February 23, 2006

ASCE Warns Corps of Engineers About Chaos

Following Hurricane Katrina, several panels of experts were appointed to review the hurricane protection system in New Orleans. Secretary of Defense Rumsfeld authorized an an External Review Panel (ERP), composed of members of the American Society of Civil Engineers (ASCE), to review the work of other experts commissioned for the review, including those of the Corps of Engineers. Dr. David Daniel, a civil engineer and President of the University of Texas at Dallas, heads the ASCE panel. The ASCE panel will review the work of the Interagency Performance Evaluation Task Force (IPET) and report to the National Research Council (NRC). "Eminent Civil Engineers Appointed to New Orleans Hurricane Protetion System External Review Panel" (ASCE Press Release -- Nov. 22, 2005)

The ERP has released stern warnings about organizational problems with the hurricane preparedness that are not being addressed. The focus of the apponted panels has been on the physical structures such as levees and pumping systems, and not on the organizational failures that led to disasterous results during Hurricane Katrina. The Corps of Engineers has disclaimed responsibility for the organizational structures, pointing their institutional finger to the state political structure.

(read more)

Dr. Daniels has stated that the ERP chose forceful language to emphasize its concern that vital aspects of the disaster preparedness were not being addressed by the appointed panels. "We intentionally selected forceful language," he said, "to reflect the seriousness and urgency of the issues we raised."

The full interim report of the ERP provides details to support its position. In the report, the ERP stated, in part:

"No one person or organization is in charge of the New Orleans hurricane protection system. * * * The ERP sees clearly that organizational complexities and the ways in which decisions are made are among the most important factors that influenced the performance of the hurricane protection system. Organizational effectiveness has been and will continue to be questioned, with justification. It is impossible for the ERP to conceive a mechanism through which the levee system can be rebuilt and operated effectively and efficiently with such organizational discontinuity and chaos. The ERP recommends that organizational issues be assessed critically and thoroughly as soon as possible."

"It is obvious that the hurricane protection system for New Orleans failed miserably during Katrina. That the system was so clearly overwhelmed and failed so catastrophically demonstrates to the ERP that fundamental flaws were part of how the system was conceived and developed."

"One of the lessons of Katrina that is already obvious is that once the levees were overtopped, destruction was catastrophic. * * * The question is not whether the levees will again be overtopped but when and by how much they will be overtopped. The levees need to be protected from catastrophic failure resulting from overtopping."

"The ERP is convinced that there are important lessons to be learned concerning the planning and design processes. As a nation, we must understand these lessons if we are to do better in protecting New Orleans and other American cities from the next major hurricane that strikes."

The full first report, with supporting appendices, is available here: "External Review Panel Progress: Report Number 1" (Feb. 20, 2006)


Posted by dougsimpson at 08:03 PM

February 10, 2006

AIG Settles: Primary Sources

American International Group (AIG) agreed to pay over $1.6 billion to settle allegations of fraud, bid-rigging and improper accounting brought by the State of New York and the S.E.C. Below are links to the press releases and the original settlement agreement and S.E.C. complaint.

AIG Settles Fraud, Bid-rigging And Improper Accounting Charges (Press Release - New York State Ins. Dept., Feb. 9, 2006)

Signed Settlement Agreement (PDF - 56 pages) (Dated Jan. 18, 2006, announced Feb. 9, 2006).

The Settlement Agreement references a Summons and Complaint (PDF, 38 pages) filed May 26, 2005.

AIG to Pay $800 Million to Settle Securities Fraud Charges by SEC; Press Release No. 2006-19; February 9, 2006 (U.S. Securities and Exchange Commission)

SEC v. AIG Complaint 06 CV 1000(PDF - 29 pages)(filed Feb. 9, 2006)

Thanks to Marc Mayerson's Insurance Scrawl for the pointer to these primary sources on AIG's settlement. Insurance Scrawl: AIG Settles NY State Charges and Buys Insurance Against Future Liability (Feb. 9, 2006)


Posted by dougsimpson at 03:20 PM

February 09, 2006

Federal Insurance Regulation

Some research on the tension between federal and state ambitions in insurance regulation was posted in June 2005. It focused on hearings held about that time that focused on long-standing issues with Optional Federal Charter for Insurers ("OFC"), Oxley “Road Map” and “SMART” Bill, and NAIC Responses to Federal Initiatives ("Interstate Compact").
Unintended Consequences: Hearings on "SMART" : Federalizing insurance regulation? (June 23, 2005)

It may be of interest to those following the story about a U.S. Treasury spokesman who was again advocating a greater federal role in insurance regulation at a recent NAIC meeting. Specialty Insurance Blog: Federal Insurance Regulation

To repeat my editorial views on the subject from June 2005:
(read more)

One of the strengths of complex systems is the capacity of its components to interact independently because of the existence of diversity. That independence has repeatedly been shown to protect the overall system from vunerability to unexpected consequences that lead to cascading failures in "monoculture" systems that are highly interlinked. (See: Unintended Consequences: Reading: Barabasi, Linked: The New Science of Networks (2003))

The vulnerability of monoculture systems to catastrophic results of otherwise survivable errors or attacks has been observed again and again, from the Irish Potato Famine (Fraser, "Conservation Ecology: Social vulnerability and ecological fragility: building bridges between social and natural sciences using the Irish Potato Famine as a case study" (2003) to the recent New England electrical blackout (Unintended Consequences: Blackout Report: Maintenance, Training and Communication Errors (2003). During the Blackout of 2003, only the systems that were able to independently decide to disconnect from the "efficiency" of the centralized, unified controls avoided being sucked into the collapse of the highly connected network.

Looking back on decades of ill-conceived centralized government "solutions" to insurance availability and affordability "crises" in state after state, in automobile insurance, workers compensation insurance, medical malpractice insurance and product liability insurance, we see a record of attempts to solve political problems with price controls and lock-ins that caused long-term damage to the whole economic system. If our decentralized insurance system gets federalized, mistakes that would have an impact on only one state may impact every insurance transaction in the entire nation. Time will tell if the game of "chicken" going on between state and federal regulators has a net positive or negative effect. Whatever happens, I'm counting on unintended consequences.

Today, I can also add the caution that the federal agency with the most experience in insurance is FEMA, which runs the National Flood Insurance Program (NFIP). A GAO report in 2003 found serious financial challenges with NFIP unmet by federal regulators. See Unintended Consequences: 2003 GAO Report on Financial Challenges to NFIP (Sep. 16, 2005). Within weeks after Hurricane Katrina, the NFIP had run out of funds and was unable to pay claims without massive borrowing authority from the Congress. Unintended Consequences: FEMA, out of funds, freezes flood insurance payments (Nov. 19, 2005). One must consider if a catastrophe performance like FEMA's in 2005 is what we can expect to result more frequently as a result of federal insurance regulation.

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Posted by dougsimpson at 04:51 PM | Comments (0)

February 08, 2006

Virtual Journalist Focuses on Book re Second Life

For almost three years, Wagner James Au has documented his thoughts and experiences in Second Life, an artificial world operated by Linden Labs. He did so as a contractor for Linden Labs, and has announced he's "going indy." In March 2006, he takes ownership of the e-zine "New World Notes" and focuses on developing "a book version of New World notes."
New World Notes: GOING INDY (Feb. 8, 2006).

Since April 22, 2003, Jim (a.k.a. Hamlet Linden) has written as an embedded journalist in the artificial world of Second Life, which at the time of this writing reports over 125,000 registered user accounts, of which over 5,000 are "in world" at one time during peak hours. Wagner (Hamlet) writes about the law, sociology, economics and human interest stories of Second Life and its residents, with snapshots from inside Second Life. Wagner is just one of the journalists and academic exploring artificial or synthetic worlds like Second Life for its insights into human social organization and behavior.

First Monday published an essay by Au for First Monday Special Issue #5: Virtual Architecture at State of Play III, in which he proposes tenative guidelines for journalistic ethics for reporting in synthetic worlds, developed from his years as an embedded journalist in Second Life, "with the object to preserve a separation between real life identity and virtual being, while sustaining the fantastic, otherworldly nature of online worlds."
Taking New World Notes (First Monday, October 2005 Special Issue on State of Play)

Among his recent stories was one about Lawrence Lessig's appearance at the Robert Burn's birthday celebration in the Second Life venue of ElvenGlen, in which kilted Scotsmen danced jigs while the traditional haggis was cut in honor of the Immortal Bobbie Burns. The event was a fund-raiser for the Creative Commons project. He was quoted as saying to the crowd: "So thanks to everyone who came and was kind enough to give something to Creative Commons. I've got to go take care of my kid, but I hope I can come back. There are few places in the worlds where people understand what we're about as well as here."
New World Notes: LORD OF THE LESSIG DANCE (Jan. 30, 2006).


Posted by dougsimpson at 06:53 AM

February 03, 2006

Four Indicted in Finite Reinsurance Probe

Grand jury indictments and an SEC civil enforcement action were filed by the United States on February 2, 2006 against individuals alleged to have used finite reinsurance contracts to help AIG mislead its investors about its loss reserves. Individuals named in the indictment were Ronald Ferguson, Elizabeth Monrad and Robert Graham formerly of GenRe and Christian Milton formerly of AIG. Also named in the enforcement action complaint but not in the indictment was Christopher Garand formerly of GenRe.

According to a press release by the SEC:

"The complaint details recorded conversations among the defendants and other evidence reflecting the planning and implementation of the sham transaction. On the basis of this evidence, the complaint charges that the defendants understood from the beginning that they were structuring a sham transaction involving the creation of phony documents for the purpose of providing apparent support for false accounting entries AIG made on its books."

The 40-page complaint in the enforcement action is here:

The Department of Justice press release regarding the indictments in the Eastern District of Virginia is here:

Earlier references in Unintended Consequences regarding finite reinsurance and these actions include:

Unintended Consequences: Wharton's Thoughts on AIG and "finite reinsurance" (April 7, 2005)

Unintended Consequences: "Finite Risk Reinsurance" background online (Nov. 24, 2004)

Unintended Consequences: Spitzer and SEC investigate "finite insurance" (Nov. 16, 2004)

Unintended Consequences: AIG targeted by US Grand Jury, AP reports (Oct. 22, 2004)


Posted by dougsimpson at 03:38 PM

February 02, 2006

$4,000 Artist Fellowship Offered in Second Life

Linden Labs, the operators of the synthetic world "Second Life" is offering a $4,000 "Fellowship in the Visual and Performing Arts" to one undergraduate or graduate student. Application deadline is March 15, 2006.

According to an announcement from Linden Lab representatives, this "will provide a young artist with a chance to be free for a semester or summer to explore the use of the digital world of Second Life as an artistic medium. In doing so, we hope that we will see Second Life used to even greater potential in the expressive arts to the benefit of both the Second Life culture and the broader world of art."

According to the information in the Fellowship Application on the Second Life website: "The fellowship will be made available to an undergraduate or graduate student in the visual and performing arts (including music, film, video, new media arts, and architecture) who has shown through his or her work a commitment and talent in innovating using digital media. The fellowship is not intended to support study, but to allow a student the free time to fully explore the potential of Second Life as a creative medium."

More information is available at www.secondlife.com/education. The application deadline is March 15, 2006. According to Linden Lab, applications will be reviewed by a panel of distinguished academics, and the fellowship recipient will be announced in mid-April.

Thanks for this tip to Terra Nova: Linden Lab Fellowship

According to a recent third-person article on the current status of the population, economic statistics and "look and feel" of Second Life, the user-created synthetic world sees peak simultaneous users online over 5,000 and recent growth at around 15% per month. For more, see Pham Neutra's weblog entry in "SLOG, a Second Life resident blog" The SL Economy in Review -- 2006 January - SLOG


Posted by dougsimpson at 02:42 PM

GAO on 2005 Hurricane Response

Hurricanes Katrina and Rita are the focus of an ongoing study by the General Accountability Office (GAO). Comptroller General David M. Walker released a preliminary statement to Congress identifying several shortcomings already evident from their ongoing study. His statement indicates that many of the shortcomings were previously identified in studies of Hurricane Andrew in 1992. In his statement, he reported that three key themes are emerging from their ongoing study.

Quoting from the statement in GAO-06-365R:

Clear and Decisive Leadership
"First, prior to a catastrophic event, the leadership roles, responsibilities, and lines of authority for the response at all levels must be clearly defined and effectively communicated in order to facilitate rapid and effective decision making, especially in preparing for and in the early hours and days after the event. As we recommended in 1993, we continue to believe that a single individual directly responsible and accountable to the President must be designated to act as the central focal point to lead and coordinate the overall federal response in the event of a major catastrophe. This person would work on behalf of the President to ensure that federal agencies treat the catastrophe as a top priority and that the federal government’s response is both timely and effective. In cases where there is warning, such as the high probability of a major hurricane (e.g., a category 4 or 5), the senior official should be designated prior to the event, be deployed appropriately, and be ready to step forward as events unfold."

Strong Advance Planning, Training and Exercise Programs

"Second, to best position the nation to prepare for, respond to, and recover from major catastrophes like Hurricane Katrina, there must be strong advance planning, both within and among responder organizations, as well as robust training and exercise programs to test these plans in advance of a real disaster. Although the NRP framework envisions a proactive national response in the event of a catastrophe, the nation does not yet have the types of detailed plans needed to better delineate capabilities that might be required and how such assistance will be provided and coordinated. In addition, we observed that the training and exercises necessary to carry out these plans were not always developed or completed among the first responder community. The leadership to ensure these plans and exercises are in place must come from DHS in conjunction with other federal agencies, state and local authorities, and involved nongovernmental organizations."

Capabilities for a Catastrophic Event
"Response and recovery capabilities needed during a major catastrophic event differ significantly from those required to respond to and recover from a “normal disaster.” Key capabilities such as emergency communications, continuity of essential government services, and logistics and distribution systems underpin citizen safety and security. In addition, as these capabilities are brought to bear, streamlining, simplifying, and expediting decision making must quickly replace “business as usual” approaches to doing business."

The report goes on to outline areas in which the GAO has assessed as deficient the governmental response in these key areas.

GAO-06-365R "Preliminary Observations on Hurricane Response." (PDF) (Feb. 1, 2006)


Posted by dougsimpson at 09:31 AM

February 01, 2006

Arden Institute explores synthetic worlds at Indiana U.

An institute for academic research of, and in, synthetic worlds has been proposed by Prof. Edward Castronova of Indiana University. The Arden Institute provides a 28-page whitepaper and institute prospectus.

From the executive summary:
"Synthetic worlds are a special kind of host for human society: being synthetic, they can be designed for a purpose. Worlds can be built that teach anyone in the world about Renaissance England, or about practical democracy. They can also be built to explore the evolution of social patterns, being in essence social science Petri dishes: controlled environments for studying the evolution of macro-level forces of government, law, economics, sociality, learning, and culture. Synthetic worlds present an unprecedented opportunity to open a new frontier in the understanding of human affairs.

This document proposes the establishment of a center for the study of synthetic worlds that will explore this technology, develop a deeper understanding of it, and then use it to build synthetic worlds for public interest purposes of research and education. Tentatively named “The Arden Institute”, the center could be launched with a three-year grant of $5.8m."

In September, a conference was held at Indiana University with the objective "to blur the lines between work and play by embedding an academic conference within the context of a live-action game. Topic: Integrating Synthetic World Technology in University Research." A report of this Ludium I Conference is available at the above link, as is a 22 minute documentary video.


Posted by dougsimpson at 05:05 PM