On Friday, an EF-3 tornado hit St. Louis County and City. At least five people passed away, and thousands of homes were damaged, some beyond repair.
Although the official National Weather Service report isn’t complete, initial reports suggest that the tornado likely formed in Clayton, moved northeast through Forest Park, DeBaliviere Place, Fountain Park, the Greater Ville, O’Fallon Park, and crossed the Mississippi into Illinois.
My home is in DeBaliviere Place, mostly known (albeit incorrectly) as the Central West End. We were home, we were not injured, and our home suffered relatively minor damage. Although no one from my neighborhood was hurt, many homes on my street sustained extensive damage.
It was heartening how neighbors came together on Friday to check on each other and start cleaning up, and the street was full of work crews on Saturday and Sunday. The immediate aftermath was shocking, but the following efforts were equally astonishing, in a beautiful way.
Amidst the cleanup, I couldn’t help thinking about risk. I’ve read many definitions over the years, and the best one for me is simply the chance of something bad happening.
Insurance is one classic way to manage risk, more formally known as risk transfer or risk pooling. Property insurance started after the Great Fire of London in 1666 and was simple: everyone paid a little bit into a fund each year that helped the few who suffered unexpected losses. No one knows who will be hurt on day one, so it makes sense to contribute just in case.
On Thursday, my terrific property and casualty insurance agent emailed me to let me know that my homeowners insurance premium is set to rise 31 percent at renewal. She shopped other policies, which would be much more, so we agreed to stay put. (My other policies dropped modestly, so the overall increase was ‘only’ 21 percent).
Naturally, I didn’t love the news, but I’ve seen this phenomenon in the newspaper, so I wasn’t surprised either. And I knew it wasn’t her fault, so I thanked her for looking after me.
Mind you, I had no idea a storm was on the way, and I would have discounted it anyway because I used to think people overreacted to potential storm news. However, following the storm, I’ve reassessed my risk tolerance.
Recently, I’ve been bothered by one use of the word risk, which is ill-fitting. I went to a dinner put on by a private credit manager, who has a few funds that have experienced very low volatility. They kept describing it as “low risk,” even though the fund lends money to pretty junky companies.
The fund achieves low volatility because it is well diversified, employs relatively low leverage, and the underlying assets aren’t priced by the market daily, like in public markets. The first two reasons, diversification and low leverage, are classic risk mitigation strategies. The last one, not so much.
Even though the fund has enjoyed low volatility and may continue to do so for a long time, it’s not low risk. It may be a fabulous investment opportunity, but it’s still not low risk. I have no idea how, when, or if the bad thing might happen (defaults, in this case), but it will likely change the volatility profile.
Risk is a good thing to consider. Learning to avoid, manage, hedge, insure, or embrace it are all worthwhile endeavors. Risk tolerance (or appetite) differs from person to person, and changes over time within ourselves. What seemed fun as a teenager (driving too fast) seems idiotic now.
So please don’t wait until after the storm, like I did, to think about risk. Think about when the chance of a bad thing seems low, so you don’t have to think about it as much when something bad happens.
We can help, and be sure to call your insurance broker!
