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Global Disaster Recovery Practice

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 resulted
in severe loss of life and some of the most severe
economic losses of any earthquake on record.
Despite other significant losses in China, Iran, and
Italy, 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 US 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 plus has not been abnormal:
between 2000 and 2012, there was an annual average of 15.31
major earthquakes and 1.3 great earthquakes. In 2012 through
July 2013, 24 major earthquakes and 4 great earthquakes have
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 2011 earthquake in Japan that
resulted in an estimated $309 billion in economic losses, four of
the eight costliest earthquakes since 1980 by total economic loss
have occurred within the past four years.
The January 2010 earthquake in Haiti resulted in an estimated
230,000 deaths. The loss was magnified by Port Au Princes
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, Chiles 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%
of the worlds earthquakes. As such, the possibility of the deadly
combination of earthquake, tsunami, and nuclear disaster that
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 US urban areas are at risk of significant seismic
activity, including New York and Los Angeles.
A generation ago, an earthquakes economic impact would be felt
primarily by people and businesses in the affected region. Todays
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.
1. Utilize the latest earthquake-proof building techniques.
The technology exists to earthquake proof buildings, for a cost.
A new building that uses earthquake-resistant technology is
likely to cost 5% to 10% 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
organizations overall risk management program to enable

2 Mitigating Earthquake Risk

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 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 fixed asset 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.

NOTABLE EARTHQUAKES SINCE


JANUARY 1, 2012:
February 6, 2012: Magnitude 6.7 earthquake in the NegrosCebu region, Philippines kills over 40 and results in about $15
million in total losses.
May 2012: Magnitude 5.9 earthquakes in Northern Italy kill
26 and result in $17.5 billion in total losses.
August 11, 2012: Magnitude 6.4 and 6.3 earthquakes in Iran
kill 306 and result in about $650 million in total losses.
September 7, 2012: Magnitude 5.5 earthquake in SichuanYunnan-Guizhou region, China kills more than 80 people and
results in over $550 million in total losses.
February 6, 2013: Magnitude 8.0 earthquake on the Solomon
Islands kills 13 people.
April 20, 2013: Magnitude 6.6 earthquake in Sichuan, China
kills nearly 200 and results in $1.6 billion in total losses.
July 22, 2013: Magnitude 5.9 earthquake in Gansu, China kills
nearly 100 people and results in $1.2 billion in total losses.

Marsh 3

For more information, visit Marshs Global Disaster Recovery Portal, contact your Marsh client executive,
or contact:
DAVID PIGOT
Chairman, Global Claims Practice
+ 44 207 357 5738
david.pigot@marsh.com

DUNCAN C. ELLIS
US Property Practice Leader
+1 212 345 3183
duncan.c.ellis@marsh.com

ALAN MORTON
International Property Claims Leader
+ 44 207 357 5331
alan.morton@marsh.com

ROBERT W. OBRIEN
National Property Claims
+1 202 263 7863
robert.w.obrien@marsh.com

CAROLINE WOOLLEY
Global Business Interruption Center of
Excellence Leader
+ 44 207 357 2777
caroline.woolley@marsh.com

KEVIN McCARTHY
Global Financial Advisory Services
Practice Leader
+1 312 627 6722
kevin.m.mccarthy@marsh.com

TRACY KNIPPENBURG GILLIS


Global Reputation Risk & Crisis
Management Practice Leader
+1 212 345 3886
tracy.knippenburggillis@marsh.com
MARK CRITES
Valuation Services Practice Leader
+ 1 404 995 2594
mark.crites@marsh.com
CHERYL FANNELI
CAT Modeling Center of
Excellence Leader
+1 212 3450326
cheryl.fanelli@marsh.com

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