The Importance of Corporate Earthquake Programs

Transcription

1 3rd US-Japan Conference on Corporate Earthquake Programs, 1996 The Importance of Corporate Earthquake Programs Robert Reitherman Executive Director California Universities for Research in Earthquake Engineering Recent research reveals some interesting findings concerning the importance of corporate earthquake protection programs (or their inverse, corporate earthquake losses). Consider the fact that a survey of businesses and analysis of economic interactions after the January 17, 1994 Northridge Earthquake concluded that on top of the approximately $30 billion in direct losses--the cost to repair damaged property--there was an additional $6 billion in business interruption losses. (Gordon et al., 1995) And this from an event that was only a magnitude 6.7, and located on the fringe of the San Fernando Valley rather than a bull s eye hit in the Los Angeles Basin. Most economists studying the impact of natural disasters, such as California s recent 1989 Loma Prieta Earthquake in the Bay Area or the Northridge Earthquake in the Los Angeles metropolitan area, have found that the affected region does not suffer a significant net loss. (RMS, 1996, chapter 16) Come again? Freeways topple, hospitals with extensive nonstructural damage evacuate patients, thousands of dwellings are damaged, businesses experience major property loss--not to mention that $6 billion in follow-on interruption cost--and the region doesn t suffer a net loss? 1

2 The 1964 Alaska Earthquake was the first of the modern earthquakes in which the federal pay-out exceeded the actual cost of damage, once the final relief bills were paid, and this event was very influential in establishing federal earthquake research and loss control programs. The 1989 Coalinga Earthquake, a small disaster localized in one town, is an easy-to-understand case. The total damage of the earthquake amounted to $31 million. The total of state and federal aid was $50 million. (Spangle & Assoc., 1991, p. 59). In such cases, it is easy to see that the net economic impact, averaged over the localized area, is a gain, not a loss. Net economic impact, averaged over the localized area is an important proviso. Similarly, it is true that on average there are no gambling losses in Las Vegas: Because of the altruistic behavior of those who deposit their coins into slot machines, the losses incurred by the casinos that operate the slot machines are more than canceled out. For large earthquakes, perhaps half of the loss will be paid for by insurance and governmental disaster relief payments. The establishment of a California Earthquake Authority this year will increase the amount of loss suffered by homeowners that is covered by insurance. Corporations are typically uninsured or underinsured for earthquakes, as compared to the approximately one-fourth of California homeowners properties that are earthquake-insured. Also, the Stafford Act s relatively generous disaster relief payments are available to local governments, states, non-profits, individuals, and, via the Small Business Administration, some smaller businesses. Major corporations need not apply, nor do the homeless (having no rental unit or house to claim) or the poor qualify for a significant portion of the governmental benefits paid out. 2

3 Also extremely significant in determining who wins and who loses is the stimulated demand for goods and services the earthquake induces in some sectors and for some companies. An example in the construction sector is the multi-million dollar bonus paid by Caltrans on top of the usual profit margin to the contractor who was able to rapidly repair the La Cienega overpass on Interstate 10 (Santa Monica Freeway). Those dollars fall on the plus side of the ledger to counteract the negative figures. While some employees lose a day of work until they devise alternate routes to work, others work overtime for the next few months repairing the damage. While one business is closed because of damage, another company in the same market expands its sales to the damaged business s customers. Business X is damaged, business Y takes up the slack, and society notices no loss. Of course, from the viewpoint of Business X, an unfortunate event has occurred: X has lost market share to Y. Similarly there is never a net loss in Las Vegas; it s only the people who don t own or work in the casinos who will go home with fewer dollars than when they arrived. Corporate strategies for reducing loss exposure to earthquakes have varied with time. Until the 1970s or early 1980s, companies assumed that having their buildings built up to code was sufficient earthquake protection. Gradually they learned that a building designed to meet the 1970 Uniform Building Code might not perform as well as one that meets the 1982 edition s requirements, just as a 64K RAM desktop computer in 1982 might not perform quite as well as a new desktop model purchased 12 years later in (For the younger readers, yes--that s a K, not a typo). This trend has accelerated since 3

4 the Loma Prieta and Northridge Earthquakes, with engineers moving quickly to keep pace with the market demand for enhanced performance. Performance-based engineering is now a popular term in the earthquake engineering field. Rather than having your building perform safely, but with damage that requires repairs, wouldn t you prefer it to go through the event without a scratch? The engineer will reply that very high performance is possible, though the engineering field is still struggling to provide that very high level of performance with reliability, considering all the uncertainties of ground motion and structural response. Earthquake-proof isn t a performance level a knowledgeable engineer would lightly promise, but on the other hand engineers are happy to design to almost any criteria, as long as the budget is not limited. The catch is that you must pay first class airfare to get first class service. One seemingly attractive option is to locate a company s facilities so as to avoid areas that will shake strongly. If your motivation to escape earthquake risk is strong enough, the real estate market provides millions of acres of land that meet this requirement. However, most people do not want to re-locate to Greenland, central Australia, northern Canada, Siberia, the Amazon Basin, or Antarctica. As astute readers will note, on our particular planet, the large regions where earthquakes do not occur turn out to be where first-run movies are hard to find, not to mention reliable supplies of specially-fabricated stainless steel, microbiologists, semi-conductor fabrication equipment, and the like. 4

5 It is true that on the scale of the United States, the risk varies greatly, generally from West to East. California contains three-fourths of the country s highly-seismic population and economic resources. However, moving from California typically implies jumping from a frying pan into various kinds of fires, such as tornadoes or hurricanes, not to mention the recurring episodes lasting a few days of transportation and other outages caused by snow and other bad weather. The strategy that enlightened companies have been taking is to employ earthquake response planning to ameliorate the impact of an earthquake, while investing in improved facilities to avoid the damage in the first place. Perhaps over the last ten years there has been a shift from emphasis on emergency planning to a focus on facility upgrading: retrofitting existing buildings and equipment, moving to more earthquakeresistant facilities, or having new buildings constructed with at least some extra measure of seismic protection than the code minimum. If a building experiences collapse or major damage, no matter how efficient the emergency response is, there will still be a disaster. And if damage causes the company to fail to ship products or provide services for even a few weeks, there will be undamaged competitors ready to step in. A net gain in the regional economy is no consolation to the company whose assets and business future have been irreparably harmed. References FEMA, National Survey Instructions. Washington, DC: Federal Emergency Management Agency (TR-84). 5

6 Gordon, Peter, Harry Richardson, Bill Davis, Chris Steins, and Ashwani Vasishth, The Business Interruption Effects of the Northridge Earthquake. Los Angeles, California: University of Southern California School of Urban and Regional Planning. RMS, Development of s Standardized Earthquake Loss Estimation Methodology, Vol. II, Draft Technical Manual. Menlo Park, California: Risk Management Solutions, Inc., prepared for the National Institute of Building Sciences and funded by the Federal Emergency Management Agency. Spangle & Assoc., Rebuilding After Earthquakes: Lessons From Planners. Portola Valley, California: Spangle & Associates; funded by the National Science Foundation. 6