.I.I. non-resident scholar; John Rollins, FCAS, MAAA, actuary, Milliman; Keith Wolfe, president, U.S. Property & Casualty, Swiss Re; Roy Wright, president and CEO, Insurance Institute for Business & Home Safety; and Rohit Verma, global chief operating officer at Crawford & Company.

Landrieu himself knows a thing or two about the power of resilience. He was on the ground when Hurricane Katrina hit New Orleans and he helped lead the effort to rebuild the city in the aftermath.

I was especially struck by how the storm changed his entire mindset around preparedness and resilience. “It shifted from hoping something bad wasn’t going to happen to expecting it to happen, and to building social and physical resilience and to prepare ourselves, so that if something happens we’re stronger and in a better position to respond.”

Unfortunately, this story is all too common: people often only appreciate the need for resilience after the disaster. The insurance industry can and should change that.  Our panelists pointed out several ways insurance can help build community resilience:

  • Improving catastrophe modeling to identify and quantify exposures to help insurers, policymakers, and consumers make resilience-focused decisions.
  • Educating consumers to better understand the risks they’re exposed to – and what kind of insurance they need to protect themselves.
  • Encouraging consumers to invest in mitigation through premium discounts and other incentives.
  • Working in public/private partnerships with local and state governments for insurance affordability and community mitigation initiatives, including better building codes to create a more resilient built environment.

But there are many hurdles still to overcome.

  • Mitigation can be expensive for some risks. For example, installing wind-resistant roofs is relatively affordable and easy to do. But elevating already-built houses above flood levels is another story entirely.
  • Catastrophe models are increasingly viable for some risks (like flood), but not others (like wildfires).
  • Many consumers are still in the dark about how their insurance works. Take flood: 43 percent of homeowners incorrectly think they’re covered for floods. And only 15 percent of homeowners had flood insurance.

A resilient America won’t be built in a day. But the insurance industry will be a crucial player in making our communities ready – so that when the next hurricane hits, the next wildfire breaks out, or the next earthquake strikes, there is less that needs to be rebuilt and more people whose lives and livelihoods were saved from destruction.

Everyone wins – insurers, insurance customers, and society – in a more resilient world.