Image Credit: DeepWater Horizon Rig, April 2010 (NOAA News)
By Mark Montgomery
April 26, 2017
Every year, natural catastrophes (nat cat) are highly visible events that cause major damage across the world. In 2016 the cost of nat cats were estimated to be $175 billion, $50 billion of which were covered by insurance, reflecting severe financial losses for impacted areas.[i] The total cost of natural catastrophes since 2000 was approximately $2.3 trillion.[ii]
Much less understood is that human-caused catastrophes (hum cat) have resulted in much greater economic damage during the same period and have become increasingly preventable. Since 2000 the world has experienced two preventable hum cat events of $10 trillion or more: the 9/11 terrorist attacks and the global financial crisis. In addition, although the Tōhoku earthquake in Japan was unavoidable, the Fukushima Daiichi nuclear disaster was also preventable, now estimated at $188 billion excluding widespread human suffering and environmental damage.[iii]
One commonality in these and other disasters is that experts issued advanced and accurate evidence-based warnings only to be ignored. The most famous and costly such example was the Phoenix memo issued on July 10, 2001 by Special Agent Kenneth J. Williams.[iv] The FBI memo was described as “chilling” by the first journalist who reviewed it due to specificity in describing terrorist-linked individuals who were training to fly commercial aircraft.
Williams was a seasoned terrorism expert who followed the prescribed use of the FBI’s rules-based system, yet during the two-month period prior to the 9/11 attacks no relevant action was taken. If the lead had been pursued the terrorist attacks and ensuing events would very likely have been avoided, including two wars with massive casualties and continuing hostilities. Government agencies have invested heavily in prevention since that fateful day of September 11, 2001 so hopefully similar events will be prevented.
In corporate catastrophes, however, prevention scenarios are usually more complex than the Phoenix memo case. They are also occurring with increasing frequency and expanding in scale and cost.
While critical details on corporate crises are typically confidential due to liability and privacy concerns, the DeepWater Horizon (DWH) disaster was an exception to the norm. Several investigative reports on the DWH are available that serve to assist in understanding human-caused catastrophes. Estimated to cost $62 billion to BP, the disaster caused 11 deaths, injured 17 people, and produced a massive oil spill.
Although few corporate events compare to the scale of DWH, commonalities are found in almost every case regardless of size or type. BP’s internal investigation concluded similarly to most large human-caused catastrophes:
“A complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident…” [v]
Predictive analytics for networks is essential but insufficient. The Deepwater Horizon Study Group (DHSG) describes the cultural dynamics involved:
It is the underlying “unconscious mind” that governs the actions of an organization and its personnel. Cultural influences that permeate an organization and an industry and manifest in actions that can either promote and nurture a high reliability organization with high reliability systems, or actions reflective of complacency, excessive risk-taking, and a loss of situational awareness.” [vi]
Overcoming barriers to prevention
Barriers to prevention systems are problematic for everyone, not least for the senior executives involved. Companies at the center of catastrophes are usually found in hindsight to have underinvested in prevention. This is true even for high-risk profiles where an exceptional return on investment (ROI) appears almost certain to the trained eye. The oil and gas industry is a thematic example. Despite overwhelming evidence in the DWH and many others, the industry is slow to adopt organizational systems that can prevent such catastrophes.
AI systems face a special challenge due to a paucity of decision makers who have spent thousands of hours studying related science. A scarcity of qualified and unconflicted advisers compounds this problem. Some teams are also challenged by a desire to control prevention systems that must be secured against tampering or fraud. However, the most persistent obstacle blocking the realization of value in prevention of human-caused catastrophe is the difficulty in demonstrating efficacy in advance, particularly while protecting intellectual property.
While several functions are included in the Kyield OS to provide a system greater than the sum of the parts, including productivity, security and continuous improvement, prevention is the most valuable. The value is not limited to catastrophic events, however. Small events can rival hum cat values over time and trigger a chain reaction, hence the importance of prevention.
In order to eliminate barriers to the realization of critical prevention systems, we have developed a new market-based approach named ‘hum cat’. This program provides an option to combine the Kyield OS functionality with insurance similar to ‘nat cat’ bonds. Insurance coverage is tailored to the unique risk profiles of each organization in an offering that reduces or eliminates uncertainty in the decision process with upfront guarantees.
Benefits and incentives with the hum cat program
1. Ownership and control of the data remain with the customer
2. Select meta data is shared with underwriters per agreement
3. Strict certification is required for compliance, including monitoring
4. Cost-plus model with deeply discounted bonus for prevented catastrophes
5. Captured preventions are confirmed and valued by independent actuaries
6. Insurance is tailored and managed by specialty brokers
By installing the Kyield OS in a strictly certified manner, operational risk can be significantly reduced. Much of the remaining risk can then be transferred to insurers. Expected benefits include lower insurance and borrowing costs, significantly improved balance sheets, reduced operational risk, and continuously improving performance. The hum cat is an idea whose time has come.
Mark Montgomery is the founder and CEO of Kyield, originator of the theorem ‘yield management of knowledge’, and inventor of the patented AI system that serves as the foundation for Kyield: ‘Modular System for Optimizing Knowledge Yield in the Digital Workplace’. He can be reached at email@example.com.
[i] Munich RE January 4, 2017: “Natural catastrophe losses at their highest for four years” https://www.munichre.com/en/media-relations/publications/press-releases/2017/2017-01-04-press-release/index.html
[ii] WEF 16 December 2015: “How much do natural disasters cost the world?” https://www.weforum.org/agenda/2015/12/how-much-do-natural-disasters-cost-the-world/
[iii] Reuters December 9 2016: “Japan nearly doubles Fukushima disaster-related cost to $188 billion” http://www.reuters.com/article/us-tepco-fukushima-costs-idUSKBN13Y047
[v] BP September 10, 2010: “Deepwater Horizon Accident Investigation Report”
[vi] DHSG March 1, 2011: “Final Report on the Investigation of the Macondo Well Blowout” https://ccrm.berkeley.edu/pdfs_papers/bea_pdfs/DHSGFinalReport-March2011-tag.pdf