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Ken Feinberg: Responding to unique catastrophes
Ken Feinberg: Responding to unique catastrophes
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    Ken Feinberg – Special Master of the 9/11 Victim Compensation Fund and Administrator of the BP Fund after Deepwater Horizon – gave an overview on his experience with ad hoc compensation schemes after major catastrophes over the last 30 years. Following his visit at Munich Re, he summed up his main considerations in an interview with Christian Fuhrmann, Head of Divisional Unit Global Clients / North America Casualty.
    New York
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    Ken, you have organized many of the most comprehensive compensation schemes in the US. How do you proceed when you are asked to distribute hundreds of millions or even billions of USD to thousands of victims?

    Over time I have developed almost a checklist of how to tackle such an assignment. The first question is always: How much money is available and where does it come from? After 9/11, there was so much political pressure to generously compensate the victims, that the government was willing to pay as much as necessary. Resources were endless. After Deepwater Horizon, BP came up with 20bn USD up front and told me, if that´s not enough, we´ll give you more.

    Next on the list is eligibility: Who is eligible to file a claim? This is relatively easy if you compensate for death and bodily injury, like after 9/11. It is a lot more complicated if it is about economic loss. After Deepwater Horizon, most of the claims were for loss of income. We had to draw the line somewhere. You have to find criteria. The further away the claimant is from the scene of the catastrophe, the more evidence was needed. After all, we received claims from all 50 US States and about as many foreign states, as far away as Europe.

    Regarding losses after Deepwater Horizon, absence of sufficient proof rendered over half of all claims ineligible. Then you have to come up with a method to calculate awards. Usually not too difficult regarding economic losses. By the way, asking for tax forms as proof helps to limit the amounts people claim. Estimating the loss is more difficult when you compensate for death, for injury, for pain and suffering. With thousands of victims, don´t even try to come up with individual solutions. Streamline the process. With an ad hoc scheme, you want to avoid litigation. Look at what people would on average receive for certain injuries when litigating and then award as much. Or slightly more. Latent claims are even more difficult to calculate. But if you give people the choice between a best-estimate lump sum now and the chance to come back later and give evidence of a higher loss, the vast majority will accept the lump sum.

    After you have clarified all this, how do you move on?

    Due process is essential. People who have lost a loved one or were seriously injured do not simply want money. They want to talk. Let them. They want to be heard. Listen. You have to deal with the emotion. A lot of emotion. After 9/11 I held 950 private hearings with families of victims. I hardly acted as a lawyer in these hearings. Rather as a psychologist, a counselor. Keep in mind, you will never receive gratitude or appreciation for what you are doing from the victims, no matter how much compensation you pay out to them. These people have lost a loved one or have suffered catastrophic injury. You can help them but you cannot make them happy.

    How do you achieve this transparency?

    By involving all who might be affected from the very beginning. This starts with the design of the program. Invite input from everyone – victims, experts, the public. Listen to them. Show you care about what they have to say. Make sure everyone understands how the program works. Who gets what, when and how.

    You said, ad hoc schemes are about avoiding litigation. How do you ensure that people don´t take the money and sue anyway?

    Be very generous in compensating and make everyone who receives compensation sign a full release. If you compensate claimants for any loss they had, there is no reason for them to sue anyone afterwards. Also, never ever leave a program open for a long time. If you want people to opt into your compensation scheme voluntarily, set a clear limit for bringing claims. Claimants are usually skeptical when such a scheme is offered and only come forward at the last minute.

    Paying out enormous amounts of money to thousands of claimants within a limited time period leads to moral hazard. How serious is this problem?

    Not as serious as one might think. Of course there are always a number of dubious or even downright fraudulent claims. After Deepwater Horizon, for instance, 18.000 of the 1.2 million claims we received were suspicious. However, if you process claims in a sensible way, you will be able to identify most of them and declare them ineligible. If the compensation scheme you have in place works well, fraud and corruption are a minor annoyance, not a big worry.

    What is the role of the internet and social media in the context of ad hoc compensation schemes?

    When you want as many victims of a catastrophe as possible to join your program, modern media can help to spread the word. Social media can support you in reaching out to the claimants, in making your program transparent, in establishing trust. Of course, you will also catch the attention of a few people who will bring bogus claims. But if you have the right program in place, you can handle this.

    You have shown that ad hoc compensation schemes can be very successful. Should they be used more often?

    Ad hoc compensation schemes will always be the rare exception. And rightfully so. To make such a scheme a success, it has to be very generous. The 9/11 Fund is the best example for this. After 9/11, such a fund was the right thing to do. But a compensation scheme like this won´t happen again, ever. 9/11 was an unprecedented event that called for generous compensation. Even though the taxpayer paid for it, there was no political opposition against the Fund. But even then, victims of other catastrophes found it difficult to understand why they were not equally compensated. Bad things happen to good people every day. It is very rarely justified to favor one group of victims to all the others who suffered similar losses.

    If you had to give the insurance industry one more piece of advice, what would that be?

    I have little experience with insurers. I usually get involved very early on, very soon, sometimes only days after the catastrophe. Insurers normally only appear on the scene when I am done. However, looking back, the one advice would probably be: Try to get even better at predicting future catastrophes. Not just natural catastrophes. Also improve your methods to anticipate litigation risks. Learn as much as you can about the US tort and litigation system. Some attempts to model liability risks have already been developed, based on making use of new data to predict the next big toxic tort or pharmaceutical risk. This might still be in an infant stage. It will probably never work for all kinds of liability risks. But anything that helps you understand how liability risks develop into mass litigation is good for your industry.
    Christian Fuhrmann
    Head of Divisional Unit Global Clients / North America and expert for P/C Insurance and Reinsurance General management


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