The Economic Consequences of a Catastrophic Earthquake Proceedings of a Forum (1992) / Chapter Skim
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6 THE 'RIPPLE EFFECT'
6 THE 'RIPPLE EFFECT'
Pages 141-155
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From page 141... ...
Dr. Cheng will assess the theoretical and empirical evidence related to economic Ripple effects.
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From page 142... ...
it. Having lived with the earthquake threat for a long time, California banks have some very sophisticated emergency planning systems, but whether those emergency plans contemplate everything in the area being shut down is something else.
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Most affected would be the municipal bond market. Property and casualty insurance companies hold 20 percent of the municipal bonds outstanding in this country.
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Commercial and residential mortgage lenders require borrowers to have property damage and sometimes liability insurance. Without insurance, many entities would have to bear their own risks or else curtail their activities.
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PRESENTATION OF LEONARD K CHENG This presentation offers a few theoretical considerations which may be useful in assessing the economic ripple effects of a major earthquake (i.e., economic effects on areas other than the impacted regions.
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From page 146... ...
To ignore the benefits provided by the economic linkages, including a greater capacity to deal with disasters, and to view them primarily as the nodes of a network by which diseases are spread would be theoretically wrong and very misleading. On the one hand, the loss of capital and equipment due to an earthquake implies the loss of income in the impacted region derived from the original economic activities.
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From page 147... ...
An effort by the insurance industry to do its best to settle claims in full and speedily not only is not a disruptive force to the national economy, it would lead to good business for the insurance industry in the future. If the effect on future demand for insurance, is ignored then any shortfall in Insurance payment for validated claims amounts to a transfer of wealth from the insured victims to the shareholders of the insurance companies.
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From page 148... ...
, the level of disaggregation within the impacted region can be reduced accordingly to retain tractability. A report prepared by Japan's Tokai Bank attempted to estimate quantitatively the economic ripple effects of a major earthquake in the Tokyo area on the rest of the world.
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From page 149... ...
By January 1916 they were back down to 4.06 percent. The methodologies for estimating the economic ripple effects of a major earthquake in the United States Ernst, but care must be exercised in constructing an appropriate model which can be used to generate meaningful and reasonable results.
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From page 150... ...
If you are going to look for devices to address the problem, I think that is where you look, not from the national economy, given the usual sizes of the effect of an earthquake that we are taming about. QUESTION: The All Industry Research Advisory Council was interested in the ripple effect on the insurance, reinsurance industry for a large, catastrophic event.
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From page 151... ...
I want to look at the liquidation of securities. For technical reasons, the property and casualty insurance industry is very largely invested in municipal bonds, because they receive favorable tax treatment.
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From page 152... ...
Now, of course, we do build surpluses to the extent we are allowed to by various insurance commissioners around the country. But no doubt that a carefully constructed provision allowing insurers to accumulate reserves specifically earmarked for a major event, not necessarily only an earthquake, would be a very helpful thing.
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From page 153... ...
A catastrophic earthquake has been defined as one which disrupts the national economy, etc., etc., etc. From the very begs ng that definition set the wrong conceptual tone.
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From page 154... ...
But given the fact that some regional economic models have been developed, the next step Is to put them in the context of a national economy model and build In realistic economic linkages, that is, linkages that come from the real world as opposed to what we assume. Now, talking about the Tokai study, it makes several unrealistic and wrong assumptions.
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From page 155... ...
That is a very good case, and a great test of what we predict about these ripple effects. If that is the only event, I do not think that will affect the capital market very much.
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