Planet Money
00:09:07 · Julie Rochman, Alexi Horowitz-Ghazi
[00:09:07] S4: The insurance industry in this country was really born out of fire. [00:09:12] S2: Houses in the colonial era were mostly built out of wood. People used fire to cook and light and heat their homes, and it was, as you can imagine, a highly flammable combination. Then one of the first American insurance companies was cofounded by none other than Benjamin Franklin. It was aptly, if a bit windily named, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. And the basic idea then as now was essentially to pool as much money as possible in order to shield any one person from being financially ruined by a big fire, like a mutual aid agreement. And that was the principle at play as new insurance companies started to pop up around the country, organized around specific regions or communities looking to hedge against the vicissitudes of fate. [00:09:56] S4: Most insurance companies were started as, mutual companies owned by their policyholders. So it was, a county mutual in Indiana or Lutheran Mutual came through a church. I mean, there [00:10:10] S2: were all these specialty companies and then State Farm, Nationwide. I mean, farmers, these were all started by farmers. Julie says these insurance companies, had started as this form of mutual aid, got bigger and bigger as they signed up more and more people paying into a common pool of money. [00:10:26] S4: And then it is that pool of money that the insurers manage. They invest it. They hope that they can grow it because then they will pay out losses with that money.
00:10:26 · Julie Rochman, Alexi Horowitz-Ghazi
[00:10:26] S4: And then it is that pool of money that the insurers manage. They invest it. They hope that they can grow it because then they will pay out losses with that money. [00:10:35] S2: As more and more Americans moved west or into coastal towns and places like the Gulf Coast, so too did the financial liabilities and profit opportunities of the insurance industry. And so insurers started creating new kinds of policies to cover that risk. Things like tornado insurance in the late nineteenth century or earthquake insurance in California in the early twentieth. And in this way, Julie says you can think of the property casualty insurance industry almost like this giant financial mirror, reflecting and responding to whatever forms of peril we all collectively face at any given time. And that peril doesn't just come from natural disasters. It also comes from human innovation. [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.
00:11:13 · 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.