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An Entirely Preventable Disaster

Eye of the Storm: Natural disasters, the insurtech market, and other musings from Bob Frady, CEO of HazardHub

 

Our company prides itself on its risk models, which help businesses mitigate issues when they happen -- or better yet, prevent them. But there’s one thing our risk models don’t anticipate – and that’s a catastrophic failure of a location’s underlying electrical grid.

As we’ve seen, grid failures can take a minor problem and turn it into a life-altering series of events. What happened in Texas is the case in point.

Yes, Texas had a spell of really cold weather, but cold weather isn’t completely unknown in the state. In most normal years, some pipes would freeze, then burst – primarily in homes that are seasonal, or where people did not know how to keep pipes from freezing. Cold weather is not unusual in Dallas; in an average year there are 20 winter days with temperatures below freezing. It’s false to say that NO damages would have occurred if the grid hadn’t failed, but they would have been relatively small.

Instead, the failure of the grid meant that systems that could prevent the effects of a freeze from happening were not able to do their job. What should have been a “minor league” incident quickly morphed into a catastrophic event with billions of dollars in damages.

This disaster was entirely preventable. Wind turbines spin regularly in the upper Midwest and in Canada, where subzero winter temperatures are the norm. Any idea that those sources were “at fault” is simply false; it shows a lack of preparation that cold weather might actually happen. The grid operators took a bad problem and made it much, much worse. When your coal piles freeze and your natural gas pumping equipment fails and you have no electrical interconnection to the rest of the country, you’re going to be without power.

Here’s another factor: While Texas has a very low risk of frozen pipes, it has an exceptionally high risk for mold formation. People are rushing to get the water back on – and rushing leads to problems. Patrick Kelahan, risk consultant for H2M (aka The Insurance Elephant), writes, “Secondary damage (microbial growth) is almost a given for TX water damage scenarios -- extensive geographic breadth of damage combined with inadequate repair resources compounded with undermanned water damage mitigation response capability is a prescription for mold problems.”

The question now becomes: “Who pays?”

Of course, insurance companies will ride in and try to make their policyholders whole. It’s what they do. The interesting part is determining the “expected” loss from the weather versus what happened from the failure of the grid.

Fortunately, there should be a relatively straightforward path to determining this variance. El Paso was attached to the western power grid and – for the most part – rode through this event with a fraction of the damage of other parts of Texas, even though El Paso has a higher relative risk of both frozen pipes and ice dams than Dallas.

The process should work like this: Take the loss experience from El Paso – claims per 1,000 of population might be a good measurement – and compare it to the area in the state that’s covered by the Texas power grid. If there is a significant variance, which there will be, then you’ll have the amount that insurance companies should be seeking to claw back from the grid. Of course, the grid may simply try to pass that back to the public in the form of a rate increase, but that’s a discussion for another day.

PG&E’s experience in California should have been a wakeup call to all U.S. utility companies: an ounce of prevention is far less expensive than a pound of cure. Poor planning should no longer be an excuse for the ratepayers to suffer.

 


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