WHEN DISASTER HAPPENS:

The Effect of Tornados, Hurricanes, Earthquakes and Tsunamis and the Economics of Recovery and Safety

TORNADOS

HURRICANES

Satellite Photo of Hurricane Katrina one day before landfall on August 28, 2005

EARTHQUAKES

US Geological Survey photo: Collapsed and burned buildings from Loma Preita, California Earthquake of October 17, 1989.

TSUNAMIS

U.S. Navy photo of a coastal village in Sumatra after the 2004/2005 East Asian Tsunami

2006 Hawaiian Earthquake

• Magnitude of 6.7

• 1,130 Houses Damaged

• 29 Houses Deemed Uninhabitable

• Most powerful since 1983

• Declared a major disaster area

• Disruption in Electrical Power and Communications

• Landslides

• Sinkholes

• Destruction to buildings, schools, and roads

Damage Estimates

• $100 - $150 million range

• Insured losses below $25 million NOT INCLUDING:

Public Buildings Infrastructure

• Considered non-catastrophic due to low insured losses

Factors for Minimal Insured Losses

• Hawaii ranks 33rd in earthquake premium coverage

• Property owners have option to purchase insurance through alternative providers

• High deductibles

• Earthquake compliant building codes

Impact

• Increasing demand for insurance coverage

• Fewer insurance providers due to risk

• Higher premium costs for consumers

• Reduced access to coverage due to price increases or lack of providers

Hurricane Katrina

• Hit the Gulf Coast in 2005

• Percentage of homeowners with Flood Insurance was low

• Mandatory Insurance Requirements were strengthened

• Increased awareness that the United States has exposure to natural disasters such as Earthquakes and Tsunamis

Initial Damage Estimates

• $21 billion in damages to commercial buildings

• $36 billion in equipment damages

• $75 billion in residential buildings and contents

• $231 million in electric utility damages

• http://www.marshall.edu/cber/research/katrina/Katrina-Estimates.pdf

Initial Damage Estimates cont…

• $3 billion in highway infrastructure

• $1.2 billion in sewer system infrastructure

• $4.6 billion in commercial revenue

• http://www.marshall.edu/cber/research/katrina/Katrina-Estimates.pdf

2004/2005 Indian Tsunami

• December 26, 2004 Earthquake triggered a Tsunami

• One of the worst natural disasters in history

• Impacted the coastlines of 12 countries in South Asia and East Africa

• 350,000 dead and missing

• Economic losses in excess of $4.45 million

Tsunami Triggers

Earthquakes

Volcanic Eruptions

Underwater Landslides

Onshore Landslides

California

Hawaii

Alaska

Oregon

Washington

Carribean Islands

Early Warning Systems

Tsunamis• Underwater Sensors• DART – Deep –Ocean

Assessment Reporting of Tsunami buoys

• Radar data from satellites• Sea level monitoring/tide

gauge stations• Global Seismographic Network• Tsunami Ready Program –

Community Education and Preparedness

Earthquakes• Cannot be predicted• The USGS is committed to

improve the ability to detect earthquakes through the study and analysis of earthquake events and improvements in the Global Seismographic Network

Risk Management

• Insurance is an important component of loss mitigation

• Insurance provides funds for rebuilding• Insurance reduces economic loss• Disaster can provide an economic boost as

communities and individuals with adequate funding rebuild and replace aging structures and infrastructure

Insurance Risks

Non-Catastrophic Risks• Policy costs are spread

across many policy holders at a lower premium price

• Frequency of claims can be predicted

• Claims are paid from assets, cash flows, debt, reinsurance

Catastrophic Risk• Limited number of policy

holders

• Limited capacity of insurance companies to cover disaster losses

• Regulations discourages insurance companies from accumulating cash reserves

Reinsurance

• A tool for insurance companies to hedge their portfolios

• Reinsurer accepts a portion of the risk

• Primary insurer shares a portion of the premiums

• Risks are layered

Reinsurance Example

• Loss from an earthquake exceeds $100 million• Primary insurance company pays $100 million• Reinsurance company pays the excess• A portion of the excess may be transferred to

a retrocessionary in exchange for a premium• After a catastrophe, primary insurers may

have a difficult time acquiring affordable reinsurance

Insurance Linked Securities

• Funding source for catastrophic risk• Liquidity for catastrophic loss from the U.S.

debt and equity market• Not linked to interest rates and credit default• Risk premium is high• Offshore companies are required• Insurance Linked Securities (ILS) as an asset

class are expected to grow

The Role of Government

Early warning

Emergency assistance

Recovery resources

National Flood Insurance Program

Policy

Regulation

Research

Disaster Relief Management Efforts• Basic needs – food, water,

shelter, medical care – are front line necessities for survivors

• Inclusion of victims in planning and rebuilding of the community

• Assistance groups should be focused on their area of expertise

• Needs of men, women and children are not the same

• Aid should be distributed according to needs

• Education for aid groups on international standards set by major groups such as the International Committee of Red Cross and the Sphere Project

• Careful management of grants and financial aid

• Debt relief can provide funds for reconstruction

STAYING SAFE- A CONSUMERS CHOICE FOR DISASTER SAFETY

A Retail Level Mitigation Product for Consumers:

SAFEROOM

FUNDING A SAFE ROOM

• Cost: $2,500 to $6,000

• SBA Disaster Loans allow homeowners to use disaster funds to construct a safe room.

• Tornado Shelters Act provides community block grants to construct tornado safe shelters in mobile home parks that have at least 20 units.

FUNDING A SAFE ROOM

• FHA 203(k) Rehabilitation Loans and FHA 203(b) New Construction Financing allow borrowers to use funds for wind shelters

• Hazard Mitigation Grant Program provides assistance to states and local communities. Grants can be used to fund protection projects for public or private properties.

• Pre-disaster mitigation programs.

A SAFE ROOM PROVIDES PROTECTION FROM MULTIPLE DISASTERS

• Wind hazards from tornadoes and hurricanes

• Protects from strong winds and flying debris

• Can be located in a bathroom or closet

• A separate detached shelter can be constructed either above ground or below ground

Interior Safe Room Characteristics

• Must be a “room within a room”

• Proper construction insures the room will remain intact if the house is destroyed

• Safe rooms built within the interior provide safe and quick access

• Should provide complete protection from winds of 250 mph

FEMA Construction Guidelines

• 6-inch to 12-inch concrete masonry walls • Vertical and horizontal steel bar reinforcement• Fully poured 3000 psi concrete• 6-inch thick horizontally and vertically reinforced

concrete• Plywood covered wood stud walls filled with dry-

stacked concrete blocks• Hollow metal doors that meet FEMA 320 design specs• 12-gauge or greater steel sheets with plywood sheeting

and wood studs

Accessibility and Comfort

• All occupants should be able to access the safe room

• Do not block with furniture or use as storage• Safety is the primary function of a safe room• Comfort is achieved with adequate space for

each occupant and adequate supplies• Space needs vary from 5 to 10 feet per person

depending on catastrophic event

Supplies

• Flashlight• Extra batteries• Fire extinguisher• First aid kit• Radio• Air horn for emergency signaling• Water• Food – depending on catastrophic event

References• Athukorala, P. and Resosudarmo, B.P. (N.D.) The Indian Ocean Tsunami: Economic Impact, Disaster Management and

Lessons. Division of Economics, Research School of Pacific and Asian Studies, Austrailian National University

• Burton, M. L. and M.J. Hicks (2005) Hurricane Katrina: Preliminary Estimates of Commercial and Public Sector Damages, September 2005, Center for Business and Economic Research, Marshall University, WV accessed on October 24, 2009 at http://www.marshall.edu/cber/research/katrina/Katrina-Estimates.pdf

• FEMA (2003) Residential Safe Rooms: Background and Research. March 2003. U.S. Department of Homeland Security, Washington, D.C. accessed on October 24, 2009 at http://www.fema.gov/library/viewRecord.do?id=1971

• King, R.O. (2006) Tsunamis and Earthquakes: Is Federal Disaster Insurance in Our Future? CRS Report for Congress, Congressional Research Service, The Library of Congress, November 7, 2006

• Nakada, P. (2009) Insurance-Linked Securities: Last Asset Class Standing. Insurance Finance & Investment, March 15, 2009. Vol. XIV No. 6, accessed on October 24, 2009 at http://www.rms.com/Publications/RMSRiskMarkets_IFI_031509.pdf

• Offenheiser, R.C. (2005) Tsunami Response: Lessons Learned – Testimony for the record of the Senate Foreign Relations Committee, February 10, 2005

• USGS (2006) Tsunami Hazards – A National Threat. USGS Fact Sheet 2006-3023