The insurance industry is aware of our collapsing infrastructure, so why aren't we doing anything about it? by Bill Gee
(centrist)
Monday, May 23, 2011
On a recent canoe trip down one of New Jerseys many tributaries, I could not help but look up in horror every time I paddled my way under a bridge. Above me, the drivers of the cars, trucks, busses and trains that used these waterway bridges were blissfully unaware of the state of the steel I-beams that were their only protection between them and a headfirst plunge into the creek.
Twisted Priorities
According to NACE (National Association of Corrosion Engineers), the estimated cost to eliminate all backlog bridge deficiencies in the US alone is between $78 billion and $112 billion. According to the American Society of Civil Engineers, they believe that it will take a $2.2 trillion investment over the next five years in order to address our horrible infrastructure issues.
Compare that with the $1.283 trillion approved by Congress to fight its global war on terror!
While some communities have made an effort to try to address this issue, given the fiscal challenges faced by our government and governments all over the world, the likelihood that this will be addressed to the level that will mitigate a major infrastructure failure is not very high. The warning signs have been there for years but as the saying goes, "infrastructure is not sexy", and therefore, governments from the local level all the way up to the national level have let our infrastructure deteriorate in favor of low taxes, pet projects, and outright corruption.
The Rising Cost of Insurance
While taxpayers and the government has been ignoring the sorry state of our infrastructure, the insurance industry has not. Your property insurance carrier is well aware of the increasing number of potholes on your route to and from work. They are cognizant that the bridges on the interstate you drive have not been maintained for corrosion damage in over fifteen years. They know that the wooden poles that hold your power lines and transformers should have been replaced years ago and are just waiting to burn your house down. They know this, and they have factored that increased risk into the price of the insurance policy that protects your home, car, and your life. In fact, the insurance industry is actively seeking ways to mitigate their losses by finding ways to not pay their claims. For example, if your home or business is damaged due to an infrastructure failure and your insurance company determines that the problem existed prior to the coverage date, they will not pay the claim! (Source: Schladen Speigel, an industry newsletter published by Munich Re)
In other words, where you have been able to save money by keeping your infrastructure taxes low, you are now seeing your "private taxes" increased by your insurance company. The problem with this added private tax that you give you your insurance carrier is that the money is used to pay the claims of infrastructure failure AFTER it has happened, not BEFORE it has happened, and there is no assurance that your insurance company will pay in either case! (Economists call this the "Tragedy of the Commons")
Ignore This At Your Peril
It is not the job of the private insurance industry to fix our infrastructure problems. At the end of the day, all they want to do is to be a profitable business, and in order to do that, they need to price their products at a level that will enable them to do that. Some insurance carriers, such as Munich Re and Swiss Re are making direct infrastructure investments as part of their global commitment to be good corporate citizens, but their efforts are largely symbolic. The real commitment needs to come from us.
The longer we try to ignore our infrastructure problems, the worse it is going to get and the more expensive it will be to fix both in Direct Costs and Indirect Costs.
The I-35 Bridge Collapse
Let us consider the direct and indirect costs associated with a single infrastructure failure - the I-35 bridge collapse just outside Minneapolis on August 1, 2007. The collapse of the bridge at the height of rush hour resulted in the deaths of 13 people, caused major economic disruptions to traffic into the Twin Cities and prompted the need to construct an entirely new bridge.
Direct Costs
Life Insurance Payouts: (Assumes a $250K payout per person)
$3.25 million
Injury Claims: (Assumes $50K per person X 98 injured)
$4.9 million
Cost of Rescue & Cleanup Approved by Congress
$250 million
Cost of New I-35 Bridge
$234 million
Total Direct Costs
$492.15 million
That's the easy part. More challenging are the Indirect Costs. According to the Minnesota Department of Transportation, they estimated that the loss of the I-35 bridge resulted in an indirect economic impact of about $400,000 per day due to business interruption, increased travel time for commuters and added stress on other major roads in the region. The overall cost was $17 million in 2007 and $43 million in 2008 for a total of $60 million from the time of the original bridge's collapse to the opening of the new bridge. What we should but cannot measure in this cost calculation is the physical and psychological trauma, especially for the 60 school children whose bus nearly fell into the river! What also cannot be measured are the opportunity costs of businesses that were considering moving to the Twin Cities, but decided not to due to the bridge collapse. That's a total economic impact of over half a billion dollars, when regular maintenance or replacement of the bridge when the problems were first discovered (prior to the collapse) would have been less than half that cost!
What Do We Do?
The simple answer is that we need to make a commitment to fixing our aging infrastructure and to stop ignoring its slow destruction. We have ignored this problem for too long and the longer we wait the worse it is going to get.
Your taxes are going to go up either way. If we choose to address this externality now, your taxes will go up because as a Public Good the burden must be borne by the public. If we choose to ignore the problem even longer, your insurance premiums will go up because your insurance company needs to price their coverage against the current risks. Unfortunately, if we wait, the economic impact will be much higher in terms of lives lost and economic opportunities missed, plus we run the risk that the insurance industry will either be unwilling or unable to pay for the damage once our infrastructure fails.
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The views expressed
in this article are those of Bill Gee only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Bill Gee is solely responsible for the contents
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