Planet Money
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.
00:17:26 · Alexi Horowitz-Ghazi
[00:17:26] S2: Julie explained to each company that if they invested in IBHS's research, they would eventually see returns in a couple ways. First, their research would help identify risky materials and building techniques that posed a financial risk to the insurers. This new information would give them a more accurate way to look at which houses they offered coverage to and at what rate. So if someone had a roof that was now proven to be more likely to cost the insurers way more in the event of a storm, they might choose not to cover that property, and they could offer discounts for people whose construction decisions made them a lower risk. And second, insurers have been paying to rebuild people's houses in the same way in the same places again and again after successive disasters. There just wasn't enough science to know why some houses survived a disaster and some didn't. If IBHS could sway building practices and market dynamics toward products that were less likely to fail, the insurers would ultimately have to pay less to make their customers whole because there would be less property damage overall. Julie says she managed to get funding from a few of the biggest insurance companies relatively early on, but others needed a bit more convincing. I would go out
00:18:32 · Julie Rochman, Alexi Horowitz-Ghazi, Ann Cope
[00:18:32] S4: and do presentations, and I would list all the funders. And, originally, it was one slide. Right? And then it got longer. And then would say, you may notice some names missing on these slides, you know, when I would go to a company and say, you don't see your name up there. Right? And and shame definitely does work in a competitive environment. [00:18:49] S2: Peer pressure is a hell of a drug. [00:18:50] S1: It is. [00:18:51] S2: Julie says getting the facility built took a couple of years of intensive lobbying. At the same time, her counterpart at IBHS, the chief engineer, was busy figuring out things like, how do you actually create a tiny artificial hurricane inside a building? Or how do you measure how many embers it takes to light a roof on fire? Finally, in the fall of twenty ten, the lab was ready for destruction. Julie and her colleagues invited a group of their investors, insurance company executives, to come see the inaugural set of test demonstrations. They set up a pair of two story houses in the test chamber. One of them was built to the standard code, and one was built with extra fortifications. They then programmed the giant wall of fans to reproduce the wind patterns of a hurricane. And when they turned it on, something unexpected happened to the unfortified house. You can actually still see this in a video they took at the time. [00:19:45] S4: The whole house blew out the back door of the test chamber. It was literally in a pile, you know, like, in a field in the pile.
00:19:52 · Alexi Horowitz-Ghazi
[00:19:52] S2: Julie and the IBHS scientists hadn't expected the house to completely blow away, but they still were able to learn how small differences in construction could lead to vastly different outcomes. The house that survived, it had been built with fortifications that cost less than 5% more than the house that ended up a pile of debris. The insurance executives were impressed. And over the next several years, Julie and Company built out their program according to the specific research requests from the various insurance companies backing IBHS, the so called member companies. In exchange for dues, sometimes in the millions of dollars, member companies get exclusive access to the full range of IBHS's research, though some portion is also released to the public. And when you think about all this from an insurance market perspective, there's something sort of odd going on here. Like, usually, all these companies are locked in a heated competition for customers. That's why we're all bombarded by ads with talking geckos or annoying jingles. Yet in the case of this IBHS destruction lab, here they all are congenially cooperating in order to fund research which could benefit them all, which means these companies are also constantly walking a sort of legal tightrope. Because under US antitrust law, which is meant to promote competition, competitors are strictly forbidden from coordinating on things like their pricing strategies or market segmentation because of the risk of collusion. How does the specter of antitrust law hang over this?