Planet Money
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?
00:21:19 · Julie Rochman, Alexi Horowitz-Ghazi
[00:21:19] S4: Antitrust law is at the center of all things property casualty insurance. And all meetings start with what I call the antitrust invocation where, you know, before anybody says anything, there's a lawyer or somebody acting as the antitrust counsel from outside. They will specifically say at the start of every meeting, we are forbidden to talk about, you know, company operations and business practices. If anybody gets anywhere close to that line, we will stop the conversation immediately. And, fortunately, I haven't seen a lot of people stopping those conversations over forty years, but occasionally, you will see a whole bunch of people stand up around a table and go, ah. [00:21:57] S2: No. No. The floor is lava. Yes. [00:21:59] S4: The floor is lava. [00:22:00] S2: Now it's true that the research IBHS does provides all these companies with a common body of knowledge they can use to tweak their business models, But each of them is also creating super secret formulas from their own specialized data sets to try to determine whether to offer coverage and how much to price their premiums so they can get an edge on their competitors. Julie says IBHS figured out a way for their funders to communicate their needs without breaking the antitrust rules. And IBHS has been able to build out a dizzying array of experimental programs, some of which they've published for the general public.
00:22:00 · Alexi Horowitz-Ghazi, Julie Rochman
[00:22:00] S2: Now it's true that the research IBHS does provides all these companies with a common body of knowledge they can use to tweak their business models, But each of them is also creating super secret formulas from their own specialized data sets to try to determine whether to offer coverage and how much to price their premiums so they can get an edge on their competitors. Julie says IBHS figured out a way for their funders to communicate their needs without breaking the antitrust rules. And IBHS has been able to build out a dizzying array of experimental programs, some of which they've published for the general public. [00:22:33] S4: It's to show people the data and to teach people which questions to ask so that overall, we are putting in place better building stock. We're not just putting the same types of buildings in the same vulnerable places where they will be demolished by the same natural forces again and again and again. And that's what we had been doing. I mean, we've basically been building with steel and brick and what... You know, in the same way for a couple hundred years.
00:22:59 · Alexi Horowitz-Ghazi
[00:22:59] S2: Julie retired from IBHS back in 2018. The research center has continued to build a growing body of research that insurance companies can, in theory, use to evaluate their premium pricing or to choose who to approve or deny for coverage. It's also research that developers can use to decide what kinds of materials they use and that governments might use to update their building codes. So this one corner of the private sector, well, this nonprofit research organization for the insurance industry, is producing a sort of semi public good. It's only semi because not all of their research goes to the public. It is a membership organization after all. But the information they do share can benefit a bunch of homeowners and neighborhoods and cities by potentially reducing the amount of destruction from storms and wildfires and other mega events, which also happens to help the insurance company's bottom line. After the break, we head back to South Carolina to see how these researchers put the destruction in the destruction lab. We hear some of the lessons they've learned, how their research is being put to use on the ground, and how the insurance market itself might be making it harder to convince people to fortify their homes against disaster.