Disaster capitalism - How financial markets benefit from the climate problem | DW Documentary

Summary

The transcript discusses the emerging market for catastrophe bonds which allow investors to bet on potential disasters. It explores how former Wall Street bankers like John Seo create complex financial products to cover damages from events like hurricanes, using advanced statistical models. However, these products are inaccessible to most disaster-prone communities. The transcript criticizes how global capital exploits catastrophe risk for profit rather than focusing on prevention and community resilience. It highlights the limitations of algorithms in capturing unpredictable human behavior during crises when lives are at stake.

Takeaways

• 💰 Excess capital is a global issue, with an estimated 10 to 20 trillion dollars seeking profitable investments.
• 🌎 'Planet Finance' symbolizes a complex and fast-paced world where financial opportunities, especially risky ones, are pursued aggressively.
• 🔥 Catastrophe bonds (cat bonds) are financial instruments that speculate on the occurrence of disasters, transferring risk from insurance companies to investors.
• 🚨 The shift from traditional insurance to cat bonds reflects increasing costs and risks associated with natural disasters, leading entities like New York's Transportation Authority to seek alternative coverage methods.
• 🌧️ Cat bonds provide a unique investment opportunity, offering high returns but with the risk of total loss if the specified catastrophe occurs.
• 📈 The demand for cat bonds is growing, driven by their non-correlation with traditional financial markets and the increasing frequency and severity of natural disasters.
• 🔍 Cat bond pricing and risk assessment heavily rely on data modeling and predictions about future disasters' likelihood and impact.
• 🏘️ The personal stories from Bonny Dune illustrate the harsh realities and limitations of relying on public services during natural disasters, highlighting the importance of individual preparedness and community action.
• 💡 There is a clear divide between those who can afford to protect their assets through instruments like cat bonds and those who must fend for themselves.
• 🌐 The global nature of 'Planet Finance' shows that while financial markets can provide mechanisms for risk management, they also reflect broader disparities in access and vulnerability.

Q & A

What is the main issue caused by excess capital roaming the world?

Excess capital has no useful place to be invested, so it creates its own opportunities and allows crazy financial schemes to arise just to be put to work.

How did catastrophe bonds first come about?

They arose after Hurricane Sandy when the New York City transportation system realized its insurance was not enough to cover damages, so it worked with Wall Street to create catastrophe bonds to raise additional funds.

Who buys catastrophe bonds and why?

Big investors like pension funds, hedge funds and others buy them because they provide high returns uncorrelated to other markets and diversify risk across different disaster types and geographies.

How do the catastrophe bond triggers work?

The bonds have precise triggers based on disaster model predictions of minimum damage thresholds. If those triggers are hit, investors lose their money, which then pays for damages.

How did the residents of Bonny Doon fight the wildfires?

When the fires approached and firefighters would not come, the residents fought the fires themselves, using bulldozers to create a fire break to protect their homes.

How did John Seo's firm assist with the wildfires?

They used satellite imagery and modeling to predict property damage and losses, helping investors understand if their catastrophe bonds were at risk of being triggered.

What criticisms were raised about traditional disaster risk models?

That they rely too much on historical data when risks are changing with climate change, so AI and machine learning approaches do more simulations to better predict future risk.

Why are catastrophe bonds appealing to investors?

They provide returns uncorrelated to financial markets, so even if markets crash, the bonds continue paying high interest unrelated to market conditions.

How did residents of places like Bonny Doon feel they were viewed by officials?

They felt labeled as insignificant and disposable, realizing for the first time that the fire department and wider society did not value them or their homes.

What preparations did the Bonny Doon elder make for future fires?

He created a protective bunker stocked with air, water, and firefighting gear to shelter in and have the means to defend his property during future fires.

Outlines

00:00

😱 Capital chasing opportunities leads to crazy financial instruments.

Excess capital is desperately looking for places to invest, creating niche markets like catastrophe bonds that pay out when disasters happen. This allows capital to chase speculative opportunities just to be put to work.

05:00

🌪️ Sandy wreaks havoc, but creates opportunity.

Hurricane Sandy caused massive damage to New York's infrastructure. Since traditional insurance didn't fully cover the losses, the city issued catastrophe bonds to raise money, paying high interest rates to investors who take on the risk of losing principal if another storm hits.

10:04

💰 Wall Street finds appetite for oddball risks.

Investing in catastrophe bonds became popular on Wall Street because they provide high returns uncorrelated to other markets. They are complex instruments that pay off under highly specific disaster scenarios, but hedge funds enjoy modeling the risks.

15:04

🌊 New York adapts to climate change threats.

After Sandy, New York installed flood barriers and improved infrastructure. The catastrophe bond arrangement provides funds for repairs if flooding triggers are met, encouraging proper planning by setting measurable risk thresholds.

20:06

🔥 Taking on tail risks beyond the bell curve.

Traditional finance dislikes unpredictable disasters and uses normal distribution curves. But by developing models for severe events like 9/11, new firms like John's hedge fund tap into profitable "tail risks" that scare big institutions.

25:06

😢 Locals fend for themselves as wildfire encroaches.

When a massive wildfire threatened their California community, residents stayed behind to fight it themselves as firefighters were overwhelmed by the scale of simultaneous blazes sparked by lightning.

30:10

💻 Wall Street models don't capture human behavior.

John's firm models wildfire risks to price related catastrophe bonds, predicting likely property damage. But unpredictable human actions in crisis like stubborn residents staying to defend homes defy simplified calculations.

35:11

😕 AI judges areas uninsurable based on models.

A startup uses machine learning to model wildfire probability, considering factors like weather, terrain and emergency resources. But model outputs may determine remote communities are too risky for affordable insurance.

40:14

😢 After the smoke clears, there is only loss.

In the wake of the devastating wildfire, the isolated rural community was largely written off by officials and received little aid. For them no financial instruments cushions the blow, only loss of lives and property.

45:16

🌡️ Climate change fuels growing catastrophe market.

Increasing disaster severity from climate change drives more demand for catastrophe bonds. Firms Make big money modeling amplified risks while promoting these instruments as diversification for investors.

50:19

💰 Ultimately insuring yourself may be the only option.

Those in vulnerable, underserved areas cannot rely on Wall Street innovations to manage risk. Instead locals build their own "insurance" by preparing for disasters, from bunkers to community defense like fire breaks.

Keywords

💡Capital

Capital refers to money and assets invested by companies or individuals for financial return. The video says there is 10-20 trillion dollars in excess capital globally that is desperately looking for investment opportunities and returns. This drives capital to fund risky ventures like catastrophe bonds.

💡Catastrophe Bonds

Also called cat bonds, these are a type of insurance-linked security that transfers catastrophe risk to investors. They pay high interest rates but investors lose principal if a triggering event like a hurricane or earthquake occurs. Cat bonds provide insurance companies with reinsurance so they can cover large-scale disasters.

💡Planet Finance

This metaphorically refers to the world of high finance focused on complex financial mechanisms, investments, and speculation. Things like derivatives, hedge funds, and cat bonds exist on Planet Finance. The video explores how this planet operates.

💡Risk

A major theme is how risk is calculated, commodified, traded, and profited from within Planet Finance. This includes tail risks from catastrophes as well as systemic risks from climate change which traditional finance is unequipped to handle.

💡Mathematics

Advanced mathematics and algorithms are used to build models that try to predict the likelihood and losses from various disasters and extreme events. However, the video questions whether human behavior can be captured fully in such models.

💡Opportunities

For those with capital and computing resources, disasters also represent profit-making opportunities as clients urgently seek to offload cat bonds and related securities when catastrophe seems imminent.

💡Triggers

Cat bonds have triggers which specify conditions like minimum hurricane intensity or flood water levels. If those triggers are activated by a subsequent disaster event then investors lose all or part of their principal.

💡Bunkers

Both the village elder in the video and the Planet Finance system create bunkers as protection against disaster - physical bunkers in the case of people, financial bunkers in the case of cat bonds.

💡Significance

The village residents realize they are not "significant" to the wider system governing disaster response and are essentially disposable. In contrast, financial centers like New York are significant which is why cat bonds exist to protect their infrastructure.

💡Vulnerability

Both the physical/geographic vulnerability to disasters and the financial vulnerability of companies and municipalities are calculated and translated into cat bond mechanisms and premiums.

Highlights

There is roughly $10-20 trillion in excess capital globally that is struggling to find useful investments

Catastrophes like hurricanes, floods and fires cause breakdowns of systems and create uncertainty, which financial markets struggle to deal with

Catastrophe bonds allow investors to invest in the risk of potential disasters, providing high returns but with the risk of losing everything if a disaster occurs

John's hedge fund makes money by precisely calculating risks of disasters using complex data sets and algorithms to price catastrophe bonds

Human behavior in crises is hard to capture in algorithms and models. Individuals react unpredictably compared to large groups

When disaster strikes, most people freeze or flee but some stubbornly stay to defend their property, a behavior that is accounted for in pricing models

AI models run billions of simulations with granular data like tree types and distance to fire trucks to calculate wildfire risks for insurance

Investors are attracted to catastrophe bonds because returns are uncorrelated to regular markets - bonds still pay out if stock markets crash

When a potential trigger event happens, investors race to re-price and trade the affected bonds, providing profit opportunities

John's team continuously stress tests climate projections against their models to estimate rising risks and potential damage over time

After disasters like wildfires, there is often nothing left of value except the catastrophe bonds before damage is clear

Though risks are rising, investor demand grows for catastrophe bonds which now exceed the expected disasters

Sophisticated algorithms judge areas like Bonny Doon too risky to insure though locals feel neglected and disposable to official emergency services

Locals realize they must rely on themselves in disasters, not governments, as they are deemed insignificant and disposable

The village elder has his own insurance policy - an underground bunker stocked for survival in case of being trapped by wildfires

Transcripts

[Music]

[Music]

in the old days say uh pre1 1990s uh

Capital was king or

queen you called the

shots now capital is a

burden I estimate that globally there's

roughly 10 to 20 trillion in excess

Capital that has no useful

home no place to

[Music]

go it's it's just roaming the world

searching for a a

use for those who possess that Capital

uh it's it's a little bit of a

nightmare so it can kind of make up its

own opportunities or it can allow crazy

Financial opportunities to arise solely

to put that money to

[Music]

work there is a world made up of

numbers a world where you have to be the

smartest or the

fastest a world connected by radio waves

and Fiber Optic

[Music]

Cables a world where you can make money

if you think you know what the future

holds a world of fear and

[Music]

desire where you can win or

lose I call this

world Planet

Finance wandering around Planet Finance

I arrive at a place where they really

love risk here they speculate on the

chance of a wildfire flood or other

catastrophe

happening you want to try go from there

come on boys let's go this man lives of

disasters I married while I was in

college and I started my family while I

was doing my

PhD my my first child he cost the

insurance company half a million dollars

uh being born

prematurely and so the person at the

insurance company told me your next

child won't be

covered oh so good someone whispered to

me and they said hey go to Wall Street

um you know a lot of math they'll give

you health care just for solving one

equation okay so in the first interview

the person comes in he said John uh does

money motivate

you and he went on and on a 10 or 15

minute speech that culminated almost do

you worship at the altar of money does

money mean more to you than anything

else on this planet Etc so I was like

wow this is a very long speech so waited

for him to finish and I said

no now see then why are you here I said

oh I just need health insurance and I'll

do anything that you ask me to

do that was my start and that led

directly and eventually to my getting a

phone call from Leeman Brothers one day

for catastrophe

bonds I said oh wow I go okay so I have

no experience in that and he said that's

the great thing nobody

does on planet Finance there is a market

for nearly

everything even for a future

disaster a disaster that hasn't happened

yet a disaster that might never

happen

there are people who spend all their

time calculating the minimum chance of

such a disaster happening and above all

the extent of the

[Music]

damage what is a crisis or a catastrophe

or a hurricane what happens is it Causes

Chaos and chaos is the breakdown of

typical

[Music]

systems

and it's this feeling of you normally

walk around you're like I know the

subway is going to come at this time I

know that I have to go to work at 9:00 I

have to leave by five and to go to the

grocery store and then a crisis hits and

none of that is known anymore suddenly

it's all in the world of unknown to show

you how such a chaotic situation can

give rise to a market I will take you

back to a dark Autumn

night

come here

sh Hurricane Sandy reaches the shores of

New York a state of emergency is

declared and all traffic comes to a

standstill the South part of Manhattan

is

flooded and power goes

out the next morning the extent of the

damage becomes clear and even Wall

Street is forced to close trading for

two days a rarity the last time that

happened was after to

911 the aftermath is a process of how do

you go from chaos back to understanding

or back

to some sort of stability it's not going

to be the same as it was before but

hopefully a little bit more stable than

than uh than that moment of

Chaos

the storm leaves New York with 43 dead

and billions of dollars of

damage the flooded tunnels are the

greatest disaster to ever happen to the

city's public transportation

system be careful CU you want to have

some grease in it so might be a little

sppy so how do you make a business out

of that what what is the business well

the business is

being able to predict that risk and

price it how can anyone make money out

of a disaster a disaster that only seems

to leave losers in its

wake the tunnel filled with water for

about 2/3 of its length we estimate

there were about 60 million gallons of

salt water entered the tunnel

I think it was about a week of solid

pumping just to just to pump the water

out of the tunnel that was before we

started doing any repairs or cleaning or

anything like

that I don't think anybody anybody knew

what the intensity of it was going to be

when it actually came and you know we

weren't weren't really prepared for it I

guess today New York is prepared to be

able to pay for the damage when the next

hurricane happens a former Banker has

found the solution she spent years on

Wall Street and now works for the

Transportation Authority of New York for

the uninsurable damage she goes to

Planet Finance for help we're all here

about hurricanes in the Caribbean we

know about damage in Florida

occasionally and we never thought that

it would come here but it

did

of course our system was devastated the

inside of our tunnels um have a lot of

electrical um equipment that was all um

[Music]

ruined our um damages were like in about

$800 million range I

think we were only able to get about 500

million give or take in coverage and the

premium doubled actually more than than

doubled so we were concerned that we

were not able to get enough coverage

that's when we started working on our

first cat Bond transaction let's explain

that one first cat bond is short for

catastrophe

Bond a bond is nothing more than a loan

that has to be paid back before a

specified

date I lend you a sum of money you pay

me interest and at the end of the term

you pay me back the borrowed amount but

a cat Bond goes further than that if a

disaster occurs before the end of the

loan's term the money lender loses the

entire sum which is then used to

compensate for the damage and save New

York it's it's exactly like insurance

right Insurance collects your premium

while everything's okay it's supposed to

pay you when you have been and

loss so now New York pays interest on a

cat Bond instead of an insurance

premium and if you want to buy a cat

Bond you go to John so I described the

deal and I fairly quickly got to the

size it's say oh nothing just 500

million you know years ago Jon couldn't

get health insurance when his wife was

expecting a second baby now he owns a

hedge fund specialized in cat bonds the

hedge fund there is losing leaving 400

basis points on the table right that's

why it's like cuz we're not cat bonds

that should cover the damage of future

disasters reasoning is that there are

all these opportunities and you just

have to give examples like I gave right

but as I say to get in on the game you

need at least € 100 million hold on a

second this is a billion and a half

commercial mortgage that's backed by the

collateral of the building itself the

complex and the the complex itself is

not insured against earthquake or flood

even or all these cat there are even cat

bonds to cover the damage of solar

storms and meteorite

impacts so this is uh our main room

we're 31 people and uh we invest in

bonds now bonds are usually very simple

uh these bonds are called catastrophe

bonds meaning earthquakes hurricanes

floods we lose money when they occur so

uh we're not profiting off a destruction

we're ensuring uh destruction uh that is

otherwise too large for traditional

insurance companies to handle

comfortably so there's a a lot of

computation that's involved in

this this server room is the heart of

the company the computers link the

widest range of data sets together and

continuously calculate the probability

of a future disaster

happening plus the damage it might

because um it's set up so that my older

brother who used to sit right over there

can actually see all the status lights

from his

desk so it turns out running a server

room is very complex because you have

software to see if software is broken

but then you need software to look at

that software to see if it's broken and

usually the the the whole chain doesn't

work all the time so the best uh

indicator of failure is actually a red

light so you want to be able to stand up

and see the red light

[Music]

investors uh around the world are

looking for something new to invest

their money in uh and then they find us

once they find us and allow us to invest

uh their money then then the really the

rest is relatively easy I up my hey

hello right are we on that 10 to 20

trillion dollar of capital roaming the

world is urgently looking for returns

our clients are wonderful they they come

from every continent from every investor

class uh in in the world uh so it's

everything from uh giant National

Pension funds corporate Pension funds

Sovereign wealth funds uh insurance

companies Banks endowments charities

uh and and Wealthy individuals what

would happen if normal the traditional

bonds witness higher

yields how would it affect the cat bonds

you know our our Market is if the

interest rates on other bonds go up as

they do today the interest rates on cat

bonds automatically go up as well so the

returns remain high you know in a sense

catastrophe bonds are the only thing

left over to absorb that extra risk the

the demand for cyber risk coverage is

going to explode over the next

year Jon so's clients invest millions in

his hedge fund and throughout the term

of the cat Bond they receive an

attractive interest rate in return but

first the conditions under which they

can lose their money are precisely

defined there are so-called triggers for

that what the minimum damage should be

after a wildfire or what the the minimum

water level should be during a

flood the trigger was created

specifically for our area basically the

modeling firm did the analysis where

potential storms can come from and they

analyze about 100 Years of data they

model 100,000 storms based on all this

data available

historically and basically they're

continuously measuring water levels the

triggers are in if in area a the trigger

level the water hits

7.75 ft or in area B it hits 12.75 ft

above nava8 then transaction triggers

another condition for the transaction to

trigger is that there's got to be an

aimed

storm every new hurricane season the

first tropical storm gets a name

starting with the letter A until the end

of the alphabet is reached Anna Bill

claudet Dany many named storms have

swept across New York since but the

water never reached as high as it did

during

[Music]

Sandy it it actually never triggered so

so far investors didn't lose any money

on us we hope it is going to happen at

some point I'm I'm joking but um yeah so

so far so good um um so far it hasn't

triggered we we didn't have another

Sandy so this cat bond is not only a

solution for New York but Planet Finance

is happy as well a typical winwin

situation a catastrophe Bond it's

brilliant because it's so simple uh

there was no complexity for the

investors you know when you when you set

a high uh water mark there and you tell

very clearly to the organization if the

water comes to 8 ft not 8 and 1/2 ft

then we have no insurance then the

engineers know how high to make the

sandbags to design all the flood

barriers for all the entrances

to

so one of the the mitigation measures

that we put into place after Sandy was

these floodgates right here these are

steel hinged flood gate each of these

Gates weighs approximately um more than

40,000 lb so approximately 20,000

kg this Floodgate seemed to be the the

best combination of cost strength as

long as we maintain them and replace the

gaskets these should last for 7,500

years John's job is to make sure that

even if there is a big storm there is no

damage to his tunnel our tunnel I should

say

right so my job is to make sure that if

there is damage we have money to fix it

right investors who invest in CAD bonds

they just used to investing in this kind

of risk that's what they do and to be

honest because it's such a risky asset

right um they enjoy much higher interest

rates that are currently available on

other assets you know they will invest a

little little bit in MTA CAD Bond and

then unless a little bit in the

earthquake in Mexico cat Bond and a

little bit in Japanese typhoon CAD Bond

and this is how they diversify their

portfolio so things don't hit all at

once and they don't lose everything

but so there is a market for disasters

all around the world each with its own

risk and therefore its own

price managing catastrophe risk is is

very very particular

and this was originally what drove my

perception of the opportunity here the

opportunity not just for profit but

actually create a whole another industry

that never existed before it was driven

by the fact that traditional Finance

actually uh is very uncomfortable

dealing with catastrophe risk and

effectively sweeps it under the rug

right they want to think about the

opposite which is you know uh the

winning lottery ticket hitting it big

you know big upside who wants to think

about downside so the very first task I

set myself to even before I went to

Leman Brothers to manage a catastrophe

uh Trading Group was to actually

redevelop all the mathematics outside of

the bell curve right so there it is the

bell curve a graph in the shape of a

church bell traditional Banks and

insurance companies use the bell curve

to calculate their

risk in the middle you see what is most

likely to happen for instance the chance

of people paying off their mortgage the

sides of the curve show you the chance

of what is less likely to happen like

mortgages that aren't paid off due to

unemployment or

illness the business model of Planet

Finance is built on the most likely

risks not on the so-called tail risk

that's where it becomes much harder to

make precise predictions because because

what are the chances of an airplane

flying into the World Trade Center or of

a tsunami crashing straight into a

nuclear power plant these are the

unexpected events the traditional part

of Planet Finance isn't prepared for but

John so lives off these fickle chances

the reason why they're stuck on that

framework is because they don't have

anything

else and it terrifies them because if

you can't rely on that uh there is

actually no academic framework for

dealing with systemic uh catastrophe

risks CU if you don't have that

framework then you can only deal with

emotion or relying on old-fashioned

techniques that are that are known not

to work and and you need to break with

that if you're going to survive uh in

the catastrophe Bond

[Music]

Arena so Jon so's algorithms can be used

to calculate the chance of a disaster

happening but to me human behavior seems

much harder to capture in an algorithm

because uh individuals are too wild and

wet and

non-uniform uh to be conquered with

simple

mathematics to show you how those Planet

Finance algorithms affect planet

Earth I travel to the Village of Bonny

Dune a close-knit community on the

American West

Coast a place where the threat of

wildfires looms every long dry summer

there's Josh hey hey I he you are you

going to be there for a few minutes all

right I'll be around the community has a

village Elder who lives off the wood

from the

forest Johnny did you see there's three

deer in the

orchard his wife who grows flowers for

weddings and celebrations the St deer

might go up over the road we have to Sho

some deer out of the garden uh

okay and this man who makes his living

drilling water wells I think we're set

okay oh you want to get fuel you already

got

it and a teacher who gives lessons to

convicts when one fateful August Night a

wildfire came St stra at them they

decided to fight it

themselves it was the night that marked

the beginning of the Santa Cruz

lightning complex fires which started

with as many as 11,000 bolts of

lightning in all the 50 years or more

that we've been here we have never seen

so much lightning and we thought what is

going on but we still uh the fire hadn't

really become a reality well it wasn't

reality it hadn't started started yet

and there happens to

be some lightning chain

Lightning by the mon

B got to check this

out we looked out our bedroom window and

we had never seen anything like it well

it was lighting up the sky everywhere

wasn't even in one

spot there's the wall of clouds coming

towards

us

Uh something's coming something

big something's

going thunder clouds humid

huge I mean it was behind as it was up

north of us it was everywhere there were

big lightning bolts going off all over

the place and that's why there were nine

different fires started you know and the

Thunder claps were loud they weren't

just you know all way off in the

distance they were right on top right

around

us the fire

department well we didn't ever see them

to be truthful because they were all

going going to these different fire

locations I took

Nancy our daughter and all the kids and

everyone up here

vacated and then fire was

hitting it was hitting the upper part of

BU who was coming up that SWAT there and

starting down this way he get a chunk

here it'll drop every human being is

constantly making his own personal

assessments how to deal with the risks

of

Life John was up on the mountain by

himself his son had left his daughter

had

left everybody was gone except for John

all the neighbors left John was the only

one who stayed there was one night when

John was the only one up

there he's also kind of this uh

patriarch of community and and a really

well-respected Elder I would call him

and so I felt the need that I needed to

go up just to help John if help was

needed and when disaster suddenly

strikes you can freeze flee or fight

most of us even though we're Hermits

just kind of were like okay the

government's going to handle it let's

get out of the way and then when um John

Laman decided to stay uh and you know he

let us all know that nobody was here you

know it's kind of like that uh age-old

story like no one's coming to save

you ooh cop don't know what he's doing

here maybe we're all in

trouble but we kept getting uh refused

by the police um and uh so we ended up

sneaking up

here I'm so curious about that sheriff

we rarely rarely get cops up here just

because you know why

Patrol we're not super

interesting um yeah to to start we'll be

uh revisiting some notable wild many

miles away John so and his team are

trying to calculate bu the possible

damage of the wildfires to see if any

triggers could be activated the the tubs

fire from 2017 campire from 2018 Wy from

2018 and the Santa Cruz Landing fire

from 2020 so then let me see here where

the where the property counts there the

actual property counts are there in line

six right you obviously see in green the

fire perimeter for the Santa Cruz Fire

the CCU fire what what's in green that's

the the green is the it's not Forest

it's actually the buyer per that's the

that's the fire perimeter which I'm I'm

going to turn on and off toggle on and

off okay and um could you create a

different color for that make it

red you know what you see is a bunch of

yellow dots and each of those dots

represents properties in and around this

case the Santa Cruz County we know what

resources are we at the very beginning

of that event we tested a uh a new

satellite imagery processing technique

to try to predict what the the losses of

that fire would be but would you say the

burn ratio in those areas total number

of structures versus you know it will be

quite High it'll be high yes yeah so

that's what it would be interesting to

find out because now you're basically

coming up with a a

resource kind of uh dependent view on

what the burn ratio is going to be yeah

which I like wildfires are very common

and they are relatively straightforward

events you have ignition you have burn

and then you have damage Dage so where

most people actually think that the

greatest uncertainty lies is in the

damage itself right if you if you burn a

certain area then how many of the homes

are destroyed and there is some

uncertainty in there but there's

surprising patterns in

that maybe those patterns can be

recognized in the data but I wonder what

good those calculations are to you when

the fire is coming your

way

no one knew how bad it would

get all night long I would go up to the

top of our property and during the night

I kept hearing these explosions that I

thought were the propane tanks I mean it

was a boom you

know Ash was falling on me but it was

still tiny breeze on the back of my neck

the the little breeze was actually

blowing the fire slightly away from us

in the morning it came over the

Ridge and then I could see trees flaring

up

um I was walking

around

and I

guess partially because my daughter

was

emotionally

um I guess she was tweeting and calling

people telling them to get me out of

here it was a very surreal

experience rodents uh mice and rats

literally like running through your legs

just fleeing the fire

and then the um butterflies a lot of

Monarch butterflies were just they were

just landing on me in the woods and they

didn't

seem I mean how can you read a

butterfly's uh personality but they

didn't seem panicked you know the way a

butterfly is just so light in the way

they live it seems like and so they're

just kind of cruising along and they

would land and then they would move on

but there was a lot more than I have

ever seen in the woods and obviously

they were just moving away from the

danger

they don't have necessarily decent roads

coming in going out calfire won't be

able to reach there so the burn ratio is

going to be 60% should yeah

[Music]

[Applause]

right the fire was finally starting to

come around and approach

[Music]

us anybody that knows how to go towards

the

Empire no I don't

no I think I realized probably on the

second day of fighting the fire that we

were going to control it as long as the

weather didn't

change the information was so poor from

social media under their iPhones they

were seeing pictures

of that very aggressive

fire

and so from social media there was these

satellite images that showed what they

said were hot spots of where it was

burning and where it wasn't so you would

you was kind of an overlay of the

Topography of the land and it just had a

bunch of dots the red dots where it was

really hot orange wasn't as hot yellow

maybe it had already burned and then

green was okay and when you looked at it

it showed red dots all over our house

and all over our

neighborhood people were hyperfocused on

this image and they're just like it's

burning right here and then we would get

texts from them say from people in town

saying it's burning on back Ranch Road

you need to go check it out you need to

get out that's your only way out and we

go out to back Ranch Road there was no

fire and we say there's no way it's

burning on background so we can see the

fire it's right here you know and then

we would tell them and then no it's

burning on Warren Drive you need to go

get out and then we'd go look and be

like no it's not burning there

either and it wasn't until I think

probably 3 or 4 days in we realized that

the satellite damage was transposed

improperly it needed to shift East by

about a mile or

[Music]

so the fire went around I came up the

backside and all of a sudden we got a de

A

desperate hollering there was a draw

there it had come up and it caught one

of his out buildings on

fire

by the time I got up

there it had taken off it was really

burning we were going to stop

and it literally sounded like some Jeet

plane preparing to take

off and that's when I

decided you know this is ridiculous

let's get the bulldozers and we push

this fire break

through and with those bulldozers the

Bonny Dune residents create a wall a

fire break between themselves and the

approaching

Flames it almost looks like that upper

left lobe yeah like it go to the left

there yeah that lobe right there that

looks like they were the ones that

actually successfully built a perimeter

so I'm going to I'm going to zoom in on

that and actually see if I can see uh

the and then the human behavior is a

fundamental part of the modeling it's

actually already taking into account

that there's millions of sometimes very

stubborn and independent especially here

in the US uh homeowners who are defying

orders to leave and evacuate are running

around you know putting up boards over

their windows and defending their homes

if it weren't for that behavior uh then

the losses would easily be double or

triple what we're observing so it's

actually in a sense priced in this human

behavior right so John so has already

factored in this behavior of large

groups of people but what about the

behavior of a single

individual because whether our village

Elder can be insured against wildfires

is De decided today by

algorithms in New York a finch startup

is confident that it can calculate the

risk of a wildfire down to the smallest

detail and therefore determine whether

something is insurable or not and the

first version of our model didn't really

take into account the randomness of

lightning so it didn't really consider

lightning as as a as a major variable um

so the

reason we exist is

because the old way of doing things is

isn't really working anymore that's the

traditional way of understanding risk is

let's look at this spot on the map this

ZIP code and we look and say okay over

the last uh 500 years this has burned

five times so it has a one inone 100

chance of

burning and then you price it

accordingly the problem is

it's right there in the word climate

changed see right here negative4 is

Extreme drought right negative3 is a so

you can't really use the last 500 years

and expect to be able to predict the

next 10 years off of that you have to do

a much

more bottomup physical model uh using

machine learning looking at the reality

of that place now this is what the trees

look like this is this is what the

weather looks like this is uh where the

fire brakes are this is how close the

closest fire engines are and all that's

being done by the the model the AI model

so it's to give you an idea the

traditional way of doing it they might

run a 100,000 simulations to get to that

one and 100 number they might say run

100,000 different simulations and say

okay I I think that this has a one in

100 chance of burning we're our machine

learning models our mod models they're

running

682 billion

simulations to build a well functioning

AI model out of

682 billion simulations you need all

kinds of things I'm losing money I don't

know how to model this anymore the

models aren't working I'm going to leave

I'm just I'm not going to do this

anymore first of all you need

investors's money where else can you go

with but also brains with a background

on Wall Street and I started my career

at Comm Sachs and and I'm a doctor as

well a climate

scientist a mathematician a probability

that the fire will spread to a greed in

California and the founders who

zealously promote their AI model there

is significant Alpha that we could find

in the industry as we've seen as they

all pull back because they say all right

we have no idea what the future's going

to look like there's a far more measured

and datadriven approach that that we

could really take towards it yeah a lot

of the traditional finances so places

like Pension funds and hedge funds and

and family offices looked over and said

well here's this whole world that that's

writing insurance policies it's not

focused at all on the stock market or or

you know in Commodities or something

like that they're just focused on

whether or not a hurricane happens an

earthquake happens or you know Wildfire

happens and why that's so valuable is

because it's a non-correlated asset and

what I mean by that is the stock market

can be doing whatever it is today that's

almost completely unrelated to whether

or not the wind is blowing in Florida

and there's a hurricane happening and

one of the best things you can have it

is an investor is something that's

non-correlated because even if you think

you're Diversified in your portfolio but

it's all in the stock market well if the

stock market blows up tomorrow then

everything's going to go

down so the appeal of a cat bond is that

it's a completely different type of

risk even if Wall Street crashes

tomorrow the cat Bond will still bear

High interest

rates we're headed out to last chance

road to to get people water um we work

on work on water wells and uh repairing

water wells virtually every water well

out here

melted fire came through

there uh very fast and very hot very

different than the than the fire that we

did dealt with at our

home sorry for the dirty

windshield it's only going to get

dirtier

today it used to be you couldn't see any

of this this this was all

trees that was a house there there was a

house right

here that one

survived

[Music]

one gentleman died out

[Music]

here he was an elderly guy who went back

in to get stuff from what I heard and he

didn't make it out he tried to hike out

through the state park and he didn't

make

it they found him some some of the

neighbors found

[Music]

him

after the disaster there is nothing of

value left but when lightning strikes a

bone dry forest or when a hurricane is

on its way to the coast and the extent

of the insured damage isn't clear yet

that's when Jon so swings into

action whether it's a a hurricane

wildfires or an earthquake that just

happens in the middle of the night I get

a phone call and I'm woken up we have

software and tools in which we bring up

our portfolio and immediately access the

impact to the portfolio from the event

so um if I zoom in if it looks like a

trigger is activated and as an investor

you could lose all your money then you

naturally want to get rid of your cat

Bond as soon as possible by putting it

up for sale that's when interesting

opportunities arise if you're not able

to estimate the the losses of of a live

event like this then you have to

question your ability to estimate the

risks hypothetical risks to this Bond

and pricing it so it's a it's a little

bit like a Formula One

race worldwide very few players have the

knowledge computing power and reaction

speed necessary to play the game LEL

just before the fire and then as soon as

possible I wonder whether that would be

it a typical uh catastrophe bomb

portfolio will have roughly 200

positions in it what do you mean uh

we'll have 200 different catastrophe

Bonds in it these data and so in a major

event um roughly 80 to those are

potentially exposed to the event that

narrows it down from 200 to

80 and then um are immediately

estimating what the intensity of the

event is going to be and and therefore

what the financial losses will

be and then from that next cut the 80

bonds that are at risk suddenly Narrows

down to 10 so that final list of bonds

that are potentially at risk the seller

really just wants to sell lot of media

attention we saw a lot of like a hot

potato no one wants to burn their

fingers on these cat bonds are now being

resold for less and less

money the uh the market maker will call

us and say I've got an offer on 5

million of this Bond at 60 cents on the

dollar so normally if the bond was not

in trouble it would trade at full value

uh 100 cents on the dollar but it's

offered at 60 cents on the dollar so if

JN so thinks he is better informed than

the rest of the market and he is sure

that the trigger won't be activated and

he won't lose Millions then he can seize

his opportunity and buy a cat bond for a

bargain

[Music]

price it's a it's a tricky business

because roughly every other year you

have a catastrophe bond that loses money

and I've been doing this for over 20

years so we've lost um a lot of money on

on on those cumulatively

we've made more than we've lost on net

but we've had significant loss

experiences for

sure so if a cat bond is really

triggered you lose a lot of money as an

investor therefore Jon has to constantly

test the most recent climate projections

against his own data and calculate the

extent of the potential damage of those

projections so here are the different

end of century temperature projections

so obviously the 8.5 scenario is the

highest okay so 2° by 2050 45 40 Etc and

we tweaked those the historical storms

and ran it through their model and on

average that increases by 3 1.34 so 34%

you were so it's a 3 no it's a 35% 34 in

what I okay 34% increase in in damage

right in damage and what' you do did you

oh that's annualized and you an

annualize it from today or from 2020 oh

okay the world is getting riskier for

sure so that is driving growth in our

Marketplace by our

estimation uh the the world needs

roughly 500 billion of catastrophe of on

finance largely it's for the time being

uh a US centered Market but the

potential worldwide is is immense you

know whether it's a flooding in Germany

uh flooding in Asia particularly in

China you can calculate what the

exposure is because in the end it's

physical so really you you need

effectively Google Earth and to look at

all the property around the world and

understand its vulnerability to

earthquakes hurricanes and floods and

you can do the

calculation right

but what is the bottom line for the

people of Bonny

Dune for a lot of people up here it was

a huge surprise to them that the firemen

didn't

come I think it really is a numbers game

on people and then the amount of wealth

within an entire community so you know

we might have some affluent community

members but it's not the Silicon Valley

or you know it's not all affluent Comm

so it's not worth it for them I think it

must

be uh how close it is to a city that you

know that they care about for most of my

community it was the first time that

they realized that they were not

significant um and uh that that they

were deemed easily

disposable not significant disposable

the fire department wasn't willing or

able to save many of the houses so cat

bonss at Bonny Dune no one noticed their

existence they only work for you if you

own insurable property this is bunny

Doom yes uh yes

T Last Chance

Road last

chance Last

Chance

no yes this still shows us like a

extremely high risk we see that

historically this place has burned in

the

past so actual model shows that this uh

Bon do location uh is like

1.18% chance of burning so that's

actually within 95 percentile in terms

of the risk yeah so 95% of the

California has lower risk than this

particular location the distance to um

Wildland and Uber interface is to to

close and then the Palmer jot uh

severity index is too low and those are

the reason behind um we think this

location is actually too dangerous for

to

Ure

[Music]

so this is my little

bunker I've got four compressed air

bottles there that are full of

air I'm never going to if I stay in here

I could stay in here hours with those

tanks with no outside air but my house

would be burnt down and I've got to come

out of this as soon as that big wave

Burns over I've got to be out there

putting out the fires but anyway this is

just a little there a little insurance

policy is what it is you know I

doubt 90% of the time I'm never going to

use this but if if that one two five% of

the time I need it it could save my life

so that's why I got the compressed air

tanks and the water and and it also

gives our loved ones the Assurance or

the feeling that oh yeah Grandpa's got

it together he'll get in his little

pizza oven and sit there and eat pizza

you know so yeah and I've got a hoses

and I've got a little can of gas there

so I'm I'm Ready the people of Bonny dun

ensure their own

lives and rebuild them if they need

to because if you live in Bonny dun or

by the mass River or in Pakistan you

you'd better build your own bunker or

[Music]

Levy if there's anything I've learned is

that it is hard to calculate the risk of

a war a pandemic or climate change yet

on planet Finance even this kind of risk

is a good business model because the

capital that's roaming the world is

always looking for a way creating new

arenas for profit

you could call it perverse but for a few

years now the demand for cat bonss

actually exceeds the expected

[Music]

catastrophes