How do you calculate risk in an era when nightmares are becoming headlines? That terrifying question, of course, faces anyone who flies in an airplane or opens an envelope these days. But it is a particular quandary for those who practice the relatively new profession called risk management.
Actuaries who set insurance rates, bank lenders who assign credit limits, Wall Street managers who keep their traders in line all try, in various ways, to look at the past and figure out what could go wrong in the future. Now that disasters are striking, these risk managers are revising their formulas and trying to figure out how to manage risks they never took seriously before.
"The things that happened a month ago were pretty darn improbable, the sort of things you worry about in your sleep," said Wilson Ervin, the head of strategic risk management for Credit Suisse First Boston. "We are living in a different world today. You have to re-examine every assumption you have made."
PHOTO: NY TIMES
The insurance industry reacted the fastest. Companies that included terrorism insurance as a free bonus in property policies now are reluctant to sell it without taxpayer backing. Other insurance rates are shooting up. Traders are pulling in their horns, too, reducing their positions and their leverage. And lenders, beyond shying away from the industries that have been hardest hit, such as airlines and insurance, generally are becoming more cautious about making loans.
Suddenly old economy virtues like a healthy balance sheet become essential. "There is far less capital available than there was," said Leah Modigliani, a portfolio strategist at Morgan Stanley.
"The companies that are already strong and well positioned will tend to dominate."
The insurance industry is already coping with something worse than it has ever faced before. Analysts estimate that the total payout for the Sept. 11 attacks will range from US$30 billion to US$60 billion.
Harder to calculate is the cost of undermining assumptions about the world that largely determine how insurance rates are set.
"You know how often a big hurricane is likely to hit, and a hurricane today is very much like a hurricane 25 years ago," said Warren E. Buffett, the chief executive of Berkshire Hathaway, which owns several big insurance companies. "But terrorism today is not at all like terrorism 25 years ago."
Insurance companies are replacing open-ended policies that covered nearly any risk with much narrower ones that cover only certain, specified hazards.
Risk managers on Wall Street were merely rattled by the impact of Sept. 11 on their portfolios. That largely was because banks and brokerage firms already had endured a series of financial disasters, from the default of Latin American debt starting in 1982 to the 1987 stock market crash to the collapse of the Long Term Capital Management investment fund in 1998.
"Before Sept. 10, our worst downside case was a global recession," said Modigliani. "Now we still have a global recession case, but it's also a war scenario."
ROLLER-COASTER RIDE: More than five earthquakes ranging from magnitude 4.4 to 5.5 on the Richter scale shook eastern Taiwan in rapid succession yesterday afternoon Back-to-back weather fronts are forecast to hit Taiwan this week, resulting in rain across the nation in the coming days, the Central Weather Administration said yesterday, as it also warned residents in mountainous regions to be wary of landslides and rockfalls. As the first front approached, sporadic rainfall began in central and northern parts of Taiwan yesterday, the agency said, adding that rain is forecast to intensify in those regions today, while brief showers would also affect other parts of the nation. A second weather system is forecast to arrive on Thursday, bringing additional rain to the whole nation until Sunday, it
LANDSLIDES POSSIBLE: The agency advised the public to avoid visiting mountainous regions due to more expected aftershocks and rainfall from a series of weather fronts A series of earthquakes over the past few days were likely aftershocks of the April 3 earthquake in Hualien County, with further aftershocks to be expected for up to a year, the Central Weather Administration (CWA) said yesterday. Based on the nation’s experience after the quake on Sept. 21, 1999, more aftershocks are possible over the next six months to a year, the agency said. A total of 103 earthquakes of magnitude 4 on the local magnitude scale or higher hit Hualien County from 5:08pm on Monday to 10:27am yesterday, with 27 of them exceeding magnitude 5. They included two, of magnitude
CONDITIONAL: The PRC imposes secret requirements that the funding it provides cannot be spent in states with diplomatic relations with Taiwan, Emma Reilly said China has been bribing UN officials to obtain “special benefits” and to block funding from countries that have diplomatic ties with Taiwan, a former UN employee told the British House of Commons on Tuesday. At a House of Commons Foreign Affairs Committee hearing into “international relations within the multilateral system,” former Office of the UN High Commissioner for Human Rights (OHCHR) employee Emma Reilly said in a written statement that “Beijing paid bribes to the two successive Presidents of the [UN] General Assembly” during the two-year negotiation of the Sustainable Development Goals. Another way China exercises influence within the UN Secretariat is
Taiwan’s first drag queen to compete on the internationally acclaimed RuPaul’s Drag Race, Nymphia Wind (妮妃雅), was on Friday crowned the “Next Drag Superstar.” Dressed in a sparkling banana dress, Nymphia Wind swept onto the stage for the final, and stole the show. “Taiwan this is for you,” she said right after show host RuPaul announced her as the winner. “To those who feel like they don’t belong, just remember to live fearlessly and to live their truth,” she said on stage. One of the frontrunners for the past 15 episodes, the 28-year-old breezed through to the final after weeks of showcasing her unique