Planet Money
00:11:13 · Julie Rochman, Alexi Horowitz-Ghazi
[00:11:13] S4: Once the industrial revolution hit and there were more machines, those machines need to work. And sometimes they injure people, and so workers' comp comes along. And it is just literally... Like, every time there's a new industrial sector or a new product or a new service, we all go back to Lloyd's of London, which is we have to share the risk. Right? We can't allow a person or a company to be destroyed because of an accident. [00:11:39] S2: And it was one new technology in particular that inspired the insurance industry to radically rethink its approach to risk, a new approach that would eventually lead to the destruction lab I visited in South Carolina. Julie says it was toward the tail end of the industrial revolution when the insurance industry started banding together to do its own experimental research to figure out not only how to better price risk, but to find ways to actually reduce it out in the real world. [00:12:05] S4: That new technology, Julie explains, was electricity. When electricity went into homes during the Victorian era, the wires were not all that safe. They were cloth wrapped. You know, the switches, the bulbs, everything could explode or overheat and cause fires. And so the industry, the underwriters, the people who bear risk, it got together and created a laboratory in which they could do testing, rigorous, objective testing of these products.
00:12:05 · Julie Rochman, Alexi Horowitz-Ghazi
[00:12:05] S4: That new technology, Julie explains, was electricity. When electricity went into homes during the Victorian era, the wires were not all that safe. They were cloth wrapped. You know, the switches, the bulbs, everything could explode or overheat and cause fires. And so the industry, the underwriters, the people who bear risk, it got together and created a laboratory in which they could do testing, rigorous, objective testing of these products. [00:12:32] S2: This insurance funded laboratory in Chicago was called Underwriters Laboratories or UL for short. It started by testing out these new electrical wiring systems to figure out which were more dangerous than others, but they also eventually expanded their mission to include many of the newfangled appliances and products that started to pour onto the market. They wanted to determine which might be likely to electrocute somebody or start a house fire. [00:12:57] S4: And if you passed the testing, then UL would put their mark on your product. The UL product mark meant essentially that somebody who is looking out for your safety says this particular thing is safe.
00:13:10 · Alexi Horowitz-Ghazi
[00:13:10] S2: Now insurance companies did not have regulations, but they did have the power to deny coverage to buildings or homes that did not choose UL certified wiring. And they could convince mega retailers like Sears to use UL's safety mark to decide in part which electronics and appliances to stock. And in fact, to this day, if you look at the electronics around your house, odds are high that hidden somewhere near the serial number, you'll still be able to find this little circle with the letters UL inside of it for underwriters laboratories, meaning this private industry group has been able to exert influence over infrastructural and consumer standards you might usually associate with the government. So that was one of the insurance industry's first major forays into experimental research and intervention in the market. Julie says the next big example was automobiles. As cars took over the roads, insurance companies were on the hook for more and more accidents, and so they eventually funded their own crash test facilities. And the research from those facilities and videos of crash test dummies flying through windshields, they helped push car companies to change the design of things like headrests and airbags. But Julie says the idea that the insurance industry might apply this experimental approach to the buildings we all live and work in started percolating about a decade later in the mid two thousands. Around then, she started hearing rumblings about the latest and perhaps biggest new form of risk that the insurance industry now had to contend with, the threat of increasingly frequent and destructive natural disasters.
00:14:41 · Julie Rochman, Alexi Horowitz-Ghazi
[00:14:41] S4: We all went through Katrina, hurricane Katrina, and saw the tremendous loss of life, almost the death of a city. And then in twenty o seven, there was the Witch Creek wildfire in San Diego County that was a billion dollar wildfire. And so people in the industry could see that these were becoming mega events. Anything over a billion dollars, we typically would call mega event. And the industry was looking at losses that were being driven in new ways and to new levels, and that's not sustainable. Like, if catastrophes keep going like this, there won't be a property casualty insurance industry anymore. [00:15:17] S2: So Julie says a nonprofit insurance trade association called the Institute for Business and Housing Safety or IBHS decided they wanted to help engineer a solution to this problem. They decided it was time to figure out how to do for buildings what the industry had already done for cars and electronics, to create their own destruction lab where they could subject various kinds of structures to various kinds of disaster in order to learn what building techniques and materials might ultimately reduce all this catastrophic loss.
00:15:17 · Alexi Horowitz-Ghazi, Julie Rochman
[00:15:17] S2: So Julie says a nonprofit insurance trade association called the Institute for Business and Housing Safety or IBHS decided they wanted to help engineer a solution to this problem. They decided it was time to figure out how to do for buildings what the industry had already done for cars and electronics, to create their own destruction lab where they could subject various kinds of structures to various kinds of disaster in order to learn what building techniques and materials might ultimately reduce all this catastrophic loss. [00:15:47] S4: The dream of IBHS was to create a rigorously, meticulously sourced set of data points that would inform builders, architects, developers, public policymakers, the media, and obviously consumers so that they can make better choices about where and how they live and work so that losses would not occur on that same catastrophic level as often as they were starting to occur. And, the industry looked around for someone who felt like being a part of that and leading the charge, and it ended up being me. [00:16:24] S2: Julie had experience doing just this kind of work. She'd worked with the insurance industry's car crash research group for several years. So becoming the CEO of IBHS was a natural step. But on Julie's first day on the job, the board told her that it was now her responsibility to raise the full budget to get the facility up and running. She'd have [00:16:42] S4: to raise a total of $40,000,000. And I'd never done fundraising. And I just thought, what the heck have I done?
00:16:42 · Julie Rochman, Alexi Horowitz-Ghazi
[00:16:42] S4: to raise a total of $40,000,000. And I'd never done fundraising. And I just thought, what the heck have I done? [00:16:50] S2: Julie starts reaching out to insurance companies around the country to start raising money. And she knew they all had a vested interest in researching the science of property destruction, but each of them also had a different risk portfolio. So depending on where they operated and what kind of disasters they were trying to cover, Julie had to cater her pitch accordingly. [00:17:09] S4: So if I was talking to an insurance company in Florida, we talked about hurricanes. If I was talking to an insurance company in Colorado, I was talking about high winds and hail. If I was talking to an insurance company in Nebraska or Iowa or Illinois, I was talking about tornadoes, high winds and hail winter weather, and those are very different conversations to have.