Managing Earthquake Risk
March 2002
Since September 11, risk managers have focused
on man-made risk. However, Ron Hamburger explains the greater danger of natural
catastrophes, particularly earthquakes, and how their risk should be assessed
and handled.
by Ronald O.
Hamburger, SE
ABS Consulting
Since September 11, 2001, the public's perception of risk and the primary
sources of risk have changed dramatically. Today, everyone is concerned about
terror-related risk, whether it comes in the form of explosive devices or biohazards.
The attacks on New York and Washington were indeed terrible and a great tragedy
made even worse by the fact that rather than being the result of some natural
disaster, they were ruthlessly planned and executed by man.
However, in comparison with the losses frequently associated with natural
disasters, such as hurricanes and earthquakes, the life and economic loss associated
with these attacks were not unequaled. The economic losses from the Northridge
and Kobe earthquakes each exceeded the economic losses associated with the World
Trade Center disaster. Even the life losses due to the September 11 attacks
have been greatly exceeded by many natural disasters, including each of the
1985 Mexico City, 1988 Armenia, and 1999 Izmit earthquakes.
The events of September 11 were horrible and were made even more so by the
fact that we could all watch the events unfold before our eyes over and over
again. However, risk managers would be prudent not to be distracted by their
response to this new perceived risk of potential terror attack, to the exclusion
of consideration of all other risks.
One of the major consequences of September 11 on most businesses is the effect
on the availability and cost of catastrophic insurance. The insurance market
has tightened considerably and facility coverage for earthquake and other catastrophic
losses is either unavailable in sufficient quantity for high value risks or
is too expensive to procure. Thus, this is an appropriate time to review alternatives
to risk transfer as a means of managing potential earthquake and other catastrophic
risk.
There are five basic steps to any intelligently defined risk management program,
regardless of the peril addressed. These include (1) understanding the current
level of risk exposure; (2) assessing the acceptability of this risk, (3) evaluating
alternative risk mitigation approaches; (4) selecting an appropriate approach;
and (5) implementing the approach. Each of these steps is discussed below.
Step 1—The Risk Audit: Understanding the Risk
It is impossible to make informed choices with regard to managing the risk
associated with any hazard unless the risk is first understood. Simply stated,
risk is the product of the probability that an event of a given severity will
be experienced and the likely consequences of that event should it occur.
Risk may be expressed in several ways including (1) the probability that
losses due to a given peril will be exceed a specified amount in a given period
of time; (2) the average annualized loss considering all events that could occur;
and (3) the maximum loss that could occur, given that a specific level of peril
is experienced. Losses can be expressed in several forms, including loss of
life and economic loss. The best way to express these various losses depends
on the decision model that the risk manager prefers to use in deciding between
alternative mitigation approaches.
For earthquake risk, two measures of risk are probably most appropriate.
The first of these is the scenario-based estimate. In this approach, a specific
earthquake is assumed to occur, and the potential losses from this event are
estimated. For this approach to be meaningful, the event selected must both
be realistic and reasonably likely to occur. In the case of earthquakes, this
approach is most commonly used in regions close to known active faults where
it is assured that events of a given size will occur, the only question is when
it will actually happen. The second approach is more commonly used in areas
where a specific scenario event is difficult to define.
Although it was once more guesswork than science, estimation of earthquake
risk today is straightforward and economical to perform. In fact, sufficient
guidelines have been published on this method to permit many organizations with
in-house engineering capability to perform this task themselves. The hazard,
that is the likely recurrence of events of different intensities, has been studied
by numerous government agencies. In the United States for example, the U.S.
Geologic Survey operates a Web site that allows users to determine the risk
of given intensities of ground shaking at any site in the United States simply
by entering a postal code or geographic coordinates.
The vulnerability of different classes of facilities is also well understood,
and several publications, such as FEMA-154, are available to assist in determining
the likely levels of damage, given that certain hazards occur. For those risk
managers without access to in-house facilities engineering capability, many
engineering consulting firms offer risk audit services at a reasonable cost.
Step 2—Assessing the Acceptability of the Risk
This step is perhaps the most important. Once the risk is known, the risk
manager must determine whether it is acceptable. However, the perception of
risk acceptability is often quite subjective. What is acceptable to one organization
or manager may be totally unacceptable to another.
Most agree that significant probability of loss of life is unacceptable.
Once the risk of loss of life is reduced to suitably low thresholds, the acceptability
of risk remains largely an economic issue. Some managers will weigh the probable
cost of mitigating a risk against the economic loss associated with the risk
itself. If the mitigation cost is below the benefit received in reduced loss
exposure, than some mitigation makes sense. Other managers will determine to
mitigate based on a consideration of risk of ruin. That is, as long as potential
loss is not complete, with the enterprise going out of business, the risk is
judged acceptable as the enterprise is deemed capable of recovery.
Step 3—Evaluating Alternatives
The risk manager can select from a wide range of alternatives to mitigate
earthquake risk. These include transferring the risk to others through acquisition
of insurance, hardening facilities so that the probable loss given an event
is reduced, diversifying the portfolio of holdings so that only a small percentage
of an organization's assets is simultaneously at risk, and emergency response
planning, so that the losses that actually occur in an event are minimized.
Most risk managers will want to select from several of these.
In addition to determining the specifics of these feasible options, it is
also necessary to determine their probable costs and other impacts. Most of
these mitigation approaches can be explored using the manager's own resources.
However, to determine the feasible options for hardening facilities and the
cost of hardening, assistance from a structural engineering consultant will
typically be required.
Step 4—Selecting an Appropriate Alternative
There is no single preferred risk mitigation alternative for all organizations.
The best choice depends on the individual organization's status, its risk, its
tolerance for risk, and the costs associated with the various approaches. Increasingly,
risk-transfer, through purchase of insurance is becoming an undesirable choice,
due to the lack of cover available on the market and its high cost. Many risk
managers, therefore will want to look to alternative mitigation measures.
Step 5—Implementing the Measures
No matter how good the plan, unless the mitigation measures are actually
implemented, there is no benefit. Implementation does not have to be immediate.
The chance that an earthquake will actually occur at any specific facility in
a period of a few years is low. However, it is also real. The best approach
to implementing mitigation alternatives is to coordinate them with other management
programs, including facility modernization, plant expansion, and product diversification.
There is time to act, but this time is not infinite. The time to begin to act
is now.
Ronald O. Hamburger is an internationally recognized expert in earthquake-resistant
design with over 27 years of experience in civil and structural engineering,
earthquake engineering research, earthquake damage and forensic investigation,
field engineering, building code and standards development, construction, and
project management. He is widely known in the structural engineering community
for his leadership in the area of performance-based earthquake engineering.
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