Black Swan

The Day the Dike Breaks

A Cat 5 hurricane strike of Lake Okeechobee would inundate much of South Florida.
By: | August 1, 2013 • 7 min read

Hurricane Otto, a Category 5 hurricane, makes landfall at 3 p.m. ET on Tuesday, Sept. 12, 2014, just north of Fort Lauderdale. The storm travels northwestward across the state, maintaining Category 4 strength as it touches the southwest reaches of Lake Okeechobee, the 10th largest lake in the United States and the largest lake in the South.

The driving rains cause the water levels on the lake to rise, which creates a breach in the lake’s protective barrier, the Herbert Hoover Dike, in the vicinity of Clewiston. Tornados spawned by the hurricane also touch down on the dike, causing two more breaches, near the towns of Pahokee and Belle Glade.Hurricane

The lake, at 730 square miles and an average depth of only 10 feet, begins to flood the surrounding communities.

Eventually, much of South Florida will be inundated.

U.S. highways 441 and 98, and state roads 715 and 80 are destroyed by the slow-moving water.

Geographically, there is nothing to stop the wall of water as it spreads out from Lake Okeechobee toward the Atlantic Ocean. It will be weeks before the flood waters recede.

Evacuations began in heavily populated Broward, Miami-Dade and Palm Beach counties when the hurricane’s landfall became a certainty.

But there wasn’t much time.

Once the dike is breached, the more than 640,000 evacuees in Broward have less than 14 hours to move. Miami-Dade’s more than 936,000 evacuees have less than 13 hours to get out. In Palm Beach County, the window is less than 16 hours and more than 448,000 people need to leave.

The number of evacuees in the 10 low-lying Florida counties south of the lake totals nearly 2.9 million people. And that doesn’t count the handful of counties to the North and East that are also affected.

But whether the residents will be able to evacuate is in doubt. In Miami-Dade County, the inundation puts 212 miles of evacuation routes under 2 feet or more of water. In Palm Beach County, 180 miles of flooded roadways could trap residents attending to flee.

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Fatalities number close to 670. The property damage from the flooding and the windstorm that caused it run into the hundreds of billions of dollars.

The flood will have a devastating impact on businesses, families and Florida’s famous Everglades, which would suffer massive environmental damage.

The lake sediment contains decades worth of chemical runoff from local farms. Much of that sediment will contain toxic chemicals from the days when farmers weren’t as careful about what they put into the ground.

Flood cleanup costs will be amplified by debris, amounting to tens of millions of cubic yards, that will accumulate in heavily populated Broward, Miami-Dade and Palm Beach counties. According to a report by the Florida Division of Emergency Management, an Okeechobee dike breach scenario acompanied by a Cat 5 hurricane would produce 75.8 million cubic yards of debris. The U.S. Army Corps of Engineers estimates that Hurricane Andrew in 1992 produced 15 million cubic yards of debris and Hurricane Katrina in 2005 produced 118 million cubic yards of debris.

In that 10-county area, 62 percent of commercial properties suffer minor or major damage and 22 percent of commercial properties are destroyed.

This in an area where the pre-storm business-related structure values are some $62 billion.

Business interruption losses for that region are at some $53.5 billion.

It’s also not a good time for pet lovers. There are 3.8 million of them in the affected area and there won’t be enough time to take all of them to safety.

Who Saw This One Coming?

To the question, “Who saw this one coming?” the answer is, nearly everyone who was paying any attention.

The above situation has already been envisioned by the Florida Division of Emergency Management, which published just such a scenario for emergency planning purposes in May of 2008.

Other agencies in Florida are also on the case.

A study commissioned in 2006 by the South Florida Water Management District concluded that the Herbert Hoover Dike, which holds back the lake water, poses a “grave and imminent” danger of collapse.

The problem, according to an analysis of the situation by Lloyd’s of London, is that the dike is performing a task for which it was never intended. The dike is composed of earth next to Lake Okeechobee that was merely shoveled up into walls as high as 30 feet.

The decision was made in the 1970s to use the lake as a drinking water reservoir. This called for the maintenance of much higher water levels than the dike was ever intended to hold.

According to Lloyd’s, the Herbert Hoover Dike is being asked to function as a reservoir dam, when from a technical perspective, it isn’t a dam.

“The Herbert Hoover Dike was built as a levee to protect the local area from flooding,” Lloyd’s researchers wrote in a report about the dike’s weaknesses.

“It is made entirely from earth dredged up from around the lake and assembled into a huge mound,” the Lloyd’s report stated.

The engineering requirements to classify an impoundment as a dam are much more stringent than those for a dike, the report added.

The U.S. Army Corps of Engineers is maintaining a water level in the lake of between 13 feet and 15 feet above sea level. Should a Cat 5 or Cat 4 hit the lake, estimates are that the water level in Okeechobee would rise to 20 feet above sea level.

Those who are studying the issue closely say that there is no way the aged, decrepit structure would hold if that happens. The Corps, which in published statements pushes aside concerns about worst-case scenarios at Okeechobee, is currently pouring hundreds of millions of dollars into dike reinforcement efforts.

Of all U.S. flood risks, the Hurricane Research Center at Florida International University ranks Lake Okeechobee second behind only New Orleans in terms of vulnerability.

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And hurricanes have hit Lake Okeechobee and caused breaches to the dike before. The 1926 Miami hurricane made landfall as a Category 4 and the high water levels in the lake breached a levee, leading to the deaths of 386 people.

Just two years later, the first Category 5 hurricane in the history of the Atlantic basin pushed even more destruction onto the unlucky residents in the vicinity of the lake. That storm caused a breach in a small dike at the south end of the lake and the resulting flood is believed to have led to the deaths of more than 3,000 people.

According to Lloyd’s, the only storm that killed more people in this country was the infamous Galveston Hurricane of 1900, the death toll from which is estimated at some 8,000. Hurricane Katrina is believed to have killed 1,833 people in 2005.

According to a 2006 report commissioned by the International Hurricane Research Center, there are similarities between what happened when the levees failed during Hurricane Katrina in New Orleans and the potential failure of the Herbert Hoover Dike.

The stability failure of foundation soils underneath the earthen dike and levees would be the culprit.

An Enormous Recovery Effort

Cleanup costs for the Everglades could range as high as $100 million. The geography and topography of the area would make this already catastrophic event even worse because water already tends to move slowly in the adjacent canals and through the marshy Everglades.

That means floodwaters could take several weeks to recede (much like they did after the 1928 hurricane). That would impede emergency crews, residents and claims adjusters.

Robert P. Hartwig, president of the Insurance Information Institute, said that the many home and business owners would suffer uncovered losses, since the majority of losses from flooding, especially to residential structures, would not be covered by standard homeowners’ insurance or business property insurance policies.

Homes would be covered by the National Flood Insurance Program — although many people in the area don’t opt for it.

“While many homeowners have flood coverage in Florida, many do not, even in known flood zones surrounding the Lake Okeechobee area,” said Hartwig.

While the insurance industry at large may be positioned to cover the storm, one company would be in serious jeopardy — Citizens Property Insurance Corp., a state-run, not-for-profit insurance company. It’s the largest property insurer in Florida.

If a hurricane caused Lake Okeechobee to flood, Citizens — and its claimants — would be in very deep trouble.

“Residual markets are supposed to be markets of last resort,” said Julie Rochman, the president of Institute for Business and Home Safety, which is based in Tampa, Fla.

IBHS is a national nonprofit association funded by the insurance industry. It works to reduce the social and economic effects of natural disasters and other property loss events by conducting research and advocating improved construction, maintenance and preparation practices.

If a large storm hit, “they definitely won’t have enough money to pay the claims,” she said.

If Citizens or some of the smaller insurers are taken out by a Lake Okeechobee flood, then we can expect resentment from a Florida populace that already mistrusts the insurance industry.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.