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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]