Mitigating Earthquake Risk: Strategies for Preparedness and Protection

Earthquakes are more frequent than often acknowledged, with significant economic impacts occurring from both major and minor events. Organizations in earthquake-prone areas must assess risks using historical data and advanced catastrophe modeling tools. Strategic insurance solutions, including parametric coverage, can provide critical financial support. Effective risk management requires a tailored approach to each organization’s unique circumstances, enabling them to prepare for and mitigate potential earthquake-related losses.

Earthquakes occur more frequently than one might expect, with over 50 major seismic events recorded worldwide by September this year alone. Notably, the Noto earthquake in Japan incurred economic damages projected at $17.6 billion, while Taiwan experienced its most powerful earthquake in 25 years. Europe faced building collapses after earthquakes in Turkey, and Brazil encountered a major tremor that marked one of its strongest in decades. Even minor tremors hold significant potential for damage; thus, organizations susceptible to earthquake risks must proactively address these hazards. An earthquake results from the ground shaking due to energy released as tectonic plates slip past one another. Each year, approximately 15 major earthquakes worldwide are reported, yet precise predictions regarding their timing or locations remain impossible. Although the most significant earthquakes often occur at tectonic plate boundaries, seismic activity can happen nearly anywhere. The impacts of earthquakes can be catastrophic, resulting not only from the tremors but also from secondary effects such as tsunamis, landslides, and infrastructure failures which can trigger fires or explosions. This culminates in increased risks to life and property and can lead to substantial business losses. Earthquakes are measured by their Moment Magnitude (Mw), which quantifies total energy release, and the Modified Mercalli Intensity (MMI), which assesses shaking intensity based on local geological factors. Organizations at risk can evaluate potential damage through historical earthquake records, providing insights into regions of varying risk levels. However, this analysis is sometimes limited since seismic records are typically confined to approximately a century of data, potentially excluding older, more significant events. Advanced catastrophe modeling tools facilitate deeper insight into earthquake risks by incorporating current scientific knowledge and data to project possible financial losses under varying earthquake scenarios. By using these models, organizations can comprehensively assess their vulnerability and determine if their insurance coverage sufficiently mitigates their exposure. Models that successfully incorporate detailed geolocation data, construction materials, and local geology yield more refined predictions. It is crucial to consider that earthquake-related impacts can ripple across industries. For instance, the Japanese earthquake and resultant tsunami in 2011 led to a significant and ongoing decline in the automotive sector’s capacity, which further disrupted supply chains. Specialist guidance can enable informed decision-making regarding risk mitigation and insurance strategies, as the damage from similar-magnitude earthquakes can vary widely across different locations. Once organizations have a detailed understanding of their risk exposure, they can devise cost-effective responses. For example, a North American real estate investment firm identified three properties in an earthquake-prone region contributing to 60% of its total risk. These buildings, composed of unreinforced masonry, were especially vulnerable, and retrofitting them with stronger materials, although costly at $10 million, could potentially avert losses of around $150 million. Various insurance products are available to safeguard against earthquake risks, including conventional coverages and innovative parametric insurance, which pays predetermined amounts based on specific conditions rather than assessed losses. This form of insurance can bridge gaps left by standard property policies and facilitates swift payouts since the policy conditions are clearly defined and not subject to protracted evaluation processes. An informative case involved a US public entity that secured a parametric insurance solution to guarantee access to liquidity following severe earthquakes, with predetermined payout amounts corresponding to varying shaking intensities. The policy was strategically structured over three years to reduce costs while ensuring financial stability. Managing earthquake risk necessitates a tailored approach suited to the unique circumstances of each organization. The first step involves evaluating exposure to define the appropriate risk management response. At WTW, we are dedicated to assisting organizations in managing natural catastrophe risks through a comprehensive service suite aimed at protecting assets, reducing downtime, and optimizing risk management strategies. For specialized assistance in navigating earthquake risks, we encourage you to reach out for expert guidance.

The article discusses the increasing frequency of earthquakes globally, particularly highlighting notable events and their economic impacts. It emphasizes the risks associated with not only major earthquakes but also smaller tremors, creating a significant threat to organizations in vulnerable regions. The mechanics of earthquakes and methods for evaluating potential damage are explained, along with the use of sophisticated catastrophe modeling tools. The role of insurance, including both conventional and parametric coverage, is also discussed as a critical component in risk management for organizations liable to earthquake damage.

In summary, earthquake risk management is an essential concern for organizations situated in seismic zones due to the unpredictable nature and potential enormity of these events. Employing comprehensive assessment tools and appropriate insurance strategies allows organizations to effectively mitigate risks and protect their assets. It is imperative for entities at risk to engage with specialists to formulate informed, tailored responses to this ongoing natural hazard. Our expertise at WTW is dedicated to ensuring organizations can navigate these challenges with confidence.

Original Source: www.wtwco.com