Cardano Black Box Series Part 2: The Storm Surge of '53

February 2018
The Challenger Disaster
The term black box comes from aviation, where each incident and crash is investigated in detail. “Black box thinking” centres on a willingness and tenacity to investigate the lessons that often exist when we fail, but that we rarely exploit.

Inspired by black box thinking, we will try to understand the events leading up to The Storm Surge in 1953 and study some of the lessons learned to prevent future mistakes. Human nature is often a contributing factor to a disaster and so we have found this exercise highly relevant in making DB pension schemes more robust in an uncertain world.

The term black box comes from aviation, where each incident and crash is investigated in detail. “Black box thinking” centres on a willingness and tenacity to investigate the lessons that often exist when we fail, but that we rarely exploit. 

Inspired by black box thinking, we will try to understand the events leading up to The Challenger Disaster and study some of It had been a chilly winter day with the temperature around zero and towards the night people were comfortably asleep in their warm and cosy homes. They were unware that a massive storm was brewing over on the North Sea. On the night of 31 January 1953, an unusually strong combination of high spring tide, strong windstorm, and very low atmospheric pressure led to a storm surge which at some places were as high as 5.6 meters above the normal sea level. The ice-cold water slowly rose above coastal defences and rushed into unsuspecting, sleeping towns in the Netherlands, Belgium, and the UK.

Among them, the Netherlands was hit the hardest with 200,000 hectares of land, (four per cent of the landmass of the country), flooded mostly with salt water. Large parts of South Holland, Zeeland, and North Brabant were severely flooded. Lucky for the people in North Holland, including the city of Amsterdam, they were saved by the Afsluitdijk, a causeway that is 32 kilometres long, 90 meters wide and 7.5 meters above sea level, closing off Zuiderzee bay from the North Sea.

The southern part of the Netherlands with the large river deltas were in a much worse shape. Along the river Hollandse IJssel between Rotterdam and Gouda there was only one dyke separating the water from the three million people living in the surrounding areas. A section of this dyke, Groenendijk, was particularly weak and poorly maintained. On the morning of 1 February, the Groenendijk started to collapse under the mounting water pressure. If it was breached, the situation would go from very bad to a total disaster. Out of sheer panic and desperation, the mayor of the nearby town commanded the captain of a local river ship, named The Two Brothers, to plug his ship in the eroding hole of the dyke. Fearing the ship would damage, rather than support the dyke, the captain used a rowboat instead and lodged it firmly into the dyke. The modern version of the old fairy tale of Hans Brinker, the boy who put his finger in the dyke, worked!

The storm surge also created havoc along the east coast of England, after causing extensive damage in Scotland. Sea defences in Lincolnshire, Norfolk, Suffolk, and Essex gave in. Much of East London’s dockland areas were flooded. The storm surge of 1953 was a natural disaster of the magnitude that the insurers call a 250-year event. In the Netherlands, the death toll reached 1,836. There were 307 deaths in England, 19 in Scotland, 28 in Belgium, and 361 lost at sea. The material damages were enormous.lessons learned to prevent future mistakes. Human nature is often a contributing factor to a disaster and so we have found this exercise highly relevant in making DB pension schemes more robust in an uncertain world.

Never again

Following the flooding, there was a strong consensus of “never again” among the Dutch people and their government. Twenty days after the flooding, the Dutch government appointed the Delta Commission and charged it with the task to propose a structural approach to prevent this from happening again. Five years later, in 1958, the government and parliament approved the Delta Act, of which the main goals were to close off all tidal waters in the river delta in the Southwest of Holland and to strengthen the primary dykes along the coastline. All the protections outlined in the Delta Act were firmly in place by 1986 with the completion of the Eastern Scheldt barrier with massive sliding gates. A lesson learned was that the decentralised structure with 2.500 regional water authorities (waterschappen), each with local responsible, was not operational and they were naturally consolidated into nowadays 21 water authorities.

Just when people started to think of flooding as something of the past, there came a serious wakeup call in 1995. This time the threat came from the east. Heavy rains in Europe resulted in rapidly increasing water volumes in the rivers flowing through the Netherlands towards the sea. In the province Gelderland, 250,000 people were evacuated. Within weeks of the incident, a Delta Act for the major rivers was passed which made it possible to rapidly proceed with the dyke projects along the major rivers. Over the following years some dykes were moved up to 100 meters away from the river bed to create ‘room for the river’ and other dykes were strengthened.

Over the years, the Dutch have developed a three-layer approach to deal with the flooding threat. The first layer is defensive protections such as dams, dykes, and dunes. The second layer is the spatial planning and the introduction of specific controlled flooding zones in scarcely populated areas where the water would reach as high as 6 meters. In these zones people can be safely evacuated before deliberately flooding the area. The third layer is crisis management if there is a flooding, including evacuation of people, getting hospitals operational and secure energy supply. In more densely populated areas, especially the major cities, where it is near impossible to physically evacuate away from the area, the strategy is to evacuate upwards in the buildings.

Barrier

Good governance is key

It became clear that the biggest challenge was not the massive engineering projects but the governance of water management. As time passes by, the collective memory of the storm surge becomes more distant and the public’ willingness to invest in flood protection fades. To deal with this human aspect, the second Delta Commission recommended in 2008 to appoint a delta commissioner who is explicitly responsible for and can fully concentrate on water safety. Each term for a delta commissioner is seven years, longer than the four-year term in the government. Threats from climate change and sea level rise were highlighted and taken into consideration. A delta fund was established in addition to the specific water taxes charged by regional water authorities to allow for market financing for long-term projects.

This legislation framework enables the water safety management to be truly long-term oriented and forward-looking. The Delta Decisions, prepared by the delta commissioner and passed by parliament in 2015, proposed new legal water safety standards and included a plan to meet the challenges for the next 100 years. The new level of safety means the chance that a person dies in a flood disaster is not bigger than 1:100.000 per year, was based on climate scenarios of a two-degree increase in global temperature. This resulted in new dyke projects of 1,500 km at a cost of €15 billion, which would be completed before 2050. In addition, each municipality must pass a stress test for rainfalls which is supervised by the delta commissioner. For all of these projects, the annual cost for water safety since 1953 have been €35 euro per citizen per year in the Netherlands, which is not a lot of money for keeping their feet dry.

Are we ready for a financial storm surge?

It is easy to be impressed by the Dutch water defences, its long-horizon planning, the massive engineering structures and a strong governance structure including the long-term financing. As an industry managing DB pensions, we face similar long-term challenges as the Dutch water engineers. Having seen a lot of schemes and their sponsors swept away by financial storm surges, we need to build scheme protection to make sure outcomes like this is “never again”.
Some might argue that the Pension Protection Fund – the lifeboat fund – is sufficient, but that is merely the last of the three lines of defence. The first line of defence is to manage the financial risk in a robust way, adding protection to the portfolio to reduce the inflation and interest rate risks. The second line is to use stress scenarios to make sure that the scheme and sponsor can weather the situation when the storm breaches some of our protective barriers. PPF is the lifeboat to be used only when all other measures fail.

As in water management, good governance is key for DB schemes. Someone needs to be responsible and accountable for the financial outcomes. Risk in water protection is when the dykes do not hold up to unusually heavy rainfalls and storm surges; risk for a DB scheme is when schemes do not hold up in an economic recession or a depression. This risk can be assessed by using stress scenarios in the integrated risk management (IRM) framework . The IRM framework helps trustees better understand if and how the DB scheme and its sponsor could weather such a financial storm surge. This will provide trustees with important clues on how to improve the scheme’s risk management and investment management.

The most important lesson is not to get complacent. If we experience extended periods of ‘good times’, such as the eight year equity bull run we have experienced in the UK financial markets, our natural tendency is to forget the lessons of the past (e.g. the 2008 crash). In that case we can easily be caught unprepared for a financial crisis in the future. In short, as an industry we should hope for sunshine but prepare for a storm.