5/21/2010

Waiting for the Big One

Experts warn the United States is due for a major earthquake, but are we ready?

By Annmarie Geddes Lipold

The powerful earthquakes that shook Chile and Haiti, costing 230,000 lives and billions of dollars in economic loss, raise a haunting question: When the big one hits, will the United States be ready?

We don't like to think about it, but a major quake could occur at any time. California, famous for its seismic activity, comes immediately to mind. There is a 99% chance that an earthquake as big as or greater than the infamous Northridge quake of 1994—the most expensive in U.S. history—will strike the Golden State in the next 30 years, according to the United States Geological Survey (USGS).

Northern California has a 93% chance of a 6.7 magnitude rocker, and Southern California's chances are 97%, according to USGS. For the San Francisco Bay area and Los Angeles, the chances over the next 30 years are 63% and 67%, respectively. The April quake in Sierra El Mayor, Mexico, registered a magnitude of 7.2 and was felt as far as California, Nevada and Arizona.

But earthquakes are not limited to California and its neighbors. Fault lines in the central and eastern United States affect much larger areas than those in the West. Quakes in the New Madrid/Wabash Valley seismic zone in the central Mississippi Valley were so forceful in 1811 that they changed the course of the Mississippi River and rang church bells in Boston.

At that time, it was frontier land. Now, millions of Americans live in that 120-mile area that extends from northeastern Arkansas through southeastern Missouri, western Tennessee, Kentucky and southern Illinois. The USGS predicts a 25%–40% chance of an earthquake with a 6.0 or greater magnitude occurring there in the next 50 years. And, statistically, the region may very well be due. Until recently, both Haiti and the New Madrid zone in the U.S. had not experienced a major earthquake in 200 years. As for the eastern United States, it has a 40%–60% chance of taking a major hit in the next 20 years, according to the Earthquake Education Center at Charleston Southern University.

Lessons from Haiti and Chile
With such forecasts, the recent catastrophes in Haiti and Chile serve as a good heads-up for vulnerable regions here at home. Both occurred in hot zones, areas with significant population density similar to the urban development going on in seismically active areas in the U.S.

Differences in structural standards are part of the equation, too. Chilean structures were built according to modern building codes; Haiti's were not, partly explaining why the Haitian earthquake resulted in 230,000 deaths, while the Chilean earthquake resulted in about 400. In both Haiti and the New Madrid zone, building codes designed for earthquakes either do not exist or are not consistently enforced, according to the Institute for Business and Home Safety (IBHS). To address this problem, IBHS and other organizations are calling for potentially affected states to prepare for earthquakes by adopting and enforcing such codes.
The International Code Council sets the gold standard for building codes, says Nicolas Luco, a USGS research structural engineer. Adopting such regulation is difficult, though, because of an "understandable skepticism."

"It is hard to motivate people to be better prepared and use more stringent building codes when there is a lack of experience with earthquakes," Luco says.

Ready, Set, Restore
Restoration companies come to the rescue to clean up post-incident damage and make a site repair-ready. "We are prepared to respond as the adjusters' corps," says BMS CAT Executive Vice President Tim Draney.

Draney gives an example from Chile, where BMS CAT, a global commercial restoration company, is servicing the Sheraton hotel in Santiago and other businesses damaged in the massive February earthquake. At the Sheraton, a pipe burst on the eighth floor, spilling water into lower levels and heavily damaging some of the largest ballrooms in Santiago.

The goal is to get the hotel operational as soon as possible for the least cost. Part of that strategy is restoration rather than a raze-and-rebuild effort. BMS CAT is removing what is damaged while trying to save as much original material as feasible. In this case, some of the company's work includes cutting out damaged sheetrock while preserving the vinyl-covered walls. Even the carpet and its pad will be saved after extensive drying.

Lauren John Reid, CEO of PuroClean, a national commercial and residential restoration company, says catastrophic events like 9/11 and Hurricane Katrina have made restoration companies and the insurance industry more prepared than ever. "In the post-9/11 era, companies are more aware that they have to have disaster plans in place," Reid says. Risk managers and insurers, he notes, are now contracting with restoration companies ahead of time—just in case.

Events like Hurricane Katrina have moved restoration companies up the learning curve. The Katrina experience, Reid says, showed that rapid response is paramount. Thanks to more effective and detailed disaster planning by risk managers, insurers and the government, mobilization will happen more quickly for the next event, he adds.

Mobilization after an earthquake, however, might not be on par with a storm response since an area has to be evaluated for safety before restoration can begin, Reid explains. Earthquakes create special challenges, like broken underground utilities. In such cases, temporary water and electricity have to be brought to the scene, and leaks in natural gas or other subterranean pipes have to be dealt with.

Restoration companies are ready, though. They have ramped up their capabilities over the years due to the growing demand for their services, Reid says. "It is simply less expensive to restore structures than rebuild them."

By Annmarie Geddes Lipold

Uncovering Coverage
Besides highlighting the need for building structure enhancements, the recent rumbles to our south offer another lesson for the U.S. When comparing the experiences in Chile and Haiti, the differences in insurance coverage tell a story worth repeating. Chile had a far more developed insurance market, explaining the estimated $8 billion to $10 billion in losses covered by insurance. That's notable considering that in 2008 non-life policies accounted for just $2.3 billion in the Chilean market. On the flip side of the coin, as the poorest country in the western hemisphere, Haiti had only $19 million worth of the same coverage.
The New Madrid zone is also not covered as it should be, says Robert Hartwig, president of the Insurance Information Institute, and that is due to several reasons. For one, there is a belief that, if a quake hits, the "government" will take care of it. Besides, earthquake risk is not "top of mind" for potential policyholders since there hasn't been a major event in the U.S. for 16 years, he notes. And that's true even in California.

"When the Northridge quake happened, about 33% of residents had earthquake coverage," Hartwig says, compared to just 12% of California residents who have it today.

This is despite the fact that California accounts for two thirds of the nation's earthquake risk, according to the California Earthquake Authority (CEA). "Reasons people give for not buying earthquake insurance in California include high premiums, high deductibles and limited coverage," says Glenn Pomeroy, CEO of the CEA. The average premium for an earthquake insurance policy in California is $830 annually, but it can be much more expensive in high-risk areas.

To make earthquake coverage more affordable, the CEA is working to increase the participation rate by supporting federal legislation to lower premiums by about 35%. Called the Catastrophe Obligation Guarantee Act, the legislation would provide a federal guarantee for natural catastrophe post-event debt that would be repaid by the CEA. "If passed," Pomeroy says, "the CEA would reduce expenses by purchasing less reinsurance, and would pass its savings directly to consumers."
Earthquake Tools for Claims Professionals

Clearly it's not if, but when, the next earthquake will strike. Claims managers will benefit from becoming better acquainted with earthquake monitoring tools to improve claims handling. Below are four powerful tools that can help adjusters better respond to earthquake damage claims.
  • Instant Notification, a free service offered by the United States Geological Survey, will send a short message to cell phones as soon as an earthquake occurs. Sign up at http://earthquake.usgs.gov/eqcenter/ens/
  • ShakeMaps provide near-real-time maps of ground motion and shaking intensity following significant earthquakes. After an earthquake has occurred, a ShakeMap would be accessible at www.cisn.org. The colors on the map correspond to the shaking intensity (see Map 2).
  • "Did You Feel It?" Map, also called a Community Internet Intensity Map, shows the intensity of the earthquake as reported by individuals who have answered online questionnaires. The computer assigns shaking intensities from the same scale used on a ShakeMap (see Map 3).
  • Geographic Information System Software enables users to overlay an insured portfolio onto a ShakeMap. This is an effective way to view how many insureds potentially have been affected by the earthquake.
Source: California Earthquake Authority

Adjusting to the Reality
Even though policyholders and local regulations on structural strength don't appear to be risk-ready, experts are confident that the insurance industry is more prepared than ever to deal with a major earthquake or other major catastrophe.

"As an industry, I think we are very able to handle an earthquake, particularly in California," says Gary Kerney, assistant vice president of Insurance Services Office's Property Claims Services. California even requires earthquake training for claims adjusters.

Many insurers have dedicated catastrophe teams who receive regular training so they're ready for an earthquake or other cat claims, he says. "The insurance companies have the incentive to make sure they are trained to take care of policyholders." Independent adjusters who specialize in catastrophes are also ready to help.

One of the daunting challenges for quake-claims adjusters is thoroughness in the investigation of a damaged property. The Northridge event, for example, caused many cracks around doorways and windows, but "there was no indication of the damage until the repair people came in," Kerney says. It turned out the studs between the gypsum board and interior walls had come loose, which is much more serious and much harder to find upon initial assessment. "It took a lot of time for those claims to be settled."

But lag time in claims settlements may be the least of the problems if we get a monster quake in an unprepared or uninsured area. Uncovered losses could reach well into the billions, and it's pretty obvious who property policyholders are going to call first.
Annmarie Geddes Lipold is a contributing writer for Claims Advisor.


Annmarie Geddes Lipold is a contributing writer for Claims Advisor.

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