Today’s Risk Environment

Stewart: Welcome to another edition of the InsuranceAUM.com Podcast. My name is Stewart Foley, I'll be your host. We've got a really special guest for you today. By far, the most famous person we've ever had on this podcast, Juliette Kayyem. So just to give everyone an idea, Juliette, you are an on-air personality, CNN senior national security analyst, Pulitzer Prize finalist and contributing writer for The Atlantic and Boston's local NPR station. You have worked in government, you've been in the Obama administration. The accolades go on. You are also a professor at Harvard. You went to Harvard undergrad and grad, and you serve as the faculty chair of the Homeland Security and Security and Global Health Projects at Harvard's Kennedy School of Government. So, thank you so much for being on.

Juliette: Thank you for having me.

Stewart: How this originally started was my good friend and advisor, Bill Poutsiaka, actually sent me your article in The Atlantic and said, "This is the first mainstream article I've ever seen that links insurance and climate risk." And I was actually in my car or something, and I found your contact link on there and I said, "Hey, would you do a podcast with us?", not seeing your background. Had I seen your background, I probably wouldn't have. Honestly, and you were so kind. You were like, "Oh. Yeah, of course, I'll do it." I said, "Oh, it's amazing." But since then, the Israeli war broke out and you have been all over the place talking about that. So, what I'd like to do, given that our audience is overwhelmingly insurance investment professionals, is to try to talk about, and you used a term before we started, the threat environment, right?

Juliette: Yeah.

Stewart: We're going to touch on the Israeli conflict, the Israeli war, and we're also going to talk about climate. So, I would ask our readers to buckle their seat belts and just to kick it off, as well known as Israel is in their capabilities for intelligence and military preparedness, it seems that they did not detect this threat. And I'm wondering how that can be and what you can tell us about it.

Juliette: So these aren't that different of topics in the sense that I spend my time thinking about risks and then response. And unfortunately, what we've all been encountering the last week is a lot of both. So I do serve on CNN, but I also am a contributing writer at The Atlantic. And so I wake up Saturday morning, last Saturday morning, to a phone call, this sometimes happens at 5:40 in the morning, saying, "Can you get on air by 07:00?" And I don't know what's happened. So I was like, "What's it about?" They go, "Check your phone." So by 07:00, based on my experience I'm able to comment on something, and that experience includes having Israeli leaders come to the Kennedy School doing training, doing lots of writing on preparedness and counterterrorism. That's where I started my career was counterterrorism. Was just the shock of how bad two aspects of the early days, so the first 48 hours were.

Obviously as, and we may learn more later, but at least as it appeared that Israel, this was a surprise attack. And it wasn't like one bomb or one person. This is a thousand people coming by land, by sea, by air, overwhelming Israel's defense capabilities in one fell swoop, including their communications capabilities. So, they were blind and deaf during these early days. So that's the first piece. Like, how does that happen? And there's lots of explanations. Did they rely too much on the Iron Dome and thinking that they could do defense only, didn't pay enough attention to Hamas and human intelligence. Was Netanyahu distracted by his coalition and his desire to stay in power? And just to be clear, Israeli discussions are much more nuanced than sometimes we get in the United States. He's in deep political trouble. The last poll I saw, 87% of Israelis blame him. The sense that he basically asked Israelis for more powers and the quid pro quo was, "You're going to keep us safe." And this is clearly an intelligence failure.

But in that piece, I also said, "We have a tendency to call this an intelligence failure. It's an everything failure." The 9/11 analogy for Israel, I understand it in terms of its before and after aspects, before 9/11, after 9/11. But Israelis have always existed and still exist with the threat of an attack that would be existential in nature. So we didn't before 9/11 here in the US. And so the other piece of this in terms of the everything failure was the response. And The New York Times subsequently has done an hour-by-hour breakdown. It's one thing to not expect a danger, it's another to have such a slow response that basically Israelis were left to try to either hide or fend for themselves or get killed. Not just an hour, you're talking 4, 5, 6 hours, in some instances over 12 hours for this very sophisticated army that we always hear about, the IDF, to get to, Israel a very small country, and protect its citizens. So both things were a shock to the system. And I think a shock for Israelis. The Israelis are going through, I think, an existential crisis, because of this.

Stewart: Yeah, I think that's very well put. And my understanding is that there were multiple breaches of the barrier, a coordinated multiple breaches. And I wonder, in what ways does this situation diverge from previous conflicts that Israel has faced? And you mentioned the 9/11 comparison. Can you talk a little bit about how you think about that?

Juliette: So, the sophistication of this in terms of the attack, a thousand Hamas terrorists, that's a lot of people to not have a leak, in that, sense in terms of what Israelis know. And also, because the conflict has always been ongoing. It's not like it's a surprise. Hamas was/is the governance structure in Gaza. We don't like it, but there were strategies even by the Israelis to turn a blind eye to what was happening in Gaza and the concerns in Gaza, not justifying the terrorism, but just you can't think that this comes out of the blue in terms of the Palestinian crisis. So part of what is going on in terms of the geopolitics is of course Israel trying to ignore the Palestinian issue and have better relations with the Arab nations. Whether it was Jared Kushner and the deal that he tried to strike or ongoing conversations between Saudi Arabia and Israel now that are being facilitated by the United States.

And so this idea though... So I think what's been proven as impossible is that Israel cannot solve the Arab problem without addressing the Palestinian problem. And I want to make clear to listeners, the Arabs are horrible too. In other words, and I get to say this, because I'm Lebanese, but the idea that Egypt can't freaking open up its corridor right now, I'm talking to you at a time when Egypt keeps promising it's going to open up the southern corridor to let Palestinians out who have been evacuated. It just shows that neither party, the Arabs as a whole, although there's many Arabs, or Israel is that interested in solving the Palestinian problem. The problem is, it's a 2 million plus problem. It's not like 5 people. And so someone is going to have to take that seriously, and any deal with the Arab states is going to have to take the Palestinian issue seriously.

Stewart: So, one of the things that was concerning to me has started to happen, which is Hezbollah begins to attack from the north. I am not in any way an expert in this area, but what concerns me is escalation. And you see, you say; well, now you've got Israel dealing with Hamas and Hezbollah, and you've got Iranian involvement, allegedly. I don't know. And up until this point, the bond market has shrugged it off. Not much reaction. Rates are up significantly, meaning the bond market is more worried about inflation than it is about this getting dramatically uglier. And is there a scenario in your mind in which the US gets more involved here to include boots on the ground? It seems like there's a risk. I don't know. Tell me.

Juliette: No, and look, things are changing hourly. So even by the time you post this, God knows, but at least from the... We're talking on Monday, October 16th, at least from the tea leaves from this weekend, there has been no massive ground invasion. Apparently, the Israelis have turned the water back on. There's a lot of shuttle diplomacy going on. That's twofold. One is to make sure that this does not get bigger in terms of Hezbollah, Iran and others. In the, "I'm looking for good news," front, the good news is, is that the Palestinian authority has condemned the Hamas attack, and the Iranians basically did. They're abandoning the terror that they've supported for so long. So that's good news, and it probably helps that we have two big ships out there. So that's one piece this weekend.

And I think the other is tempering of talk, then that's important. In the early days, Israeli leaders, including its president who's known to be a little bit high temperament than Netanyahu, were basically saying this is something they'll never forget. That's a threat that you worry about in terms of Palestinians, but I think that the idea is that Israel has a narrative now that it'll lose if it indiscriminately kills lots of Palestinian children. And God knows how that unfolds. This is a humanitarian crisis. I don't have the perfect solution for how Israel solves this, but I'm pretty confident that an indiscriminate air and land campaign against innocent Palestinians is not the way to make Israel safer.

Stewart: And are there ethical considerations when you talk about Israel's counter-terrorism efforts? It's such ugly business that is going on here, and I could see how passions could boil over, but it sounds like you're saying that there is tempered language and that you think that that's a positive sign.

Juliette: Yeah, I do. I do. Look, I'm looking for tea leaves here, but I think that the fact that Blinken is still there, I think the fact that the President is willing to publicly talk of tempering. It's like in the politics of this, it seems conceivable to state the obvious that the Hamas attack in Israel was a horrible terrorist attack and condemn it, and also state that indiscriminate killing of Palestinian children and women and others is probably not a good long-term solution. And I think the humanitarian crisis, and that doesn't even speak to the humanitarian crisis.

So I think that's right, and I think people are realizing that. You don't want to fall into war. What's the goal? What's the mission? And the mission is to get Hamas leadership, does it have to be an indiscriminate air campaign or even land campaign? And I do think military leaders in Israel are also recognizing like, yeah, Gaza is four miles wide. The people can hide, in very dense populations, couple hundred miles of tunnels. This is not going to be easy. Israel can cause pain easily, but the idea that this is obvious and obviously at no cost to Israel is just ridiculous and shameful for US leaders to say so. I mean critics of Biden to say so.

Stewart: So, at the risk of trying to do the most difficult segue in ever, I want to talk about why we originally connected, which is climate and insurance. And you wrote a wonderful article in The Atlantic talking about some very important issues. And I have some things to just discuss there as well. And I'm mindful of the time that we've got together and so forth, but how is the increasing frequency and severity of climate-related disasters, wildfires, mudslides, et cetera, affecting the decision making process of insurance companies regarding coverage and premiums in the high risk areas that you pointed out, in the Sierra Foothills as an example? Can you talk a little bit about that?

Juliette: Yeah. No, so this piece came to me... So I'll tell your listeners, so I'm a disaster management person, crisis management, and I always say I'm a consumer of intelligence, whether it's terrorism or climate or whatever. But obviously because of that, I've just spent a lot of time in the climate space and had been hearing about insurance and whatever. And then there were the big stories this summer about California or this spring and thought, "What's interesting about insurance," which I'm sure you find it is, "it's like this invisible hand that causes us, as individuals, to make all sorts of decisions or as a society," but we're not really talking about it as such. And in this way, it's very similar to credit rating that we've come to understand that how we decide to give people credit ratings has an impact on their ability to get cars or houses or whatever else. But we don't talk about it that way, we just sort of... We don't see it that way. We don't see its impact.

And I don't have to tell you, or people listening, insurance is really interesting, and I fell down the rabbit hole. I'm telling you now. My entire family was like, "You need to get out of it." I was so in the depths of insurance. So, let me now try to step back, or at least what I was able to write.

What was interesting to me, and I looked at California as an example, is that California had built an insurance regulatory scheme that was very progressive in the sense of both being pro-consumer, consumer protections. And that meant that it was very hard for insurance companies to make changes, you know all those specific laws, or to, even the most interesting piece, to utilize scientific modeling to assess risk in the future. So that was viewed as consumer friendly. And I sit here... And then, in the backdrop, is the most environmentally friendly state in the country. No one's going to doubt that the domestic, that the state's leadership believes in climate change, knows that things are bad. I mean, my God, the fires and the winds and everything else.

So to me, that was the backdrop. Like here's a blue state, it's easy to go after red states, they're not accepting the risk anymore. Here's a blue state that understands the narrative, but has another narrative which is consumer protections. And it just struck me, as I said, in that line I said “Consumers also love their children.” The idea that consumers should not understand the risks that they were undertaking or that they were living for, because the insurance market wasn't allowed to do it, seemed to me something worth exploring. And also because in the progressive community, of which I consider myself one in terms of most of my politics, insurance companies are easy villains. Like, "Oh, they're bad. And they do…

Well, my point is they may be the canary in the coal mine, but why are you blaming the canary? They're not the problem. And so basically it was they're telling us something that we better listen to, which is our state regulatory schemes that are set up, because we do this state by state here, that the state regulatory regimes are muting an important message, which is how do we want to build? How do we want to rebuild? How do we want to assess risk?

I was glad that after the piece came out, which I hear was circulated in California circles, that the California insurance system has gotten more flexible, that there's been a deal struck that does allow for greater, more obvious risk assessments. And I think that's the way we're going. The long-term solution is a little bit more complicated, because the more disasters that there are, the more it will be hard to get insurance. And so there's lots and lots of playing around with new types of schemes, parametric insurance, catastrophic insurance, bonds, whatever it is to try to protect communities that are already exceptionally vulnerable. And then at the end of this, a very long introduction to the piece, is should we be taking managed retreat? Which is a way in which you pay people to move away from risk, should we be taking it more seriously?

Stewart: I've been in this business a minute, as you can see by my enormous amount of gray hair, and I have had some really terse conversations with people socially who just take swipes at the insurance industry. I love the insurance industry. I'm a big fan. And the way that I typically end these arguments successfully, by the way, win these arguments, is to say, "How much would you accept to insure my million dollar home in the Sierra Foothills, that if it burns to the ground, you are going to write me a check to cover all my belongings, the real estate and all my cars and everything else?" And when you start thinking about the risk that the insurance carriers are taking on, you're right, it is not the canary. The insurance industry, as I always used to say to my students, I'm like, "When the wind blows and the hail comes down and whatever, it's the insurance industry that shows up with a checkbook." Just keep in mind.

Juliette: No, it's so true. The story opens with a woman who has lost her insurance-

Stewart: Beth Pratt.

Juliette: ... her insurance plan. And when she's-

Stewart: Beth Pratt, is the woman.

Juliette: Yeah.

Stewart: Right?

Juliette: Yeah. But Beth says to me, it didn't make the article, "I just want to make it clear, I love my insurance guy." These are people that have been around and she's trying to figure out how to assess risk. Every state has a public insurance system of last resort in many states, or at least in Florida, it's starting to become the insurance system of first resort, because smaller insurance companies have gone out of business. They can't satisfy claims. Yeah, so the whole system is, I'll relate it to my book, my book is called The Devil Never Sleeps, about how disaster management policies have not kept up with the changing risk environment, which includes climate. That insurance is the same way, that the people who are thinking about; how do we insure? How do we assess risk accurately? And whether we don't start to say, "No, you can't live there," that's a public policy problem. It's not an insurance problem. The insurance is just filling the gap where public policy is unwilling to go.

Stewart: And one of the things I found astonishing is that there's regulation in California that prohibits insurance companies from using statistical modeling to assess future risks, which I thought was... The insurance industry is the original user of big data. And at the end of the day, I don't understand how in the world you're expected to price a risk if you can't use the techniques that are commonly used to figure it out.

Juliette: And we're the people, we being more blue than red people, who have spent two years saying, "Follow the science," And then when the science says people shouldn't live here or the fire risk is high or whatever, we say, "Well, you can't use that." The hypocrisy was just... Look, there's a consumer protection aspect to a lot of these rules that now has to be reassessed, rethought through in light of what's going on in the environment.

Stewart: And it's totally acceptable... Well, maybe I'm being presumptuous, but it's totally acceptable that if you're a terrible driver and you have an accident every six weeks and you have about 29 tickets, that you're going to pay more than the person who doesn't. I grew up in rural Missouri. There were areas that flooded out every couple of years, and those people would move right back. And it's like; at what point is there some responsibility to say, "Listen, the risks are just too great to live here", which is interesting. We're coming up on time here and I've got a fun question for you that I want to bring up. But what would be a takeaway for our audience on the Israeli war and what would be a takeaway on climate?

Juliette: Okay. So a theme of my book in writing disaster management is that we have to learn to “Fail safer.” And I use that terminology. If my work had a bumper sticker, it would be fail safer, which is our standard of success has to be measured as essentially less bad, because the bad thing has already happened. And in many ways, I'm looking at things now and thinking, "What's my fail safer metric for the Israeli-Hamas issue right now?" And it's just that this does not get bigger, that if we can keep other countries out, we can keep the US out, in the sense of military action, that is good. And then when I think about climate, I think about...I want all those smart people who are mitigating climate change, who are creating new industries that are more environmentally friendly, that are... I like the public policies that are promoting green living. I like being forced to compost. I live in Cambridge. We're handed compost bins, so that we're in some ways guilted into doing it. I would've never done it unless it had arrived at my house. I like all that.

But also we have to be able to measure success by; are we failing safer? In other words, are we minimizing the harms that are sure to come to pass? And this is where insurance comes in, which is, we know the data is absolutely clear that if insurance coverage can demand certain behavior by homeowners, certain roofing, certain ways that they're the landscaping, whatever it is, certain zoning rules, like all the things that we can demand through the market condition, that when the bad thing happens, it happens less bad. Paradise did not have to have the kind of fatalities, the kind of damage it did. And in fact, post-Paradise California assessments show that with just basic changes to how people live and how they build, changes that could have, should have been brought about by insurance and disaster relief and all the mechanisms we can use to drive behavior, that not only would property have been saved, but lives would've been saved. So that's how I... Maybe success now is just measured on; can we learn to fail safer? And insurance companies seem to be in the right place on that. Insurance exists, assuming the bad.

Stewart: That's very well put. Great job. That was outstanding, really. So, this podcast has been a little bit different, Juliette, because I usually ask some fun stuff on the front end, and it's an icebreaker, and we didn't need that this time. But on the way out the door, we tend to ask the following question, you have a choice, you can take either or both. Lots of people take both, no pressure. What's the best piece of advice you've gotten or given? And who would you most like to have lunch with, alive or dead?

Juliette: I should be hoity-toity about the second one, but I really feel like I would've liked to have met Prince. Anyway, that's an aside, but I feel like he was such a genius for our time.

Stewart: That's great. That's cool. What a great answer.

Juliette: So, that's not interesting.

Stewart: I think it is.

Juliette: That's not deep. That's not deep. The advice I give my students, especially if you want a life, or not a life, but I hadn't designed my life this way, but just if you're interested in being spaces that are controversial, if you have a public voice, if you have a persona or you engage in areas that are complicated, I always say two things. One is stick to your lane. I think it's been particularly important in the Israeli... There's a certain piece of this I know very well, but the idea that I'm going to solve the problem, because then you can have an authoritative voice. But the other is, in crisis management, I always say it's not about you. There's no you in crisis management. There's an I, but no you. One has to realize that, and I'm sure insurance people who work in insurance realize this too, people are angry. They've lost the most valuable things around them and if they're lucky, they've only lost things. They are angry. Generally they are not angry at you, and so your job is to recognize that. And it can be hard to do. And I imagine that your industry faces that too. You're working hard, you're trying to do good, and people are just angry. And it's like that... Sometimes, it's just not about you.

Stewart: I can't thank you enough for being on and taking the time. You are crazy busy. You were on air this morning. You're going to be on air in a minute. You're so kind to take a moment out to be with us.

Juliette: It was my pleasure. I saw your emails, it was before all this. I was like, "I'll talk about insurance anytime." I'm thinking about my next book, and I don't know. I don't know if my family could tolerate me diving into insurance any longer, but I find it fascinating. So for your listeners, thank you for what you do. There may be disagreements, but people depend on you to help them fail safer.

Stewart: Absolutely. And I love the industry. I've been in it for a long, long time, and it is a very good group of people that manage money. The people who I know are the ones who typically are managing money, whether they work at an insurance company or at an asset management firm. And if you were to meet this community, and it is a community for sure, I think you'd be really impressed with not only how intelligent the investment or how complex the investment decisions are, but also, there are just a lot of really good people in this business, and I feel fortunate to be apart of it.

Juliette: Oh, wonderful. Well, thank you so much.

Stewart: Yeah, my pleasure. We've been joined today by Juliette Kayyem, who is an on-air CNN senior National Security Analyst, Pulitzer Prize finalist, and contributing writer for The Atlantic. Thanks for listening. If you have ideas for a podcast, please shoot me a note at podcast@insuranceaum.com. My name's Stewart Foley, and this is the InsuranceAUM.com Podcast.

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