2
What are Likely Categories of Loss and Damage?

Chapter 2 provides a basis for understanding how loss estimates are generated for different categories of losses and damages. Specific issues that will be addressed include: What loss-estimation methodologies currently exist? How satisfactory are inventories for these approaches? In relation to actual losses, how good are these estimates? Are there methodologies for estimating nonstructural losses? What data bases are available from which projections of nonstructural losses can be made?

Mr. Christopher Arnold is an architect and the president of Building Systems Development in California. He is a Fellow of the American Institute of Architects, elected for his contributions to research in the architectural aspects of seismic design. Mr. Arnold is also a member of the NAS/NRC Committee on Earthquake Engineering and has served on that committee's panel on loss-estimation methodologies. Mr. Arnold will present an overview of loss-estimation approaches.

Dr. Don G. Friedman is the director of the Natural Hazards Research Program at the Travelers Insurance Company. Dr. Friedman has 35 years of experience in the assessment of casualty and damage potentials of natural disasters for the insurance industry, federal agencies, and most recently for the All-Industry Research Advisory Council. His presentation focuses on risk-assessment models and the types of data necessary to estimate casualty and property loss potentials from a catastrophic earthquake.

Professor Kathleen Tierney is an associate professor of sociology and the research director of the Disaster Research Center at the University of Delaware. She is the author of a number of monographs, articles, and book chapters focusing on various hazard- and disaster-related topics, induding socioeconomic consequences of earthquakes. She is a member of the Advisory Committee for the National Earthquake Hazard-Reduction Program. The topic of Professor Tierney's presentation is on loss estimation and public policy from a social science perspective.

Professor Robert W. Kling is from Colorado State University. Dr. Kling has a doctoral degree in economics from the University of Kansas and has recently been involved in three National Science Foundation (NSF) projects that have addressed different aspects of social and economic effects of different types of natural hazards. The result of one of these projects is a work entitled Natural Hazards Damage Handbook: A Guide to the Uniform Definition, Identification, and Measurement of Damages from Natural Hazard Events. In his presentation, Dr. Kling focuses on the loss of the cultural environment from a catastrophic earthquake.



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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 2 What are Likely Categories of Loss and Damage? Chapter 2 provides a basis for understanding how loss estimates are generated for different categories of losses and damages. Specific issues that will be addressed include: What loss-estimation methodologies currently exist? How satisfactory are inventories for these approaches? In relation to actual losses, how good are these estimates? Are there methodologies for estimating nonstructural losses? What data bases are available from which projections of nonstructural losses can be made? Mr. Christopher Arnold is an architect and the president of Building Systems Development in California. He is a Fellow of the American Institute of Architects, elected for his contributions to research in the architectural aspects of seismic design. Mr. Arnold is also a member of the NAS/NRC Committee on Earthquake Engineering and has served on that committee's panel on loss-estimation methodologies. Mr. Arnold will present an overview of loss-estimation approaches. Dr. Don G. Friedman is the director of the Natural Hazards Research Program at the Travelers Insurance Company. Dr. Friedman has 35 years of experience in the assessment of casualty and damage potentials of natural disasters for the insurance industry, federal agencies, and most recently for the All-Industry Research Advisory Council. His presentation focuses on risk-assessment models and the types of data necessary to estimate casualty and property loss potentials from a catastrophic earthquake. Professor Kathleen Tierney is an associate professor of sociology and the research director of the Disaster Research Center at the University of Delaware. She is the author of a number of monographs, articles, and book chapters focusing on various hazard- and disaster-related topics, induding socioeconomic consequences of earthquakes. She is a member of the Advisory Committee for the National Earthquake Hazard-Reduction Program. The topic of Professor Tierney's presentation is on loss estimation and public policy from a social science perspective. Professor Robert W. Kling is from Colorado State University. Dr. Kling has a doctoral degree in economics from the University of Kansas and has recently been involved in three National Science Foundation (NSF) projects that have addressed different aspects of social and economic effects of different types of natural hazards. The result of one of these projects is a work entitled Natural Hazards Damage Handbook: A Guide to the Uniform Definition, Identification, and Measurement of Damages from Natural Hazard Events. In his presentation, Dr. Kling focuses on the loss of the cultural environment from a catastrophic earthquake.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 PRESENTATION OF CHRISTOPHER ARNOLD This section provides an outline of the methods that are currently used for developing estimates of loss, and an outline of the nature of loss focusing on one particular building in the Loma Prieta earthquake. The information on loss-estimation methods is based on the Academy panel study on estimating losses from future earthquakes conducted under the chairmanship of Bob Whitman a few years ago. But the following information does not necessarily represent the views of the panel or the Academy. The typical parameters of a loss-estimation study shows that the following things have to be determined before developing a specific study: the type of loss (e.g., casualties, the number of homeless, the functionality of essential facilities, and economic impact); the kinds of facilities (i.e., all buildings or structures and essential facilities like hospitals and lifelines); the degree of certainty, and some feel for the degree of detail which is necessary—these obviously have very large cost and time implications; and the time span and the kind of seismic risk. Perhaps the number of earthquakes which might occur in a time span is of particular interest. Either a predicted earthquake or an actual historic earthquake may be used. Studies have been done, for instance, that show the impact of the 1923 Kwanto earthquake on today's Tokyo. Also, before developing a loss-estimation study, questions of geographic scale—local, regional, state, or national—must be addressed. Typically, the kind of loss-estimation studies that have been done, other than those which may have been done for very specific purposes such as the inventory of a large corporation's set of buildings, are studies such as the NOAA studies of the San Francisco Bay area in the 1970s; the FEMA studies in selected cities, such as St. Louis and Boston; or the midwestern six-city study. These have provided damage estimates that are expressed in dollar terms and estimates of casualties. They tended to deal with all buildings, although some of them have focused somewhat on essential facilities such as hospitals. The degree of certainty is probably low. The degree of detail, because of the cost of producing the study, is also low. The estimates of seismic risk typically use the modified Mercalli scale, for better or for worse. It is at least generally understood and accepted, and has been commonly used as a way of defining the seismic risk. These studies typically have been at a regional or large-city level. The use of these studies has primarily been political. They have been used to assist the politics of earthquake-hazard mitigation and the process of consciousness raising, and they have also been used to support some of the commercial aspects of the "earthquake industry," under the new circumstances by which the earthquake problem is starting to become a recognized industry.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 Recognizing that these studies generally have a large amount of scientific qualification on the way in which they have been done and the authority of the statements, the political use of these studies has been to look for the large numbers" and to use those to attempt to increase earthquake awareness and hazard-mitigation activities. The methodology of loss estimation is extremely simple and obvious. Some time ago Mr. Arnold wrote a paper on this, which stated that methodologies are cheap, but data is very, very expensive. All studies follow the same basic methodology: develop an inventory of building stock; define the seismic risk that applies to those buildings; and utilize a mechanism for relating motion, damage, and loss so that damage to the inventory can be estimated. This is then typically converted into the dollar loss that is received from exposure to a given seismic risk, as applied to that inventory, and out of that comes a loss estimate definition. That is the general methodology. To focus on one particular aspect of it, the inventory and the motion-damage-loss mechanism must use the same building classification, therefore a classification for defining the inventory of buildings must be developed that has to be the same classification used to apply the motion-damage-loss mechanism to the inventory. That sounds obvious and simple but, in fact, it has proven to be rather difficult. Table 2-1 shows a classification system for buildings which is very widely used; it was developed originally by Karl Steinbrugge for the Insurance Service Offices in the Bay Area and has been slightly modified since. It is a simple and broad classification, with 21 different building types. One who is unfamiliar with buildings may think that is a lot. In fact, it is a very small classification because when a building inventory is inspected, every building must be assigned to one of these 21 types. Within each type there will be a great deal of variation; that presents difficulties, but nevertheless this is a very widely used system. Another system was developed somewhat later under a program called ATC-13 (Applied Technology Council Study Number 13). This was a FEMA-sponsored study which was intended to bring the loss-estimation technique to a more advanced level. It was also intended originally to go right through to loss-estimation studies which would be used to estimate economic losses, industrial capacity losses, and so on. That was never quite achieved, but a lot of the study intent was accomplished. The study uses a rather more complete classification system than the Insurance Services method. The classification system has 40 building types instead of 21, so that it is a slightly freer-grained classification system. For any study, the inventory is critical, because this is the whole basis upon which you are going to assign your loss estimation. Unlike other aspects of loss estimation, an actual inventory exists. In other words, there is a finite

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 TABLE 2-1 Construction Classes Used in the ISO and NOAA/USGS Methods Building Class Brief Description of Building Subclasses 1A-1 Wood and stuccoed frame dwellings regardless of area and height 1A-2 Wood and stuccoed frame buildings, other than dwellings not exceeding three stories in height or 3,000 square feet in ground floor area 1A-3 Wood and stuccoed frame structures not exceeding three stories in height regardless of area 1B Wood frame and stuccoed frame buildings not qualifying under class 1A 2A One-story, all metal; floor area less than 20,000 square feet 2B All metal buildings not under 2A 3A Steel frame, superior damage control features 3B Steel frame, ordinary damage control features 3C Steel frame, intermediate damage control features (between 3A and 3B) 3D Steel frame, floors and roofs not concrete 4A Reinforced concrete, superior damage control features 4B Reinforced concrete, ordinary damage control features 4C Reinforced concrete, intermediate damage control features (between 4A and 4B) 4D Reinforced concrete, precast reinforced concrete, lift slab 4E Reinforced concrete, floors and roofs not concrete 5A Mixed construction, small buildings and dwellings 5B Mixed construction, superior damage control features 5C Mixed construction, ordinary damage control features 5D Mixed construction, intermediate damage control features 5E Mixed construction, unreinforced masonry 6 Buildings specifically, designed to be earthquake resistant number of buildings of certain kinds. The problem is that it almost never exists in any published form, and the costs of achieving that are astronomical; when one talks about defining an inventory, he is really defining some kind of simulation or subterfuge for the actual inventory that exists. The Academy panel spent 2 days discussing this inventory question: how is it determined? and how is an inventory defined? For instance, the census does not reveal the things about buildings needed to determine loss estimation. Assessor's records do not indicate the things needed to know about loss estimation. The top half of Figure 2-1 shows an idealized version of achieving

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-1 Earthquake-damage-loss estimation.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 an inventory, in which the buildings would have some sort of computerized system that would send out their accurate vital statistics. The lower picture in Figure 2-1 shows the way inventories are actually done: A small number of people gather together in a room and assign buildings to their correct classification. You will find that the smoke-filled room reoccurs rather often in the loss-estimation methodology. The loss and damage mechanism, developed primarily by Karl Steinbrugge, is critical and is shown in Figure 2-2. It is simple and relatively easy to apply. The designations of the building classification system are shown as the curves: the modified Mercalli intensity is on one axis and the per FIGURE 2-2 Loss ratio versus modified Mercalli intensity (mean damage ratio curves). From: Estimating Losses from Future Earthquakes, p. 29, National Research Council, 1989; Source: Algermissen and Steinbrugge, 1984.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 centage loss is on the other axis. Select a given type of building, such as unreinforced masonry, and find the curve for it, then find the modified Mercalli intensity, and establish a percentage loss. These are obviously very gross figures; as they are studied, all kinds of reasons why they may be inaccurate can be though of. This, however, is currently the level at which these estimates are done. The ATC-13 process developed a somewhat more elaborate methodology, and the team was also interested in making the methodology more transparent. Rather than the smoke-filled room, the idea was to have a methodology in which its method of development was clear and could continue as more information came in. The project developed a general matrix, called a damage probability matrix, which defines damage states in words. These are defined numerically and can in turn be developed into a dollar-loss estimate related to the modified Mercalli scale. The estimates, of course, vary according to the building type. The actual estimates were developed by expert committees in a delphi process with a number of experts filling in forms and, in effect, voting on their estimates of the correct numbers. Figure 2-3 shows the scatter: for one particular class of building, the low estimate, the best estimate, and the high estimate. The symbols show the estimates of specific people. There were two rounds, with a fairly small number of people involved. The object of the two rounds was to try and reduce the aberrations in the estimating, although sometimes the aberrations may be correct and the ''enforced'' agreement may not be correct. Nevertheless, the process arrives at a set of numbers that can be used in the actual matrices. Figure 2-4 shows the ATC-13 matrix for facility class 18, which is a low-rise, concrete, movement-resistant, frame-building type. It can be seen that the matrix shows fairly small amounts of damage at even the high modified Mercalli figures, and 100 percent damage would be expected in this class of building for any modified Mercalli figure. One can agree or disagree with that, but this procedure enables a dollar figure to be arrived at for a given building type related to a range of modified Mercalli figures. There is another system which has been used. This is the "fragility curve," which was developed by a consultant and used for one of the FEMA studies (Figure 2-5). This is really a rearrangement of the same basic material, in which the peak ground acceleration or Mercalli intensity is used. The numbers 1, 2, 3, 4, and 5 represent different damage states. All these systems are pushing around the rather small amount of real data that there is about the effects of earthquakes on actual buildings. The above is the essence of how loss estimating is done. The question then comes up as to how accurate is the information that is received from this sort of process. Figure 2-6 shows one of the studies that was done for the Academy report, in which the curves represent different estimates of damage to wood-frame buildings based on various research studies which people have done at different times. The black spots are actual recorded damage, so the range of variation between different consultants' estimates and how those

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-3 Expert responses to round one damage factor questionnaire for Facility Class 18—low-rise moment-resisting ductile concrete-frame buildings. Note: Each symbol represents the estimates of one specific person. FIGURE 2-4 Expert responses to round two damage factor questionnaire for Facility Class 18—low-rise moment-resisting ductile concrete-frame buildings. Note: Each symbol represents the estimates of one specific person.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-5 Fragility curves for wood-frame buildings. FROM: Estimating Losses from Future Earthquakes, p. 38, National Research Council, 1989; Source: Kircher and McCann, 1983. estimates relate to actual damage is clear. Not nearly enough of this sort of validation exercise is being done. So far, a number of loss estimates have been done, but very little in the way of validation. Validation is rather expensive and does not seem to have the sort of appeal to the research community that other aspects of the earthquake problem have, but it is very critical and very important. As earthquake occurrences, such as Whittier and Loma Prieta, continue more information is developed but methodologies are not being reviewed and validated like they should be. A frequent subject of interest in loss estimation is deaths and injuries. This is perhaps even more vague than the dollar-loss aspect, but there is a table in the ATC-13 study which, again, was developed in a smoke-filled room by a small number of people (Table 2-2). By applying this table, depending on the damage state, some estimate of injuries and deaths can be calculated. This may not be very accurate, but it is certainly much more useful than just speculating about the number of injuries and deaths. Some of the Academy committee members pushed to try and get some numerical estimate of accuracy. The engineers were rather reluctant to do this, but some numbers were published that are interesting. One was that estimates for single-family wood-frame houses, where there is a lot of experience, might perhaps be accurate to within a factor of about 1.5. For run-of-the-mill

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-6 Intensity-damage relationships for unreinforced masonry buildings. Source: R. Reitherman, 1988.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 TABLE 2-2 Injury and Death Rates in Relation to Damage Damage State CDF(S) Percent Fraction Injured Fraction Dead     Minor Serious   1 0.0 0 0 0 2 0.5 3/100,000 1/250,000 1/1,000,000 3 5.0 3/10,000 1/25,000 1/100,000 4 20.0 3/1,000 1/2,000 1/10,000 5 45.0 3/100 1/250 1/1,000 6 80.0 3/10 1/25 1/100 7 100.0 2/5 2/5 1/5 NOTE: Estimates are for all types of construction except light steel construction and woodframe construction. For light steel construction and wood-frame construction, multiply all numerators by 0.1. SOURCE: Applied Technology Council, 1985 commercial-type buildings, the accuracy might be within a factor of 3, and for buildings in areas where there is not a lot of seismic activity, outside California, the accuracy was perhaps an order of magnitude—a factor of 10. In scientific terms this is very inaccurate. In other terms, however, it may be useful. It is useful to know whether there will be hundreds of houses down or thousands of houses down. Table 2-3 shows the result of a study that was part of the Academy study, which compared the ATC-13 and the Steinbrugge figures. This shows that for wood-frame buildings, for instance, the ATC-13 study has a damage ratio of 8.8. The Steinbrugge study has a ratio of 8 or 12, depending on the kind of building, so that is fairly close. If one looks at tilt-up, ATC-13 shows a damage ratio of 16 percent; the Steinbrugge curve shows a damage ratio of 30. Again, depending on the viewpoint, this is a wild spread, or it is quite useful in terms of what it is used for. A new development in loss estimation has been its entry into the commercial area. An example of a commercial project, to some extent sponsored by the insurance industry, and really directed at providing information of specific value to the insurance industry, is a project based on research done originally at Stanford University. The Insurance Investment Risk Assessment System (IRAS) Project is a computerized system in which for a given site or region damage to an individual building or an inventory of

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 TABLE 2-12 Per Trip Costs and Per Capita Visits Travel Data Calculation of visit cost per person Calculation per capita visits Zone of origin Average round-trip distance from this zone Round-trip travel hours from this zone Site visit time Direct travel cost at $0.15 per mile, 2 persons per car Opportunity cost of time, at $1.20 per hour Entry fee Total visit cost from this zone Visits from this zone Population of this zone Per capita visits from this zone         (D) (O) (E) = D+O+E (V) (P) = V÷P A 20 miles 0.5 hours 1 hour $1.50 $1.80 $3.00 $ 6.30 6,000 40,000 0.15 B 60 miles 1.5 hours 1 hour $4.50 $3.00 $3.00 $10.50 80,000 800,000 0.10 C 100 miles 2.5 hours 1 hour $7.50 $4.20 $3.00 $14.70 10,000 200,000 0.05

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 TABLE 2-13 Visits Demanded at Various Cost Increments   At actual cost If costs were $4.20 higher If costs were $8.40 higher If costs were $12.60 higher Zone of origin Cost is: Visits from this zone are: Cost would be: Per capita visits would be: Visits from this zone would be: Cost would be: Per capita visits would be: Visits from this zone would be: Cost would be: Per capita visits would be: Visits from this zone would be: A $ 6.30 6,000 $10.50 0.10 4,000 $14.70 0.05 2,000 $18.90 0 0 B $10.50 80,000 $14.70 0.05 40,000 $18.90 0 0 $22.40 0 0 C $14.70 10,000 $18.20 0 0 $22.40 0 0 $26.60 0 0 Totals   96,000     44,000     2,000     0

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 The travel-cost method has several disadvantages and limitations. Because the value estimate is based on information only about actual users of the asset, it indicates only value in use, and not option, bequest, or tradition values. Those who value the option of visiting a site, but have not yet done so, have made no observed choices that will be incorporated into the data. Second, the method is difficult to apply to an asset that typically is visited in conjunction with several others during a single trip, because the total costs of the trip must somehow be allocated among the various sites visited. This complication would occur in applying the method to value each of the monuments in Washington, D.C., or each of the paintings in an art museum. For these reasons, the travel-cost approach would be used most easily when visiting the asset site requires a short trip dedicated to that asset alone, or when one wishes to value a group of assets collectively. This discussion has been intended to give a flavor of the methods that might be considered to assess cultural asset values. None of these approaches is yet very refined. Analysts hope to explore their potential in the near future. Loss of Social Capital The term social capital has been used many different ways. For the purpose of this presentation, social capital is the set of human ties that a community's members find in that place. These ties can be of at least three types: friendships, professional relationships, and an internal sense of stability or home. Such relationships might at first be considered entirely noneconomic and beyond the scope of a tallying of economic damages. However, their economic value can indeed be assessed, because this social capital is an extremely valuable asset that people evidence a very high willingness to pay to preserve. A piece of capital is an asset that yields income. We think of social ties as capital in the sense that they are assets that yield psychic income that would be important to a household along with pecuniary income. Now, psychic income is a concept rather well developed by economists, and it can have many sources other than social ties: job conditions, public amenities in a place, natural beauty, climate, etc. But this psychic income from social capital is different in at least one key way; it is nontransferable, since it is attached to specific individuals and is developed historically over time. If one family moves out of a community and another just like it moves in, the new family could take over enjoyment of the mountains, the town, the schools, etc. just as much. But they could not take over the human ties. The destruction of social capital could be a natural consequence of the forced migration that could follow a major disaster; one might think of such capital as a special type of irreplaceable cultural asset, but one that is more personal and intangible than those discussed earlier. The evidence of social capital in our society is widespread. The best evidence is the fact that people like to stay where they are, despite many

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 incentives to move elsewhere. There are all manner of natural disasters, as well as economic disasters like plant closings and agricultural depressions, that one might think would be a large inducement to relocate, . . . but people stay. It is impossible to deny the existence of social capital. But what is the importance of this social capital from a public policy perspective? When there is a disruption, when a move is forced, a valuable asset is destroyed. Prevention of that destruction then has a value that might be included in the benefits side of various benefit-cost-based public policy decisions, just as the protection of material assets is included. This is an element that is rarely explicitly included in formal benefit-cost analyses. In the area of natural-hazard management, we can see that hazard-mitigating types of investment decisions might be made to take into account the value of saving a town, where the town is viewed as more than just a collection of real estate and physical capital. Even programs normally denounced, for imposing the condition that the relief be applied to rebuilding on the original spot, may be seen as serving (perhaps to excess) the objective of preserving social capital. Social capital is not bought or sold. So, as for the assets mentioned earlier, less-direct methods of assessing its value will be required. One might use a contingent-valuation approach, surveying people to find out what their social capital is worth. Alternatively, one might look for ways social capital affects economic decisions. Two markets that will be affected by migration are housing markets and labor markets. Residents' hesitance to leave may be reflected in the prices at which they are willing to sell their homes Or, their desire to stay may show up in the wages they are willing to accept; it might take surprisingly large wage drops to induce people to leave their hometowns. In economists' terms, labor supply would respond inelastically to wage drops. This idea can be expanded upon as an example of how an economist might use objective market data to estimate intangible, subjective values. These ideas probably make more or less sense, depending on whether one is more or less familiar with the economists' concept of supply and demand curves, and their interpretation. The phenomenon common to the three examples cited earlier is the fact that many communities appear to face a dual labor-supply curve, or what might be seen as a kinked curve. In growing, these communities find that a small wage differential relative to other regions will induce a sizable labor influx (Figure 2-13). Labor demand shifts out, wages rise a little, and the labor force grows a lot. But a reversal of economic growth generally will not lead to a labor force shrinkage that is so elastic (Figure 2-14). If labor demand drops back down, wages and employment will move, not back along the original labor supply curve, but along the steeper, dashed curve. The result is that wages drop more significantly, but emigration is not significant. The clearest explanation for this dichotomy involves the stock of social capital that a region's inhabitants establish as they spend time there. Reluctant to abandon this social capital, which has a significant human value, workers are willing to accept more-

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-13 Effect of a local labor demand increase.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-14 Effect of a local labor demand decrease.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 severe wage cuts in order to remain in what has become their home community. Figure 2-15 is a more elaborate version of Figure 2-14. For simplicity, the labor-supply curve is drawn horizontally. Labor demand is shown as falling by steps, with more workers leaving the labor force at each step. In each case, the heavy line segments indicate the wage gap that is required to induce that marginal worker to move somewhere else. It thus measures the money the worker is willing to accept elsewhere in compensation for giving up his or her ties locally. If labor demand falls all the way to the lowest level (L3), and if the social capital value is added up for all the workers who leave, the value of social capital lost would be the area of the shaded triangle in Figure 2-16, which could be measured if the labor supply and demand curves were known. This is a loss to those who were caused to move. The shaded triangle, by the way, measures the wages lost by those who still choose to stay. That is an indirect economic loss of the sort that will be discussed in Chapter 3. It is important to note that a disaster need not cause lower labor demand for this analysis to be relevant. Even if emigration were caused by destruction of housing stock, for example, estimation of labor supply and demand curves could indicate the amount of social capital at stake. In measuring social capital in this way, adjustments would have to be made for at least two important factors. First, labor immobility could be due to other ties that are not social capital: equity in a house, for example. That would have to be accounted for. Second, some communities might be better able to afford wage drops, to preserve social capital, than others. By affecting how much they show a willingness to pay for social capital, that would affect the implied dollar value of that intangible asset, in a way that might not be justified on philosophical grounds. Economic values might be adjusted accordingly. In conclusion, there are important intangible benefits that are at risk from natural hazards. Though they are intangible, there are promising methods available for assessing their value in economic terms, so that they can be included in economics-based policy analysis.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-15 Social capital lost from relocation.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 FIGURE 2-16 Losses to workers from lower labor demand.

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 GENERAL DISCUSSION OF CHAPTER 2 QUESTION: A number of the issues you raised are quite rich, and all of them could be discussed at great length, but I have just a couple of points. First, some of these issues have been discussed at great length by NAPAP, The National Acid Precipitation Assessment Program. For example, Joel Shirago of EPA did a fairly careful analysis of some of these issues and the approaches. I think we have a long way to go before they come up with really useable results, but there will be an economic assessment done on the impact. Second, it is amusing that the Cape Hatteras Lighthouse was referred to, because the Academy undertook a major study for the National Park Service of the cost associated with moving the Cape Hatteras Lighthouse or protecting it with copper gowns and so on. Many of the disaster scenarios on the erosion effect will go into the next study. DR. KLING: That is interesting because the National Park Service has a duty to assess historic assets; yet their reports indicate that they are full of great assessments of the cost of protecting or restoring these assets, but there is nothing about benefit. Is it worth a million dollars? Is it worth $20 million? Is it worth $100 million? QUESTION: This is for Don Friedman. Does Travelers Insurance currently use your models to determine insurance rates or what markets to participate in? In other words, are these models now influencing the actual insurance policy of the company? DR. FRIEDMAN: For the last 35 years I have attempted to answer questions that management has on the various effects of natural disasters. This is one input that would go into whatever other considerations they might have in terms of competition or what have you. Yes, this is an input into the decision-making process. QUESTION: Dr. Friedman, have you tried to test your method against the results of the Loma Prieta earthquake? DR. FRIEDMAN: Yes. Simulation modeling is never finished because it is a continuing process. Each time you get a new event, you try to look at it in terms of verification, calibration, and so forth. Fortunately, it worked out well. QUESTION: Maybe I should change my question. When you did that, how big a change did the Loma Prieta have on your model? I was asking whether your procedure would have given a similar loss estimate to what the actual losses were from the Loma Prieta earthquake? In other words, how good is your model? DR. FRIEDMAN: Good is a relative thing. From the point of view of decision-making, we were very satisfied with the results. The insurance industry cannot afford to go to each structure and do an engineering analysis. What is going on below the surface is still unknown. But from the point of view of an insurance operation, the law of large numbers rules. QUESTION: This is addressed to all four panel members from your various points of view. Each of you, in some way, addressed the secondary

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The Economic Consequences of a Catastrophic Earthquake: Proceedings of a Forum August 1 and 2, 1990 effects that occur from earthquakes. These effects are obviously very difficult to insure against. They are hard to measure, etc., and yet we as a society have to deal with them in some fashion. I wondered if there were some thoughts that the panel had about how we address these effects in terms of both the concept of loss mitigation and also with the question of the role of government and who should pay, who should be involved in this? I think these are questions we are going to have to address. All the remarks were very stimulating in terms of raising those issues. DR. FRIEDMAN: One thing I did not get a chance to discuss was the payoff by various lines of insurance for a large insurance company. How many assets would a company have to sell off in order to settle, perhaps, hundreds of millions of dollars in claims? You would look at the various distributions in terms of types of insurance. This reduces the ability of these companies to sell more insurance because of the ratio between the amount of money they have on reserve and the amount of premiums they can put out into the field. There are obvious difficulties that must be implied from a catastrophic event—a great earthquake, a great hurricane—in terms of the ability of individual insurance companies to continue to sell insurance in other parts of the United States in addition to the area where the event occurred. DR. ARNOLD: There is a balance sheet. The balance may not come out exactly, but one has to look at the balance sheet. I know there is going to be a lot of focus on losses. However, there are also gains. The insurance company tends to operate as a closed system and look only at its own balance sheet. If you look at the whole universe, it is an open system, and we must look at the gains, even though they do not balance out. In terms of Dr. Kling's presentation, it is great to see an economist using architectural arguments; but even there, there are gains. For instance, I would argue that Mexico City is a much better city environmentally now because of the earthquake. There are two reasons: (1) it now has a lot of small parks which are environmentally very satisfactory in a city which was very short of open space; and (2) it now has 44,000 units of well-designed, affordable housing which it did not have before. Both of these things were forced by an unfortunate circumstance, but if you look back at the history of cities and the evolution of cities, you will see that earthquakes and catastrophes are part of the natural process. So, we should keep an eye on the balance sheet as we proceed. DR. TIERNEY: We are continually hearing about how expensive it is and how difficult it is to study certain kinds of problems, to develop certain types of inventories, to look at certain kinds of variables. Wouldn't it be nice if there could be some modest efforts directed at trying to get a handle on some of the more elusive effects, just to balance off the tremendous emphasis on some other types of earthquake-damage effects that we see. This is a plea for more empirical research in this area.