The Impacts of Natural Disasters

A FRAMEWORK FOR LOSS ESTIMATION

Committee on Assessing the Costs of Natural Disasters

Board on Natural Disasters

Commission on Geosciences, Environment, and Resources

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1999



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--> The Impacts of Natural Disasters A FRAMEWORK FOR LOSS ESTIMATION Committee on Assessing the Costs of Natural Disasters Board on Natural Disasters Commission on Geosciences, Environment, and Resources National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1999

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--> NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competencies and with regard for appropriate balance. The work was sponsored by the Federal Emergency Management Agency, Contract No. EMW-96-GR-0422. All opinions, findings, conclusions, and recommendations expressed herein are those of the authors and do not necessarily reflect the views of the Federal Emergency Management Agency. International Standard Book Number 0-309-06394-9 Additional copies of this report are available from: National Academy Press 2101 Constitution Ave., NW Box 285 Washington, DC 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area) http://www.nap.edu Cover design by Van Nguyen. Cover photo courtesy of the U.S. Geological Survey. Copyright 1999 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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--> Committee on Assessing the Costs of Natural Disasters ROBERT E. LITAN, Chair, Brookings Institution, Washington, D.C. RICHARD A. ANDREWS, State of California, Sacramento STANLEY A. CHANGNON, Illinois State Water Survey, Champaign LLOYD S. CLUFF, Pacific Gas and Electric, San Francisco, California RONALD T. EGUCHI, EQE International, Newport Beach, California JAMES F. KIMPEL, University of Oklahoma, Norman ANNE S. KIREMIDJIAN, Stanford University, California RICHARD J. ROTH, JR., State of California, Los Angeles THOMAS C. SCHELLING, University of Maryland, College Park RICHARD T. SYLVES, University of Delaware, Newark CAROL TAYLOR WEST, University of Florida, Gainesville Staff JEFFREY W. JACOBS, Study Director PATRICIA A. JONES, Senior Project Assistant (since July 1998) SUSAN E. SHERWIN, Senior Project Assistant (through July 1998)

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--> Board on Natural Disasters WILFRED D. IWAN, Chair, California Institute of Technology, Pasadena LLOYD S. CLUFF, Pacific Gas and Electric, San Francisco, California JAMES F. KIMPEL, University of Oklahoma, Norman HOWARD C. KUNREUTHER, University of Pennsylvania, Philadelphia STEPHANIE H. MASAKI-SCHATZ, Ranchos Palos Verdes, California JOANNE M. NIGG, University of Delaware, Newark RICHARD J. ROTH, SR., Northbrook, Illinois HARVEY G. RYLAND, Institute for Business and Home Safety, Boston, Massachusetts ELLIS M. STANLEY, SR., City of Los Angeles, California FRANK H. THOMAS, Loudon, Tennessee Staff STEPHEN D. PARKER, Director PATRICIA A. JONES, Senior Program Assistant

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--> Commission on Geosciences, Environment, and Resources GEORGE M. HORNBERGER, Chair, University of Virginia, Charlottesville RICHARD A. CONWAY, Union Carbide Corporation (Retired), S. Charleston, West Virginia THOMAS E. GRAEDEL, Yale University, New Haven, Connecticut THOMAS J. GRAFF, Environmental Defense Fund, Oakland, California EUGENIA KALNAY, University of Oklahoma, Norman DEBRA KNOPMAN, Progressive Policy Institute, Washington, D.C. KAI N. LEE, Williams College, Williamstown, Massachusetts RICHARD A. MESERVE, Covington & Buffing, Washington, D.C. JOHN B. MOONEY, JR., J. Brad Mooney Associates, Ltd., Arlington, Virginia HUGH C. MORRIS, El Dorado Gold Corporation, Vancouver, British Columbia H. RONALD PULLIAM, University of Georgia, Athens MILTON RUSSELL, University of Tennessee, Knoxville THOMAS C. SCHELLING, University of Maryland, College Park ANDREW R. SOLOW, Woods Hole Oceanographic Institution, Woods Hole, Massachusetts VICTORIA J. TSCHINKEL, Landers and Parsons, Tallahassee, Florida E-AN ZEN, University of Maryland, College Park MARY LOU ZOBACK, U.S. Geological Survey, Menlo Park, California Staff ROBERT M. HAMILTON, Executive Director GREGORY H. SYMMES, Associate Executive Director CRAIG SCHIFFRIES, Associate Executive Director for Special Projects JEANETTE SPOON, Administrative and Financial Officer SANDI FITZPATRICK, Administrative Associate MARQUITA SMITH, Administrative Assistant/Technology Analyst

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--> The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government, and upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. William A. Wulf are chairman and vice-chairman, respectively, of the National Research Council.

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--> Preface In the United States, fatalities and injuries, property damage, and economic and social disruption resulting from natural disasters seem to have become a part of the nation's social fabric. Despite some successes in mitigating their effects, hurricanes, floods, drought, earthquakes, and blizzards and winter storms ravage parts of the nation nearly every year. The following natural hazards were among the defining events of the 1990s: the Northridge earthquake (1994), Hurricane Andrew (1992), El Niño (1997–1998), wildfires in California (1993) and Florida (1998), and the flooding of the Mississippi River (1993) and the Red River of the north (1997). Somewhat surprisingly, however, the total economic losses that natural disasters cause the nation are not consistently calculated. Following a natural disaster, different agencies and organizations provide damage estimates, but these estimates usually vary widely, cover a range of costs, and change (usually increasing) through time. There is no widely accepted framework or formula for estimating the losses of natural disasters to the nation. Nor is any group or government agency responsible for providing such an estimate. This clearly represents a problem in setting policies for coping with and mitigating against disasters. If reliable data on the losses resulting from disasters are unavailable, it is difficult to gauge the cost-effectiveness of public policy decisions such as relocating residents out of floodplains or limiting development in hurricane- or earthquake-prone areas. Such data would help government agencies identify trends in the costs of disasters, making it easier to know if hazard mitigation measures were having the desired effects. The Federal Emergency Management Agency (FEMA) is the primary federal agency responsible for helping the nation prepare for and respond to natural disasters. FEMA, other government agencies, the insurance industry, scientists and engineers, and federal taxpayers all have an interest in better estimates of losses resulting from natural disasters. Though data are available on a range of such losses, they are diffuse: several federal agencies and the private insurance industry collect data on disaster costs. A challenge in defining a consistent data set for estimating disaster losses is identifying which data should be included in the estimates. For example, if a bridge is destroyed by a

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--> hurricane, its replacement cost is clearly part of the event's total losses. But should economic losses to local businesses due to the lost bridge be included? What about the extra miles (and the extra cost of gasoline) that people must drive to their homes and businesses? Should the economic gains to a local bridge construction company be counted against the losses? This committee was convened to provide an accounting framework for assessing the losses of natural disasters. In particular, the Federal Emergency Management Agency requested the group to identify "the cost components that, when combined, would most accurately reflect the total cost of a natural disaster event. To the extent possible the committee will identify the relative importance of the components for accurate characterization of an individual event and the significance of different components across the spectrum of hazards. The committee will also suggest possible sources for accurate cost information, regardless of whether data are generally available from these sources at present." The committee carried out this charge through numerous meetings and consultations with experts from different levels of government and the private sector. This report is the product of its work. The first chapter provides an overview of natural disasters and their losses. Chapter 2 outlines what is known and should be known about the so-called direct losses of natural disasters which result from the physical destruction they cause to property and human beings. Chapter 3 addresses the more complicated question of measuring the indirect losses of disasters, or the various economic consequences beyond the immediate physical destruction in disasters, such as business losses and unemployment. As formal research on loss estimation strategies is limited, it is worth noting that another study on a similar topic was conducted at the same time as our NRC study. The H. John Heinz III Center for Science, Economics, and the Environment sponsored a study on the direct and indirect costs of coastal disasters. Entitled "The Hidden Costs of Coastal Hazards: Implications for Risk Assessment and Mitigation," this report should be available soon after the publication of this study. On behalf of the Board on Natural Disasters, I wish to thank Margaret Lawless and Stuart Nishenko from FEMA, who provided feedback and suggestions throughout the committee's 15-month investigation. We also thank Gary Kerney of Property Claims Services (PCS) in Rahway, New Jersey, and Alan Settle, mayor of San Luis Obispo, California. They spent a full day with the committee at its meeting in Irvine, California in March 1998, providing abundant information on insurance and damage estimation issues. Finally, we owe our thanks to literally dozens of representatives from various federal agencies who spoke to the committee at its first meeting in December 1997, and at a July 1998 session on federal roles in disaster response and loss estimation activities. NRC staff members Susan Sherwin (through July 1998) and Patricia Jones (from July 1998) provided logistical support for all the committee's

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--> meetings. Thanks also to study director Jeffrey Jacobs, who guided the committee through its meetings and the particulars of the NRC study process. Finally, I wish to thank my fellow committee members for their enthusiasm, hard work, and intellectual support. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the NRC's Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their participation in the review of this report: Harold Cochrane, Colorado State University, Fort Collins; Fred Krimgold, Virginia Polytechnic Institute and State University, Falls Church; Howard Kunreuther, The Wharton School, University of Pennsylvania, Philadelphia; James K. Mitchell, Virginia Polytechnic Institute and State University, Blacksburg; Frank Thomas, Loudon, Tennessee; and Victoria J. Tschinkel, Landers and Parsons, Tallahassee, Florida. Although the individuals listed above have provided constructive comments and suggestions, it must be emphasized that responsibility for the final content of this report rests entirely with the authoring committee and the institution. ROBERT E. LITAN, COMMITTEE CHAIR

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--> Contents     Executive Summary   1 1   Estimating the Losses of Natural Disasters   3     Natural Disasters: A Brief Introduction to their Effects,   3     Why Loss Estimates Matter,   9     Who Bears the Loss?,   13 2   Direct Losses of Natural Disasters   15     Data Relating to Physical Destruction: The Ideal,   17     Direct-Impact Data: The Reality,   19     Insurance Claims,   19     Losses to Government,   21     Losses to Businesses,   25     Losses to Individuals,   26     Standardizing Loss Estimates,   27     Recommendations,   30 3   Indirect Losses of Natural Disasters   35     Introduction,   35     Types of Indirect Losses,   37     Current Methods of Measuring Indirect Losses,   38     Optimal Models for Measuring Indirect Economic Flow Effects,   41 4   Conclusions and Recommendations   45     Losses Versus Costs,   45     Direct Losses: Data Collection, Reporting, and Agency and Organizational Roles,   46     Indirect Losses: Modeling the Losses and Constructing a Loss Data Base,   47     Moving Toward Better Knowledge of Disaster Losses,   48     References   49

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--> Appendix A:   Environmental Impacts of Natural Disasters   55     Background Principles,   56     Floods,   57     Droughts,   59     Hurricanes and Tropical Storms,   61     Severe Local Storms,   61     Earthquakes,   61     High Winds,   62     Summary,   62     References,   63 Appendix B:   Biographical Sketches of Committee Members   65