Flint Water – A Catastrophic Failure of Government


Since it seems that everyone else is piling on to the dialogue regarding the Flint (Michigan) water situation, I suppose it’s my turn.  It is not my intent to light a political brush fire here, but given the current election season and the emotional charge of this catastrophe, that may be easier said than done.  My guess is that I will tweak someone’s political sensibilities before I’m done here even if that is not my intent.  So here goes.

The lead-poisoned water in Flint is a result of failure in so many ways that it’s difficult to catalog all of the failures.  Moreover, I think the fact that the failure spans so many levels and departments of government is the heart of the problem.  Infrastructure is one of the most basic and primary of all duties of government.  As a society, we elect officials to be good stewards over our collective taxes and hire good people to administer the basic needs of society: roads, defense, courts, and other basic infrastructure.  Honestly, all the rest of the activities of government (e.g., social programs, public education, etc.) are “add-ons” that have become a distraction and resource drain on the fundamental duties of government.

The situation in Flint is disturbing, and that’s putting in mildly.  Even more disturbing to me is the race to the bottom on full display among the political class and ideologues.  Everyone is blaming someone else, covering their own backsides, seeking political advantage in what amounts to a sickening display of political gamesmanship.  All while Flint residents continue to rely on bottled water and filters when what they really need is world-class emergency infrastructure project to replace the water pipes – something that a properly incentivized private sector contracting firm could pull off if the political class would just shut up and recognize this.

The political left is hanging this all on Michigan Republicans.  The political right is blaming Michigan bureaucrats and the Obama-led Environmental Protection Agency.  The fact is, every level of government has failed Flint here.  Democratic and Republican politicians along with unaffiliated bureaucrats working in a flawed administrative state all bear responsibility.  Government fails because it’s incentives to manage such complex systems are all screwed up.  There is no accountability, and that’s by design.  It’s the EPA Animas River fiasco all over again.  Same screwed up results, different year.  Government fails.  Big government fails big.  Then the political class rushes in to assign blame, capture a political public relations advantage, and convince us that even bigger government is the only solution.

The late Harry Browne (Libertarian presidential candidate in 1996 and 2000) used to say, “Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'”  The Flint water catastrophe is a failure of government risk management, administrative management, oversight, and more.  I don’t believe that any one person set out to poison the people of Flint, but that’s not what Michael Moore would have you believe.  Then again, Michael Moore wants Governor Rick Snyder arrested so that he can sensationalize the entire disaster to help his leftist political causes which will only serve to give us larger and more incompetent government.

Why do we continue to trust and put our faith in behemoth government bureaucracies at the state and federal level when they have so often and so spectacularly failed?  Seems to me that this catastrophic failure of government at all levels and of all political stripes should be enough to convince us that maybe, just maybe, we should try downsizing the behemoths and trust ourselves at the local level just a bit more.  We’ve tried everything else and I don’t see how it can get any worse.



Space Shuttle Challenger


Thirty years ago today, the space shuttle Challenger exploded just 73 seconds into its flight, taking the lives of all seven astronauts, including school teacher Christa McAuliffe.  As with most tragic events that affect an entire nation, I remember where I was when I learned of the disaster.  I was just returning home from a morning class during my undergraduate days at Michigan State University.  My roommate and I watched the network news bulletins in utter disbelief.

The investigation following the disaster concluded that the cause of the explosion was a failure in an O-ring component of the solid fuel rocket boosters which allowed hot gas to escape and ignite the shuttle’s external fuel tank.  The O-rings had a design flaw which had long before been deemed to be acceptable and several previous successful shuttle launches seemed to support that conclusion.  However, the O-ring design flaw presented greater risk at colder temperatures.  On the morning of January 28, 1986, the Florida temperature was a mere 36 degrees Fahrenheit.  In the days following the disaster, we learned that there were engineers who had cautioned that the O-rings may not properly seal at temperatures below 53 degrees Fahrenheit, but such cautions were either ignored or were not effectively communicated.

Much has been written regarding this disaster and its obvious risk management failings over the last 30 years.  There have been alternative theories, talk of conspiracies and cover-ups, and frankly some pretty wacky stuff.  I can’t help but wonder if this disaster might have been averted had their been more of an enterprise-wide risk management process in place.  Don’t get me wrong… NASA and all of the contractors involved in the space program for the last 50+ years have always taken the significant risks of space travel very seriously, and have had many processes and checklists in place to ensure that no step was missed and no procedure left undocumented.  The ingenuity and dedication to astronaut safety was on full display in the case of Apollo 13.  That NASA mission also endured a catastrophic explosion, but with a much happier ending.

The fact is, bad things will happen.  The entire profession of risk management and the insurance industry that serves us exist only because there is risk in everything that we do.  We need to be prepared to identify and control these risks, and finance the economic impact of the risks that slip past us.  Enterprise risk management is a relatively recent approach and evolution from the traditional risk management approach where risk and risk control existed within organizational silos.  ERM addresses risk more holistically and bridges across those organizational silos.  I am no expert on the Challenger disaster and the investigation, but it seems to me that there is a fair amount of evidence that the launch decision on that cold Florida morning 30 years ago was made without the benefit of sufficient risk information from across the NASA enterprise.  And if that is true, what a shame that enterprise risk management couldn’t have evolved a few decades earlier.

Premium Optimization


Price optimization is not a new concept, though it is receiving increasing attention in the insurance industry.  Ushered in with the era of “big data” and “predictive analytics” commercial enterprises of all stripes now have the ability to refine pricing on the fly in order to extract every available ounce of economic value from their customers.  At its heart, price optimization involves charging higher prices to customers who are able and willing to bear the additional cost, whether they realize it or not.  Herein lies the rub.

Two customers may purchase an identical product or service but one customer pays more simply because data analytics indicated that the customer was less likely to shop around or otherwise balk at the higher price.  The customer paying the higher price may not even know (probably doesn’t) that they just paid a higher price for the identical product compared to other customers.  The use of price optimization on insurance premiums has all the makings of the credit-score-as-a-rating-factor controversy, if not more.  Opponents of credit score premium rating argue that the credit score is not related to the cost of risk associated with insuring a particular individual – except that there is statistical evidence that it is.  Circular arguments ensue.

However, price optimization is a cat of another stripe.  Suppose an insured is charged more premium than would otherwise be charged simply because data analytics indicate that the customer is likely to accept and pay the premium based on the data model showing that last year’s rate increase did not cause the customer to move his business.  What does that customer’s propensity to stay with the insurer in spite of a rate increase have to do with the customer’s risk of loss?  Nothing, as far as I know.  So price optimization boils down to charging more premium because, well, we can…. at least that’s what the predictive models tell us.

And why shouldn’t the insurance industry avail itself of all the technology and knowledge that other industries are using to their advantage?  Online retailers and travel providers (especially airlines) have been doing this very same thing for quite some time.  Ever heard of “yield optimization” in the airline industry?  When was the last time you thought that airfares made any sense whatsoever, let alone resemble the actual cost of each passenger mile flown?  So perhaps the insurance industry should use the same defense I used with my parents when I was a teenager, “Gee mom, everyone else is doing it!”

I am reluctant to get on the price optimization bandwagon, for the same reason that the “Gee mom, everyone is doing it” defense didn’t work for me a few decades ago.  The frequent retort from mom was, “And if everyone jumped off a bridge, would you?”  I suspect that price optimization is going to encounter greater regulatory resistance than credit scores (it already has in several states) and the cost of risk justification is far more tenuous.  Even in the absence of regulatory concerns, the insurance industry might want to avoid becoming addicted to price optimization such that it begins to overshadow prudent underwriting and risk-based pricing.  Imagine a world where insurance premium optimization data models become so accurate and reliable that they begin to supplant underwriting principles and the computer models start engaging in cut-throat price optimization pricing that become increasing devoid of links to the actual cost of risk.  I would hope that regulators would step in before it went that far, but after 2007-2009 (and the subsequent knee-jerk reactions), I have no illusions of what regulators will and will not do.

In the end, I just have a bad feeling about “optimized” insurance premiums.  The insurance industry doesn’t need another reason for consumers to dislike and mistrust the industry.  I’d rather focus resources on improved cost of risk predictive modeling to better fit pricing to each insured’s risk profile, and let the airlines incur consumer wrath for playing these sorts of pricing games.  Serves them right for treating us like cattle.

Pet Insurance or What the Affordable Care Act Missed


This is Ava, my daughter’s 4 year-old Yorkshire Terrier.  Ava lives with us while my daughter is away at college.  Ava is a healthy, spunky little dog with a teddy bear face that actually reminds me of an Ewok from Star Wars fame.  One of her most endearing qualities is that she flashes this cute “Winn-Dixie smile” whenever she greets a family member returning home.  That cute smile was unexpectedly in jeopardy over the recent holidays, when Miss Ava underwent two significant dental procedures that caught me and my wallet totally by surprise.

We were aware that Yorkies are prone to dental issues and so we’ve been diligent about taking her to the vet for annual cleanings, which requires anesthesia and all the expense that goes with that.  As an aside, my wife, who dreads dental visits as if they were rituals of human sacrifice, wants to know why general anesthesia is not an option for human dental cleanings.  Back to Ava’s story… I don’t want to denigrate our former veterinary clinic that previously performed Miss Ava’s annual dental cleaning, but now that we live in the “big city” we took her to larger vet practice this time around.  At this new clinic, they do more than just clean the dog’s teeth.  They take x-rays… a lot of x-rays.  The former vet took none.  The difference is that the x-rays revealed abscesses, a fractured tooth, and four smaller teeth that were just plain missing.

So on the day before Thanksgiving, Miss Ava had four abscessed teeth extracted while I had $1,000 extracted from my wallet.  Worse yet, we weren’t finished.  There were two problem molars (one of which was the aforementioned fractured tooth) that are important to the dog’s ability to chew her food that we needed to “save” rather than extract.  “How do we ‘save’ those teeth in a small dog?” I asked.  The answer… consultation with another vet clinic in Spring Lake that specializes in doggy dentistry to see if one or both teeth need a root canal.  Say what? A root canal? For a dog?  Yep.  Uh…. how much?  Oh, probably $1200-$2500, depending on how many teeth need work.  Gulp.

The x-rays were sent off to the doggy dentist, and a consultation appointment was set for early January.  I took Miss Ava for her appointment just a few days ago.  The verdict… only one molar needed a root canal (for now) and the procedure was completed in about three hours.  This time, my wallet was lightened by just under $1,400, and I mysteriously felt relieved that it was “only” $1,400.  I am pleased to report that Miss Ava is doing very well, acting like her usual self, and enjoying “mushy” food while her mouth heals.  Next week, we begin preventative tooth-brushing and anti-bacterial mouthwash to ward off more problems down the road, but we’ve been warned that Yorkies often have more and more dental problems as they age in spite of the best preventative measures.

Like most pets in most families, Miss Ava is very much a part of our family.  She joined our family when our daughter was still in high school and has been a joyful companion to all of us over the last four years.  Although we just spent a considerable sum of money on this little critter, I don’t regret it and I didn’t even consider not spending it when all of this came up.  I openly confess that Ava has grown on me as much as she has the rest of our family.

We routinely insure the most important things in our lives.  Our major assets such as cars, homes, and businesses are insured.  We insure our income from disability and premature death.  We insure our health through medical, dental, and vision insurance.  We insure our collections, keepsakes, and tools through scheduled property floaters and inland marine insurance.  Our pets?  Well, there is pet health insurance from a number of companies, some of whom have been around for years.  I’ve investigated pet health insurance policies for our pets in the past but I’ve never purchased it.  Why not?  Because risk retention made more sense given the array of exclusions and conditions written into these policies.  Many of the more serious and costly problems are often excluded.  Hip dysplasia is one such example, and the wide category known as “hereditary conditions” is another.  Pre-existing conditions?  Not covered.  Dental cleanings?  Not covered – except by a few much more expensive policies.  Doggy root canals?  Still checking on that.

Being a former underwriter and working in and around the insurance industry my entire career, I understand the reasons for these exclusions and conditions.  After all, until just a few years ago, many human health insurance policies did not cover pre-existing conditions.  To do so, invites adverse selection.   The Affordable Care Act (a.k.a. ObamaCare) put those stone age days behind us.  Now we’re all one big happy exposure pool, pre-existing conditions and all.  Some body call the White House – they need to amend the ACA to extend its provisions to our dogs and cats.  (Wait – that’s a joke – please don’t call the White House – they just might take you seriously and screw up yet another insurance market.)

In conclusion, now that Ava’s mouth has been fixed up and the preventative measures begin next week, I am once again intrigued by exploring the latest offerings in the pet insurance market.  Parting ways with big bucks after a loss has a tendency to make anyone question their risk retention strategy.  I suspect that I will once again weigh the exclusions against the premiums and decide to continue retaining the health insurance risk for Miss Ava.  Nevertheless, I hold out hope that there is an economically sensible insurance option out there to handle the truly catastrophic risk (e.g., cancer) that might rob us of our little watchdog prematurely.  If Ava’s teeth continue to be a problem, I’ve told my daughter that I’m just going to open my wallet and have them replace all of Ava’s teeth with golden dentures.  Miss Ava will have an impressive grill when she flashes her smile.

Peace on Earth, please


At this time of year, many people tend toward one of two extremes:  Charity and understanding or contempt and bitterness.  For those that tend toward the latter, I think the holiday season makes some people quite literally  crazy.  The stress of holiday events, traffic, and family tensions can definitely take its toll.

In a decidedly unscientific approach, I believe that I have observed this phenomenon in the social media posts that I have casually observed over the past few weeks.  My personal Facebook news feed contains a blend of both uplifting posts and downright negative rants.  To be sure, the current political season and climate is fanning the flames of negativism on social media.  To me, it hit bottom when I noticed a particular politically-themed post (not unusual) that someone had shared, and though it elicited a few comments both pro and con, one particularly negative post contained two “f-bombs” as it declared the original poster and all supporting commenters to be a–holes, before ending with the phrase, “Have some respect.”  I call that irony – and I’m sure that it’s totally lost on the foul-mouthed commenter.

How did we become so jaded, so mean-spirited, and so presumptuous – at least in our social media activities?  It’s enough to depress someone who is trying to enjoy the holiday season and spread the good cheer.  A while back, I posted about the potential personal liability of what we say and post online.  The natural knee-jerk reaction is to begin policing all online comments according to some set of standards, but the freedom of speech and expression of ideas is the cornerstone of the Great American Democratic Experiment.  The animus that I see online and in the news that is directed at people simply because they post or say something that others find offensive, is, well, offensive.  (More irony, I suppose.)  What ever happened to decorum?  What ever happened to civility?  What ever happened to respect?  Can’t we have just a little more peace on earth (or at least on Facebook), especially at this time of year?

For the good of my own holiday state of mind, I think I’m going to take a social media holiday for the next few weeks.  Perhaps, if we all did that, we’d rediscover some of the manners and mutual respect that we seem to have lost as a society.  Are you with me?

[Editor Note:  I’m serious.  I will be taking a holiday break from this blog and most other social media until after the 1st of the New Year.  I wish you and yours a peaceful, safe, and love-filled holiday season.]

The Drones are Coming


Christmas Day is just two weeks from today, and there are reports that drone sales could exceed one million units this holiday season.  That’s quite a few unmanned aircraft about to be unwrapped in the morning and flying over the neighborhood by Christmas afternoon.  And that’s just the hobbyist market.  If recent reports are accurate, we’re not far from the day when commercial drones will be zipping around delivering packages, monitoring city streets, and scanning crowds.  Quite simply, drones are about to become as commonplace as sparrows in the sky.

Naturally, this introduces new risk management and insurance issues to be settled.  There are currently no mandatory standards for training or certification for drone hobbyists, and very little for commercial drones.  There is talk of requiring all drone pilots to register their drones so that they can be held accountable for any troubles they may cause.  That’s a start, but there have already been many reports of drones encroaching on restricted airport airspace, and I have a sneaky suspicion that it may take a major drone-induced accident to push many of the regulatory and risk management issues to the forefront.  I hope not, but at my age, that has been my historical observation.

As I understand these flying gadgets, they do have some built-in safeguards.  The technology can keep them from flying above 400 feet, and geo-fencing can keep them out of areas where they shouldn’t be.  Like any other technology, it may not be (probably isn’t) foolproof.  I’m seeing some parallels to the 1984 film “Runaway” starring Tom Selleck in which our hero Tom was battling against rogue robots that were being reprogrammed for nefarious purposes by the villain (played by KISS rock star and mogul, Gene Simmons) to carry out his evil plan.   Some of today’s drones even resemble the evil little “spider robots” that were prominent in the 1984 film.

To be clear, I’m not suggesting that drones are about to take over the world and do the bidding of villains, but let’s be realistic.  For all the entertainment value and commercial value that drones will bring to us, they will also bring significant challenges and new risks.  It’s not that far-fetched to imagine rogue drones being used for terrorist purposes to frightening effect.

So on that cheery note, enjoy your new drone on Christmas morning.  Just be careful and responsible out there.


Unhappy Customers


Insurance has long battled a negative public image.  Let’s face it.  Insurance is an intangible product that provides nothing that even remotely resembles instant gratification (to which our 21st century society seems to be addicted), and which we hope we never need to use but expect ironclad full coverage protection if/when we do need to use it.  What could possibly go wrong?

This is a troubling reality because the insurance product does more good for society than almost any other product when disaster does strike.  Insurance rebuilds lives and businesses.  Insurance soothes when pain runs deep.  Insurance quite literally saves lives.  Of course, that’s when everything works as planned, which is most of the time.  When insurance professionals properly match insurance coverages with client needs and takes the time to sell consultatively.  And when consumers take responsibility for understanding their risks and risk tolerances and seek to be informed purchasers rather than assuming that the insurance industry is packed with employees capable of mind-reading.  When it all works, it is beautiful.  When it doesn’t, the press kicks into high gear to vilify greedy and mean-spirited insurance companies.

I recently came across an article that specifically highlighted the rise (or decline, if you prefer) of the health insurance industry to among the most-hated industries in America.   The article cited work done by the American Customer Satisfaction Index, and quoted its director, David VanAmburg – who just happens to be my former college roommate and longtime friend.  David does good work, so I place significant credibility on the ACSI’s findings.  The natural inclination is to blame the increase in customer unhappiness with the health insurance industry on the Affordable Care Act (a.k.a. ObamaCare), but the ACSI findings didn’t find any direct evidence of this, though Mr. VanAmburg acknowledges that the influx of insureds under the ACA could be straining health insurers’ customer service resources.  Most of the complaints seem to arise from bad experiences with health insurer call centers and the (limited) choice of insurance plans – many of which are saddled with higher premiums and higher deductibles.

For all the good that the insurance industry does for people and society, we clearly have our work cut out for us.  Rebuilding lives that are torn apart by accidents and disasters, getting business back open again after a fire, providing the resources to care for the sick and injured, are all noble and admirable benefits provided by the insurance industry.  How can any industry that provides such benefits be among the “most hated” industries?  We’ve got some work to do.

On a sidenote, I recently blogged about federal government budget cuts in the crop insurance program.  Being the economic libertarian that I am, I questioned whether or not these budget cuts were really so tragic to the crop insurance industry or the agricultural interests they served.  Well, it’s all a moot point now, assuming President Obama signs the recently passed highway bill which restores the $3 billion that was initially cut from the crop insurance subsidy program.  Eh, what’s another $3 billion in a half-trillion dollar budget deficit anyways?