5434 MA11-10655 Mitigating Earthquake Risk

Global Disaster Recovery Practice

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 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%

of the world’s 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.

MITIGATING EARTHQUAKE RISK

2 • Mitigating Earthquake Risk

• 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 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 MITIGATIONAlthough 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

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 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.

Marsh • 3

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.

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 Negros-

Cebu 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 Sichuan-

Yunnan-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.

10.

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Copyright 2014 Marsh LLC. All rights reserved. Compliance MA11-10655 5434

For more information, visit Marsh’s Global Disaster Recovery Portal, contact your Marsh client executive,or contact:

DAVID PIGOT Chairman, Global Claims Practice + 44 207 357 5738 [email protected]

ALAN MORTON International Property Claims Leader + 44 207 357 5331 [email protected]

CAROLINE WOOLLEY Global Business Interruption Center of Excellence Leader + 44 207 357 2777 [email protected]

DUNCAN C. ELLISUS Property Practice Leader+1 212 345 [email protected]

ROBERT W. O’BRIENNational Property Claims+1 202 263 [email protected]

KEVIN McCARTHYGlobal Financial Advisory Services Practice Leader+1 312 627 [email protected]

TRACY KNIPPENBURG GILLISGlobal Reputation Risk & Crisis Management Practice Leader+1 212 345 [email protected]

MARK CRITESValuation Services Practice Leader + 1 404 995 [email protected]

CHERYL FANNELICAT Modeling Center of Excellence Leader +1 212 345 [email protected]