Here is an interesting piece from NY Times on some familiar issues we have been dealing with in the OEP research. 

The record storms and floods that swept through the Midwest last month struck at the heart of America’s corn region, drowning fields and dashing hopes of a bumper crop. They also brought into sharp relief a new economic hazard. As America grows more reliant on corn for its fuel supply, it is becoming vulnerable to the many hazards that can damage crops, ranging from droughts to plagues to storms.

Apparently the price of ethanol went up by 19 percent in a month after the floods. The article goes on to construct a scenario that can take place once the share of biofuel in the overall supply of gasoline goes up to 20 percent:

Experts fear that a future crop failure could take so much fuel out of the market that it would send prices soaring at the pump. Eventually, the cost of filling Americans’ gas tanks could be influenced as much by hail in Iowa as by the bombing of an oil pipeline in Nigeria.

Just as in the case of OEP once again a catastrophic event (storm and flood) in a medium inherently governed by stochastic processes (the weather) problematized as a potential threat to the stability of the economy as a vulnerable system (eventually leads to the question of resilience again as we saw in the case of war mobilization and inflation problem by the early 70s under Nixon). As the article argues, introduction of biofuel leads to a new level of vulnerability:

Hurricanes Katrina and Rita interrupted a quarter of the nation’s oil production and closed dozens of refineries for weeks. Lines formed for the first time since the 1970s as gasoline spiked above $3 a gallon, a record at the time. The nation’s increasing dependence on crops for motor fuel adds another level of vulnerability from the weather.

I thought what is particularly interesting in this case is the opening up of a blockage as we pass a threshold with the emergence of biofuel. To my knowledge this is a very new development as corn, a conventional and critical source of food for populations is becoming a source of energy as the seemingly stable barrier between these two categories of vital domains are being linked for the first time as we demolished the barrier separating these two domains. Now we face with a new interface that is in need of being governed as one can even see in the concerns that IMF and World Bank have expressed their worries about this new phenomenon recently.  It seems like at a technical level the first 3 generations of biofuels, there is nothing new about the process of transforming biomass into biofuel. It is a simple process of production of ethanol. However, what is interesting is that a company called Synthetic Genomics is is genetically engineering microorganisms to produce fuel directly from carbon dioxide on an industrial scale, which might be a possible solution to the problem of vulnerability mentioned above. I believe the founder of the company might be a familiar figure to those who are working on synthetic biology: Craig Venter, a member of the effort to map the human genome and the founder of The Institute for Genomic Research. An interesting convergence of VSS and Synthetic Biology and Nanotechnology blogs...

An interesting article in Time magazine on response to floods in Tabasco reports that the Mexican Government did an admirable job when compared to the response to Katrina in the United States. Among other things, it seems that the military was out in force two days before the worst of the flooding, and was constantly running rescue operations during the entire event -- a stark contrast to New Orleans, where, as we know, getting military and national guard rescue into gear was problematic and slow.

Fantastic, informative article in NYT Magazine takes a peek at 'cat bonds' -- or catastrophe bonds -- and the argument for pricing insurance in accordance with more 'realistic' models of risk, for example for hurricanes or disasters. Interesting, compelling, and well-written... I don't like being so cynical but it almost has one believe that the insurance industry can play a socially useful role in solving the problem of risk mitigation: by encouraging people not to build and live on fault lines or in highly vulnerable hurricane zones -- or by pricing insurance sans state subsidy in such a manner as to cover actual losses as opposed to the fantasy losses that the industry, pre-Katrina, historically pre-supposed. All of this sounds great if it didn't ignore the fact that at a population level those most vulnerable to extreme disasters are to be found in the lower strata of the social class and SES registers. There is also a pretty heavy correlation between race and vulnerability to extreme events. Just thinking out loud here, but it seems there are at least two parallel discussions going on here in the area of catastrophic insurance: On the one hand are those discussions which focus on the specific techniques and practices around insurance which are introduced and made viable (and visible) in discourse and policy without reference to a number of salient elements such as social class, race, etc. On the other hand, there exist a number of critiques which point almost exclusively to 'the social' -- to social disadvantage, the reproduction of oppression, and inequalities in a number of domains -- to explain the root 'causes' of disasters (and offer a way forward) without specific reference to the very rationality and techniques which parse the world into (usually predictable) risks and rewards. This is maybe a crude second-order observation to be considered in light of Stephen's flag of the Kunreuther piece.

Howard Kunreuther, one of the major figures in insurance and catastrophe risk in the United States, has an op-ed in today's Times about hurricane insurance post-Hurricane Katrina (he has also co-edited a book on risk and natural catastrophe post-Katrina that is worth a look). Apparently, State Farm, the major insurer for flood risk in the area, has decided to stop selling policies to homeowners in the area. Thus the question: Who will cover loss for the next big hurricane? This has been a topic on which Kunreuther has been focused since at least the late 1960s, when attention in the United States began to turn to the question of increasing catastrophe risk as people moved into more risk-prone areas, and the role of government in promoting this "risky" behavior through compensation or cheap loans after the event. (Some studies showed that people ended up better off financially, at least in some cases, after natural catastrophes than before.) The prescriptions now are the same as the prescriptions then: better evaluation of catastrophe loss risk, pricing of insurance to reflect that risk, and individual decisions about what kinds of risks they are willing to take, and what kind of premiums they are willing to pay. Kunreuther adds a proposal for vouchers that would help low-income households pay for insurance, which, he holds is vastly preferable to blanket subsidies which mask the real risks assumed by location decisions. I blogged on a similar topic some time ago, concerning the Army Corps efforts to disseminate information about flood risk in New Orleans through new visualizations based on the web. Kunreuther is offering a broader overview of what might be called a neo-liberal apparatus of catastrophe risk management through the calculative choices of free actors. Sounds pretty good to me. Read on for the full op-ed:

Op-Ed Contributor

Who Will Pay for the Next Hurricane?

By HOWARD KUNREUTHER

Philadelphia AS the second anniversary of Katrina approaches, residents in hurricane-prone areas are still concerned that they cannot obtain insurance to cover damage to their homes from future disasters. Specifically, the decision by State Farm, Mississippi’s largest insurer, to discontinue selling new policies on homes and small businesses there has sent shock waves beyond the state. Banks that normally require homeowner’s insurance as a condition for obtaining a mortgage are also not sure what impact this will have on their clients’ ability to buy such coverage. The insurer’s motivation is economic. Rates are regulated by the states, so insurers are often restricted in the premiums they can charge. In addition, State Farm faced a lawsuit contending it was liable for flood losses from Hurricane Katrina. Homeowners’ policies cover only losses caused by wind in such storms; flood coverage is provided by a separate policy as part of the National Flood Insurance Program. The state of Mississippi, however, charged that insurers were responsible for hurricane damage from Katrina because surging floodwaters were caused by the wind. State Farm eventually won the case, but it was a costly process and led to its decision to discontinue selling new policies. State Farm’s decision is only the tip of the iceberg of a much broader problem: how this country can reduce future losses from natural disasters and aid victims in their recovery efforts. Because of increasing development in hazard-prone areas and the effects of climate change, we are in a new era of catastrophic losses from natural disasters. Ten of the 20 most costly natural disasters have occurred during the past five years — all 10 of them hurricanes, typhoons or tropical storms. The four hurricanes in Florida in 2004 (Charley, Frances, Ivan and Jeanne) collectively totaled more than $29 billion in insured losses; Hurricane Katrina is estimated to have cost insurers and reinsurers $45 billion. At the same time, victims have complained about receiving substantially less than the actual costs of rebuilding or repairing the damage. Many have turned to the Small Business Administration for low-interest loans; however, a property owner is eligible for a loan only if he or she can show the ability to repay it. Hence, low-income residents must find other assistance. We need a new approach to financing the costs of natural disasters and to encouraging individuals in hazard-prone areas to undertake mitigation measures. Two principles, which appear to conflict with each other, are guiding a large-scale research study being undertaken by the Wharton Risk Center in conjunction with Georgia State University and the Insurance Information Institute (as well as with firms and organizations from the public and private sectors, some of whom pay for this research). Principle 1: Risk-Based Premiums. Insurance premiums should be based on risk to encourage individuals to reduce their vulnerability to catastrophes. Principle 2: Dealing With Equity and Affordability Issues. Any special treatment given to lower-income residents in hazard-prone areas should come from general public funding and not through artificially low rates. Principle 1 is important because it provides a clear signal of relative risk to those living in areas subject to natural disasters, as well as those who are considering moving into these areas. Risk-based premiums also enable insurers to give discounts to homeowners and businesses who invest in cost-effective loss-reduction measures. If the premiums are not risk-based, insurers have no economic incentive to offer discounts. In fact, insurers forced to charge artificially low premiums prefer not to offer coverage because it is a losing proposition in the long run. More generally, those living in hazard-prone areas should have safer structures and buy enough insurance to cover their losses from a future disaster. Principle 2 reflects a concern for low-income residents in high-hazard areas who will face large premium increases if Principle 1 is followed. Today, in many Gulf Coast states, premiums in regions subject to hurricane damage are highly subsidized because of rate regulations imposed by state insurance commissioners. If insurers are permitted to charge risk-based premiums, homeowners in hurricane-prone areas will pay considerably more for coverage than they do today. To deal with the affordability issue, the state or federal government could provide some type of insurance vouchers to low-income residents. It could work like the food stamp program, in which families are given vouchers to buy food based on income and size of family. A homeowner in a hazard-prone area would pay an insurance premium that reflects risk, and then get reimbursed by the state for part of the increased cost. The amount of reimbursement would be determined by income and the premium charged. Under such a voucher system, insurance could reward individuals for undertaking risk reduction measures by lowering premiums. Principle 1 gives us a better chance of making our hazard-prone areas safer and affordable. Principle 2 implies that we as a society need to recognize that all taxpayers will have to bear a share of this cost. Rather than waiting for the next catastrophe, we can take constructive steps now to protect those in harm’s way. In the process we will reduce the likelihood of having to deal with another Katrina-like disaster.

Howard Kunreuther, co-director of the Risk Management and Decision Processes Center and a professor at the Wharton School of the University of Pennsylvania, is a co-editor of “On Risk and Disaster: Lessons from Hurricane Katrina.”

Melinda Cooper recently drew my attention to an interesting study conducted by Harvard Medical School Center and sponsored by Swiss Re and the United Nations Development Programme. The study predicts that "climate change will significantly affect the health of humans and ecosystems and these impacts will have economic consequences." In addition, the study attempts to "survey" existing and future costs of climate change. It argues that the insurance industry "will be at the center of this issue, absorbing risk and helping society and business to adapt and reduce new risks." The study seems to be of particular interest to us in multiple ways. First, it indicates that new assemblages of actors, institutions, and interests are emerging around the problem of climate change. The fact that an international development organization, an American elite medical school, and an influential Swiss insurance company collaborate seems interesting in and of itself. One of the questions we might want to pose is: What rationality aligns these very different types of actors? What kinds of interests take shape? Second, the study is based on three elements: trends, case studies and scenarios. Techniques of scenario planning have been a key focus of this blog, and we might use the study to continue our engagement with scenario planning techniques (as well as trend examination and case studies) and what they are doing. Third, the study outlines effects of climate change with regard to infectious diseases such as malaria, West Nile virus, Lyme disease and asthma. This inclusion of infectious diseases seems to be a new turn in the climate change problematization. What is the reason for this inclusion? What is it doing? What is the empirical basis? What does this inclusion leave out? This may or may not be an opportunity to continue our discussion of the vital. Fourth, the study calls for an integration of "stakeholders" and it calls climate change both a financial risk as well as a business opportunity (with a reference to, among other things, Hurricane Katrina). Are we seeing here a new turn in the neo-liberalization of nature? Fifth, the study suggests new financial tools for the securitization of unpredictable events related to climate change. These new security frameworks call for an anthropological investigation. Sixth, what is climate change doing to (and for) the (bio)sciences that are involved? All in all, how might we analyze climate change as a distinctive style of reasoning from an anthropological point of view? What forms of future engagement might be interesting? And what would the stakes of such a project be?

Yesterday news sources were announcing that the Army Corps of Engineers had made available, online, findings from its post-Katrina risk and reliability reports on New Orleans. The site is well worth a look, in part because the technology is cool. They have made flood map data available in a format that can be read by google earth, so "citizens" can choose a neighborhood in New Orleans, and then view flood maps for 50, 100, and 500 year events pre- and post-Katrina (the latter taking into account improved flood control installed since the hurricane). These kinds of flood maps have been produced by the Army Corps for a long time, and they are crucial to contingency planning for agencies like FEMA (now part of DHS). Part of what is interesting here, however, is the explicit emphasis on making such maps publicly available so that "citizens", as the report notes, "can make risk-informed decisions." There is, as I have written in the past, a long history of efforts to make individual citizens take greater account of natural catastrophe risk in their decisions about where to build or buy houses. The 1968 Federal Flood Insurance Act was intended precisely to create a technology through which insurance companies would "price" the risk of flood, so that this risk would be built into housing costs through insurance premiums. The new technology, however, has afforded an apparently more direct way to communicate this information. One wonders, however, about the conflicting incentives created by federal programs aimed at New Orleans. One of the conditions for receiving federal aid is that one must live in your house (previously damaged by floods) for a period of time. The political pressure to promote reconstruction may come into conflict with the desire to govern citizens through their calculative decisions about flood risk.

An article in today's Times reports on substantial housing development in the flood plain of the the Mississippi River following the floods of 1993.

Building is happening on flood plains across Missouri, but most of the development is in the St. Louis area, and it is estimated to be worth more than $2.2 billion. Though scientists warn about the danger of such building, the Missouri government has subsidized some of it through tax financing for builders.

“No one has really looked at the cumulative effect,” said Timothy M. Kusky, a professor of natural sciences at St. Louis University, who calculates that there has been more development on the Missouri River flood plain in the years since 1993 than at any other time in the history of the region.

These developments raise again a series of problems relating catastrophe, risk, and insurance that first emerged after the United States passed its first disaster relief act in 1950, formalizing federal aid to flood victims. Immediately, it was recognized that these policies created a problem of moral hazard: individual homeowners would not purchase insurance against what they perceived to be unlikely events, particularly since they counted on the federal dollars to bail them out (often, or so libertarian and economist critics argues, leaving them in better shape than when they started). In 1968 a program of federal flood insurance was created, which relied on the government to construct hazard models that would serve as the basis for determining premiums, and counted on private insurers to provide policies. But this program -- which has been revised many times since -- did not entirely solve the problem. On the one hand, individuals purchased policies at much lower rates than was expected, leaving much of the damage from floods still to be covered by federal relief (and the government often stepped in to offer even more relief after major events). On the other hand, these policies did not always do enough to prevent development in flood-prone areas. Of note in the article is the line drawn around the "100 year flood." This threshold was key to the original program of federal flood insurance, which mandated insurance policies for homeowners living in the damage area of a 100 year event. The question, of course, is how accurate the models are, and whether that threshold is the right one. One resident who had purchased a house outside the 100 year flood plain (and was thus not required to purchase insurance), said that “It’s not going to flood here for another 100 years, and I won’t be around by then.” A touch unclear on the concept, one might say. In the long run the dynamic is familiar. Bigger levies mean more housing in the flood plain. Which may contain small events, but open the gates for ever bigger, if rarer, events. “If history tells us anything, it’s that levees once built eventually fail,” Professor Pinter said. “But instead of being farmland there, now it’s a strip mall or residential area, or a whole city.” As Aaron Wildavsky might say, "safety" is being purchased at the price of resilience.

CHICAGO, May 8 — For months, Gov. Kathleen Sebelius of Kansas and other governors have warned that their state National Guards are ill-prepared for the next local disaster, be it a tornado a flash flood or a terrorist’s threat, because of large deployments of their soldiers and equipment in Iraq and Afghanistan. Then, last Friday night, a deadly tornado all but cleared the small town of Greensburg off the Kansas map. With 80 square blocks of the small farming town destroyed, Ms. Sebelius said her fears had come true: The emergency response was too slow, she said, and there was only one reason. “As you travel around Greensburg, you’ll see that city and county trucks have been destroyed,” Ms. Sebelius, a Democrat, said Monday. “The National Guard is one of our first responders. They don’t have the equipment they need to come in, and it just makes it that much slower.” For nearly two days after the storm, there was an unmistakable emptiness in Greensburg, a lack of heavy machinery and an army of responders. By Sunday afternoon, more than a day and a half after the tornado, only about half of the Guard troops who would ultimately respond were in place. It was not until Sunday night that significant numbers of military vehicles started to arrive, many streaming in a long caravan from Wichita about 100 miles away. Ms. Sebelius’s comments about the slow response prompted a debate with the White House on Tuesday, which initially said the fault rested with her. Tony Snow, the White House press secretary, said the governor should have followed procedure by finding gaps after the storm hit and asking the federal government to fill them — but did not. “If you don’t request it, you’re not going to get it,” Mr. Snow told reporters on Tuesday morning. The debate was reminiscent of the Bush administration’s skirmishes with Gov. Kathleen Babineaux Blanco of Louisiana, also a Democrat, after Hurricane Katrina. But after an angry flurry of words, both sides seemed to back down a bit later Tuesday. Ms. Sibelius said she now had enough equipment and personnel to deal with the problems in Greensburg, and the White House acknowledged that the governor had requested several items that the federal government supplied, including a mobile command center, a mobile office building, an urban search and rescue team, and coordination of extra Black Hawk helicopters. Nonetheless, the governor and officials in other states again expressed concern that the problem could occur again as the stretched National Guard system struggled to respond to disasters at home while also fighting overseas. As State Senator Donald Betts Jr., Democrat of Wichita, put it: “We should have had National Guard troops there right after the tornado hit, securing the place, pulling up debris, to make sure that if there was still life, people could have been saved. The response time was too slow, and it’s becoming a trend. We saw this after Katrina, and it’s like history repeating itself.” The Federal Emergency Management Agency, which came under strong criticism after Hurricane Katrina, seemed to respond more quickly in Kansas. Several of the agency’s mobile disaster recovery centers are in Greensburg assisting residents, and the agency said it had moved in 15,000 gallons of water and 21,000 ready-to-eat meals, enough to feed 10,000 people. State officials said the problem with the National Guard’s response had more to do with equipment than personnel. In Kansas, the National Guard is operating with 40 percent to 50 percent of its vehicles and heavy machinery, local Guard officials said. Ordinarily, the Guard would have about 660 Humvees and more than 30 large trucks to traverse difficult terrain and transport heavy equipment. When the tornado struck, the Guard had about 350 Humvees and 15 large trucks, said Maj. Gen. Tod Bunting, the state’s adjutant general. The Guard would also usually have 170 medium-scale tactical vehicles used to transport people and supplies — but now it has fewer than 30, he said. On the other hand, General Bunting said, it had more cargo trucks than it needed. The issue is not confined to Kansas. In Ohio, the National Guard is short of night vision goggles and M-4 rifles, said a Guard spokesman, Dr. Mark Wayda. “If we had a tornado hit a small town, we would be fine,” Dr. Wayda said. “If we had a much larger event, that would become a problem.” The California National Guard is similarly concerned about a catastrophic event. “Our issue is that we are shortchanged when it comes to equipment,” said Col. Jon Siepmann, a spokesman for the Guard in California. “We have gone from a strategic reserve to a globally deployable force, and yet our equipment resources have been largely the same levels since before the war.” In Arkansas, Gov. Mike Beebe a Democrat, echoed the concerns of Ms. Sebelius. “We have the same problem,” Mr. Beebe said. “We have had a significant decrease in equipment traditionally afforded our National Guard, and it’s occasioned by the fact that it’s been sent to the Middle East and Iraq.” He added: “Our first and foremost consideration is to guarantee that our soldiers have the resources, including equipment, to do the job and protect themselves. Having said that, my preference would be for the federal government to provide that equipment and not strip the state’s resources, which could adversely impact the state’s mission in times of crisis, which is what happened in Kansas.” Last year, all 50 governors signed a letter to President Bush asking for the immediate re-equipping of Guard units sent overseas. But officials in several states, including Kentucky, Minnesota and Texas, said Tuesday that they were not facing equipment shortages. National Guard units overseas are often assigned engineering missions, and the skills and equipment — bulldozers and trucks, for example — are also what might be required to deal with a natural disaster at home. White House officials said that the Kansas National Guard had at its disposal in the Midwest and the Plains states, everything it needed. By Mr. Snow’s count, that included 83,000 National Guard soldiers; 99 bulldozers; 61 loaders; 246 dump trucks and 59 graders. “There’s a lot of stuff available,” Mr. Snow said. “So, again, I think this is one where the equipment was available and everybody was moving as rapidly as possible.” In Congressional testimony, senior National Guard officials have said that since Sept. 11 units under their command had equipment shortages as forces deployed to Iraq and Afghanistan. Responding to concerns that the National Guard would not have sufficient personnel or equipment to respond to natural disasters, Guard leaders and state officials developed plans to ensure that if a state is in short supply of people or gear when a hurricane or tornado strikes, it can borrow from other states. But borrowing does not solve every problem, state officials said, and coordination can take time. The destruction from Hurricane Katrina ultimately required the help of 50,000 troops — and they came from all 50 states. Training is another issue. At a Washington news conference in February, Ms. Sebelius said, “The Guard cannot train on equipment they do not have.” She added later: “And in a state like Kansas, where tornados, floods, blizzards and wildfires can seemingly happen all at once, we need our Guardsmen to be as prepared as possible.” Two recent reports have raised questions about Guard preparedness. An independent military assessment council, the Commission on the National Guard and Reserves, released a report in March that stated: “In particular, the equipment readiness of the Army National Guard is unacceptable and has reduced the capability of the United States to respond to current and additional major contingencies, foreign and domestic.” Another report, released in January by the Government Accountability Office, concluded that the ongoing operations in Iraq and Afghanistan have “significantly decreased” the amount of equipment available for National Guard units not deployed overseas, while the same units face an increasing number of threats at home. Late Tuesday, in a statement, Ms. Sebelius repeated her message: “I have said for nearly two years, and will continue to say, that we have a looming crisis on our hands when it comes to National Guard equipment in Iraq and our needs here at home.”