Windfall: The Booming Business of Global Warming (14 page)

If the first way to profit off climate change—that found in the Arctic—was to expand, to push into virgin lands and virgin resources, this was a new phase. The opportunity here was also a kind of growth, yes, but it was growth born of scarcity, of someone else’s crisis—the zero-sum economics of distress. For there to be winners, there also necessarily had to be losers.

The key innovation by Chief Sam’s company, Firebreak Spray Systems of Hood River, Oregon, had been to contract for the insurance industry, not the government. (Though in the case of AIG, the two would soon temporarily merge.) Founded by the entrepreneur Jim Aamodt, who invented the sprayers that keep produce fresh at the supermarket, and Stan Brock, a former tackle for the New Orleans Saints, Firebreak had a proprietary system to coat houses with liquefied Phos-Chek—the same Monsanto-developed chemical retardant used by the Forest Service. The spray was colorless and harmless, Chief Sam told me, and it could protect your home for up to eight months, far longer than rival gels and foams.

In 2005, Firebreak went to work for AIG’s insurance division, increasing the fleet of the division’s Private Client Group from two to twelve trucks and expanding its reach from fourteen elite California zip codes—90049, 90077, 90210, and so on—to nearly two hundred, plus zips in Vail, Aspen, and Breckenridge, Colorado. Chief Sam joined the company in 2006, after five years as fire chief in Monrovia. He’d been planning a second career in executive coaching until he read about AIG’s new wildfire unit in
Fortune
. “It was the thing of the future,” he told me, “and I wanted to get in on the ground floor.”

Firebreak was growing—Chief Sam and his friend George had just started a two-truck pilot program for Farmers Insurance—but suddenly there was competition. Chubb insurance protected policyholders in thirteen western states through Montana’s Wildfire Defense Systems, which sprayed homes with the rival Thermo-Gel retardant. Fireman’s Fund contracted San Diego’s Fireprotec to clear a defensible space around clients’ homes and offered evacuation services to its richest customers. San Diego’s Fire-Pro USA sprayed homes with patented FireIce gel. Wildomar’s Pacific Fire Guard deployed “the Navy SEALs of firefighters” to spray homes with GelTech retardant. Carmel Valley’s Golden Valley Fire Suppression offered spray-foam services on Craigslist as well as “Land Clearing with use of a goat herd.” It beckoned customers with an online survey. Question 6: “If you could have a private fire force that would specifically work to save YOUR home in the event of a threatening wildfire, and the price of this protection would be $35,000 (financing available), plus $1,600 per year thereafter, how likely would it be for you to hire them?”

Firebreak’s trucks were outfitted with topflight communications systems, Chief Sam bragged, including RedZone mapping software that predicted a fire’s course and revealed clients’ addresses with a “tap on the dot.” Unlike overstretched public brigades, Firebreak could afford to be better. “To be honest with you,” he said, “we’re probably more sophisticated than a lot of municipal agencies.”

If private firefighting sounded like a libertarian dream—private industry stepping in where government falls short—in fact it was just that. As California burned, Adam B. Summers of the Reason Foundation, a free-market think tank historically funded by Shell, BP, ExxonMobil, and the climate-change-denying Koch brothers, contributed an op-ed to the
Los Angeles Times:
“Tap private-sector resources to improve fire protection.” California was a high-tax, high-regulation state, he wrote, and this stifling business environment was driving jobs away. To increase taxes to fight more fires would only make it worse. “State and local governments can better provide fire protection services by tapping military resources and private-sector resources,” he declared. “The private sector has a long and distinguished history of providing high-quality services such as paramedic services, security services, and, yes, even firefighting services at lower costs.” Summers singled out Firebreak and AIG for praise. “As is the case in numerous other outsourced services,” he wrote, “private fire protection contractors oftentimes provided equal or better services at significantly lower costs.”

“We’re in a tough economy,” Chief Sam told me at the Hyatt. “It’s important that local governments start working with privatization. Municipal agencies can’t do it all on their own.” We’d downed the wasabi peas. He summoned a waitress: “Hey, I hate to say this, sorry to bother you, but can I get some water from you?”

 • • • 

CHIEF SAM AND I LEFT
the staging area and drove uphill, toward the fire, to check on the pilot program for Farmers Insurance. It was the new team’s second day facing an actual blaze, and Chief Sam was still looking to build market share. He’d just directed Pump 43 to come here from San Diego, leaving the city exposed and worrying the people back at Farmers. We pulled over to check in. “I’m on the scene right now,” Chief Sam reassured his Farmers contact as we stared at the walls of a freeway underpass.

We drove on to the Little Tujunga police line, where residents were amassed on the sidewalk, carrying their photo albums in pillowcases, their flat-screen TVs in cardboard boxes, their cell phones in their hands. We crossed the line with our lights flashing, nodding our heads at the police. Beyond it, garbage cans still sat curbside at every empty house—it must have been trash day—and the wind was toppling them, spilling their contents onto the street. A few stragglers in gas masks were defying the evacuation order. A kid rode his bicycle in circles in the middle of the road. An old man in a flannel shirt sprayed the sidewalk in front of his home with a garden hose.

Farmers Pump 25 was parked alone on a side street. George, an amiable man with gray hair and a gray mustache who’d fought alongside Chief Sam for decades before both retired from the Monrovia Fire Department, was in the driver’s seat. He started up the engine, and both trucks charged uphill until we reached a modest, single-story home—Farmers was less exclusive than AIG—that was in little immediate danger. George’s young partner hopped out wearing a yellow helmet and yellow protective gear, unspooled an orange hose, and tugged it up a set of brick steps. He squeezed the nozzle, coating the home’s already sickly grass in Phos-Chek. Chief Sam encouraged me to take some photographs. I took some.

Then we waited, and I began to see that the ethical problems some people had with services like Firebreak—that they profited off disaster, that they protected only the wealthy—were secondary to another problem: Firebreak had a hard time protecting anyone at all. The list of homes we should spray—our “priority list”—came from dispatch up in Oregon, which was supposed to determine which way the fire was going and which Farmers homes were in its path. But the fire was barely moving, because the Los Angeles Fire Department had it nearly contained. And the pilot program was so new, the dispatchers so unpracticed, that they seemed to struggle to find any Farmers addresses. We waited for orders outside the house we’d just sprayed, then on broad Gavina Avenue where it crossed Pacoima Wash, then uphill amid the neighborhood’s newest, largest homes: palm trees, stucco roofs, territorial views, proximity to the flames. Forty minutes passed. A Skycrane helicopter and super-scooper airplane dumped retardant on the hills. Dozens of public firefighters, free to simply fight the fire, rushed past. None acknowledged us. Finally George got another address.

Chief Sam and I followed George’s Pump 25 past a clump of “For Sale” signs shrouded by smoke, down one block, peering at house numbers, and down the next. We lurched forward, then braked, watching the pump’s taillights flicker on and off. Chief Sam was getting agitated. “George, is that one of ours?” he asked over the radio. “That house on the corner, is it one of ours? Well, find ours. Is that one ours? Let’s find ours and spray it.”

Two hours after we arrived on the scene, I watched George spray a second Farmers property, a two-story stucco home in a subdivision called Mountain Glen. Fifteen minutes later, we were parked again, waiting for a new list.

“Chief, uh, Pump 43,” the CB crackled. They had just raced north from San Diego. “We are at the address command sent us to. There’s really no area we need to spray here. Just wanted to get an update on where you want us to be.”

Chief Sam’s face hardened. “Okay. You’re talking to the wrong guy. Command tells you where to go. I don’t have a priority list, Todd. Do you have command’s phone number?”

“Copy that, Chief. They advised to contact you, but I’ll contact them.”

We parked at a spot overlooking the wash and watched men and women from the Los Angeles Fire Department attack the fire. Some had hoses, some shovels. Their faces and jackets were smeared with soot. In the distance, a six-person hand crew marched single file across the charred valley. A woman from the Los Angeles
Daily News
began interviewing Chief Sam as he sat in his truck, so I got out and wandered over to join George, arriving just in time for one of the LAFD firefighters to approach the window.

“So, do you guys just do a certain area?” the firefighter asked. “You go to certain addresses, and if . . . ?”

“If they’re in danger, we try to go ahead and spray, yeah,” George said. “We try to get ahead of it, but with erratic winds like this, you know . . .”

“Yeah,” said the firefighter. He knew.

“It’s like the old days,” George’s partner offered, “with all the insurance companies.”

It was an obscure—if accurate—reference to London in the seventeenth century, when any firefighting was done by private insurers. The firefighter took it in. After he left, George rolled up the window. “You see?” he said. “He feels better now.”

I returned to Chief Sam’s truck, and we drove around the corner, out of the smoke. The smooth jazz came on again, and then he turned it down to make another call: “Hi, I’m a fire chief here in L.A. I was just at the Hyatt, and could you send me some of those wasabi peas? . . . Which one is it? With the green ones? . . . The Hyatt . . . Okay . . . And how much would it . . . ? Yeah. Could you send me a box of those? A big box? . . . Okay. Send me three pounds.”

 • • • 

GLOBAL WARMING POSED
a grave danger to insurance companies, but it was also something else: free advertising on a biblical scale. Increased risk was a problem only if it wasn’t hedged or somehow priced in. Otherwise, it was a business opportunity. Simon Webber of the Schroder Global Climate Change Fund told me that Munich Re—the world’s largest reinsurer, with thirty-seven thousand employees in fifty countries and as much as $5 billion in annual profits—was his top holding. A rival manager, Terry Coles of the F&C Global Climate Opportunities Fund, explained how a good hurricane season helped insurance companies hike rates. “People often expect it to be a big negative for insurers,” he said. “You get a big sell-off of stock. But unless a really serious one comes through, they’ll put the premiums up and actually get the benefit of improved margins.”

In 1992, when category 5 Hurricane Andrew struck Florida and Louisiana, insurers paid out more than $23 billion in claims—$1.27 for every dollar of premium collected that year. They turned to catastrophe-modeling companies such as Eqecat and Risk Management Solutions (RMS)—the quants of the insurance industry—which used a century of weather data to predict future losses, and then they raised premiums accordingly. In 2005, after Hurricane Katrina, the first category 5 storm of the new climate era, they paid out more than $40 billion but, thanks to an expanded market and better models, only 71.5 cents per dollar collected. That year, the industry still made $49 billion in profits. It has profited, sometimes more, sometimes less, every year since. After RMS updated its hurricane model in 2006—by flying four scientists to a vacation spot in Bermuda for what it called “expert elicitation”—Allstate used the non-peer-reviewed results to justify jacking up rates in Florida by 43 percent, a move blocked by state regulators. State Farm was similarly blocked from hiking rates by 47 percent. Instead, both dropped tens of thousands of policies, as Allstate also did in storm-surge-threatened areas of New York long before Hurricane Sandy arrived: thirty thousand canceled policies in the five boroughs alone. The companies had more success raising rates in California: a few weeks after the Little Tujunga fire, the state insurance commissioner would approve what amounted to $115 million in increases for State Farm and Farmers—hikes of 6.9 and 4.1 percent, respectively. Allstate’s 6.9 percent hike was approved in January 2009.

The once staid insurance industry seemed ripe enough for growth that even Silicon Valley was jumping in. In 2006, a Berkeley grad had founded what would become the Climate Corporation, which harnessed the power of big data—climate modeling, hyperlocal weather forecasts—to sell crop insurance to farmers in the Midwest and eventually weather insurance to the whole world. By 2011, it had compiled fifty terabytes of raw data and raised more than $60 million from backers including Google Ventures; Allen & Company; the Skype founders, Niklas Zennström and Janus Friis; and the green-tech kingmaker Vinod Khosla, who said it would “help farmers globally deal with the increasingly extreme weather brought on by climate change.” Its CEO claimed that $3.8 trillion of America’s GDP and 70 percent of its businesses were affected annually by the weather; he’d come up with the idea for the Climate Corporation while commuting to his former job at Google. His route took him past a beachside bike rental place: open and bustling when sunny, shuttered and financially underwater when rainy. As the Climate Corporation found new ways to underwrite customers’ bets, its own bets were underwritten by the traditional reinsurance industry, the biggest source of funding for climate science outside governments. “If we have a loss, the reinsurer covers 100 percent of the loss,” the CEO told a crowd at Stanford. “I mean, venture capitalists don’t want to be betting on the weather. They want to bet on a team that can help other people’s capital bet on the weather.”

Growth was everywhere for the innovative. AIG had Firebreak, but where rich policyholders were clustered on risky coastlines, its Private Client Group was offering the Hurricane Protection Unit: men with GPS units and satellite phones who were on the scene after a storm blew through, boarding up broken doors and windows, patching holes in roofs, covering skylights with tarps, evacuating valuable artwork. In the corporate world, Munich Re’s Kyoto Multi Risk Policy protected investors from carbon-credit defaults, and its weather derivatives helped solar projects hedge against cloudy days, wind projects against calm days. Munich Re would host a “climate liability workshop” at Princeton a day after Little Tujunga. (It might be prudent to phrase policies so as to limit climate liability, they determined.) At climate talks in Poznan and Copenhagen, the reinsurer pushed its adaptation plan for the developing world: a $10-billion-a-year insurance pool funded by governments but run, of course, by Munich Re. Two other reinsurers, the U.K.’s Willis Group and Bermuda’s RenaissanceRe, were meanwhile pouring money into hurricane research, the latter also into hurricane modification: weakening storms by seeding the clouds with aerosols or particles of carbon. In July 2008, after the Inuit of Kivalina sued the energy companies, Liberty Mutual introduced the world’s first insurance policy to protect corporate executives from lawsuits “stemming from the alleged improper release of carbon dioxide.”