Mitigating Earthquake Risk
A number of significant, damaging earthquakes since the start
of 2010 have caused some people to question whether we have
entered an era of increased seismic activity. The devastating
impact of the March 11, 2011 earthquake, tsunami, and ensuing
nuclear crisis in northern Japan is still being measured, but
has resulted in severe loss of life and some of the most severe
economic losses of any earthquake on record. Despite recent
losses, however, scientists tell us that neither the frequency
nor the magnitudes of earthquakes are increasing. Still, recent
catastrophes provide a sober reminder of the importance
of enacting sound risk mitigation measures against these
unpredictable events.
The Reality of Earthquake Risk
According to the U.S. Geological Survey (USGS), an average of 15 “major”
earthquakes (magnitude 7.0 to 7.9) and one “great” earthquake (8.0 or
higher) have occurred annually since 1900. By this measure, the last
decade has not been abnormal: between 2001 and 2010, there was an
annual average of 13.8 major earthquakes and 1.27 great earthquakes. In
2011, through mid-March, one great earthquake—in Japan—and six major
earthquakes had been recorded.
The faulty perception that we have recently seen more earthquakes, and
of greater magnitude, could be tied to the scope of damage and number
of deaths associated with such occurrences. Including the May 12, 2008
earthquake in China that resulted in $85 billion in economic losses, four
of the seven costliest earthquakes since 1980 by total economic loss have
occurred within the past three years.
Notable Earthquakes since January
1, 2010:
January 12, 2010: Magnitude 7.0
earthquake in Haiti kills more than 230,000
and results in $8 billion in total losses.
February 27, 2010: Magnitude 8.8
earthquake in Chile kills nearly 600 people
and results in $30 billion in total losses.
March 8, 2010: Magnitude 6.1 earthquake
in Eastern Turkey kills more than 50 people.
April 13, 2010: Magnitude 6.9 earthquake
in China kills nearly 3,000 and results in $4
billion in total losses.
September 4, 2010: Magnitude 7.0
earthquake in New Zealand results in $6.5
billion in total losses.
February 22, 2011: Magnitude 6.3
earthquake in New Zealand kills more than
160 people and results in $20 billion in total
losses.
March 11, 2011: Magnitude 9.0 earthquake
in northern Japan results in tsunami and
nuclear crisis, with losses still being assessed,
but estimated to be more than 15,000
people killed and more than $300 billion in
total losses.
March 24, 2011: Magnitude 6.8 earthquake
in Myanmar kills more than 100 people.
Mitigating Earthquake Risk
The January 2010 earthquake in Haiti resulted in an
estimated 230,000 deaths. The loss was magnified
by Port Au Prince’s dense population and poorly
constructed buildings. By contrast, the magnitude
8.8 earthquake that struck Chile the following month
caused fewer than 600 deaths. Though it was among
the largest earthquakes ever recorded, Chile’s stricter
building codes helped to limit the death toll.
Earthquake risk remains a very real threat for many
population centers and global businesses. More
than 50 nuclear power plants—in Japan, the United
States, and Mexico—operate in what is known as the
Pacific Ring of Fire, which accounts for 90 percent
of the world’s earthquakes. As such, the possibility
of the deadly combination of Earthquake, Tsunami,
and Nuclear disaster—ETN RiskSM—that has had a
devastating impact on Japan can no longer be regarded
as a “black swan,” beyond the range of normal
expectations for risk managers. In addition:
„„ More than half of the 130 cities worldwide with
populations greater than 1 million are located on
fault lines, according to University of Colorado
geologist Dr. Roger Bilham.
„„ About 400 million people globally are considered at
risk from earthquakes.
„„ In the United States, about 75 million people in
39 states face significant risks from earthquakes,
according to the USGS.
„„ Twenty-six U.S. urban areas are at risk of
significant seismic activity, including New York
and Los Angeles.
A generation ago, an earthquake’s economic impact
would be felt primarily by people and businesses in
the affected region. Today’s complex global economy
means that every event can have local and global
impact rapidly and extensively.
Risk Mitigation
Although it is impossible to predict precisely where
and when an earthquake will occur, there are a number
of steps organizations can take to mitigate their risk.
Such measures can put a business in the best position
to respond to and recover from an earthquake in a
timely manner—whether its operations or those of
trading partners are in an earthquake zone.
2 |Mitigating Earthquake Risk
1. Utilize the latest earthquake-proof building
techniques. The technology exists to earthquakeproof buildings, for a cost. A new building that
uses earthquake-resistant technology is likely
to cost 5 percent to 10 percent more than one
that does not—and retrofitting old buildings is
significantly more expensive. At a minimum,
buildings in earthquake zones should meet the
most current local building regulations.
2. Construct basic buildings. In poorer areas, where
high costs prohibit new technologies, experts
recommend building simple, square, squat
structures; reinforcing concrete buildings; and
bolting wooden structures to their locations.
3. Develop a crisis management program. Ensure
that you have the crisis management plans and
experienced real-time crisis response personnel
in place ahead of time in order to mitigate the
potential impacts of an earthquake and return to
normal operations as quickly as possible. Elements
of a crisis management plan include emergency
response, business continuity, supply chain, crisis
communications, and human impact.
4. Develop a focused business continuity plan.
Identify those functions essential to the ongoing
survival of your business, and assess the potential
impact of an earthquake to understand the degree
of loss that may occur. Integrate emergency
response and business continuity program
management into your organization’s overall
risk management program to enable ongoing
program viability and readiness. Develop business
continuity training and awareness programs
designed to promote a culture of survivability
across the organization.
5. Understand your value/supply chain. Analyze
your supply chain by value to your business, such
as product or service categories/families. Find
out what markets you sell to, who supplies you,
and what the critical dependencies are along the
supply chain. Map the flow of cash, information,
products, and services along the extended chain.
If you are a purchasing or procurement manager,
go beyond mapping the material or the commodity
chain to include other suppliers’ (multi-tier
removed) infrastructure. And if your own
Marsh
Mitigating Earthquake Risk
operations are in an earthquake zone, make plans
now for alternative production and service centers.
6. Develop a claim management plan. Identify
everyone who will be a part of your claim
management team—both inside and outside of
your organization—and ensure they know their
roles and responsibilities in the event the plan
is triggered. Remember there will be no warning
before an earthquake, so make sure that records—
including plan documents, policies, contact lists,
and financial and property records—are easily
accessible and available at all times. Make sure
that your claim management plan integrates
with and supports other disaster plans, crisis
response plans, and operational plans for your
organization. Establish clear communication
protocols throughout the execution of your claim
management plan.
7. Consider all risk transfer options. Purchasing
adequate insurance coverage can help
organizations recover from the financial losses
of an earthquake. Understanding the potential
economic loss due to damage to properties and
interruptions to normal business operations is
paramount. Modeling software can help determine
the most appropriate levels of insurance, and a
natural hazards expert can help account for all of
the unique factors of a specific property. Business
interruption, supply chain, and other insurance
programs can help to protect businesses in the
event of disruptions to their operations.
8. Engage a valuation expert. This should be done in
parallel with modeling. It is important to know not
just what damage a structure can tolerate, but the
value of all that may need to be replaced. A fixedasset valuation expert can provide an organization
with accurate and supportable valuations, enabling
more confident risk transfer and mitigation plans
and ensuring the proper allocation of resources for
the protection and recovery of fixed assets.
9. Understand what is not covered. Many insurance
coverages are not available on a primary basis
in CAT zones. Businesses should understand, in
advance of a claim, what is not covered by their
insurance programs so that they can adequately
plan for a catastrophic loss.
10. Always assume the worst case scenario. Be
prepared for an extended period of business
interruption – do not assume that you will be fully
operational in a matter of days – and plan with
that as a given. Also be prepared for the possibility
that you will lose a majority, if not all, of your
inventory. The strategy can always be “throttled
down,” but a “throttling up” strategy tends to be
reactive and poorly orchestrated; you may never
catch up to mitigate the consequences of the event.
For more information, visit Marsh’s Global Disaster Recovery Portal, contact your Marsh client executive,
or contact:
Duncan C. Ellis
U.S. Property Practice Leader
+1 212 345 3183
[email protected]
Fletcher MacGregor
Global Natural Hazards Practice Leader
+1 313 393 6541
[email protected]
Elizabeth Demaret
Multinational Client Service Director
+1 212 345 3978
[email protected]
Joshua Cohen
Valuations Practice Leader
+1 312 627 6813
[email protected]
Robert W. O’Brien
National Property Claims
+1 202 263 7863
[email protected]
Ken Giambagno
Global Forensic Accounting and Claims
Services Leader
+1 212 345 1063
[email protected]
Marsh
Tracy Knippenburg Gillis
Global Reputation Risk & Crisis Management Practice
Leader
+1 212 345 3886
[email protected]
Karen Avery
Business Resiliency Services Leader
+1 973 401 5133
[email protected]
Gary Lynch
Global Supply Chain Risk Management Practice Leader
+1 973 401 5357
[email protected]
Mitigating Earthquake Risk 3
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