The Economic Consequences of a Catastrophic Earthquake Proceedings of a Forum (1992) / Chapter Skim
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EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
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It is important to recognize that no truly catastrophic earthquake -- that is, one that affects production facilities, economic markets, and distribution systems in any significant manner -- has occurred in a major population center in the United States since the 1906 San Francisco earthquake. A national concern about potential economic consequences, however, has been heightened in recent years as scientifically based probabilities of future earthquakes in urbanized areas have risen, as their tinge windows have shortened, and as the social and economic costs of recent earthquakes have increased dramatically.
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7. How do current state and federal postearthquake policies and programs affect economic recovery capabilities of the public and private sectors?
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Economic Mocleling Panelists and audience members identified the need to project various types of economic impacts from a catastrophic earthquake, including: direct economic losses due to destroyed or severely damaged buildings and other structures (such as dams and lifeline systems) , direct economic losses due to damaged or destroyed contents of buildings and other private property, indirect economic losses due to disruption of the private sector (that is, business interruption)
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Economic Losses Due to Business Interruption Business interruption can result from damage to the structure in which the business is located; damage to production or manufacturing equipment, office equipment, and inventory, loss of production materials due to losses experienced by a supplier whose facilities were also damaged; loss of electrical power or other lifeline sen ices necessary to operate the facility, interruption of the transportation system to deliver supplies or finished products; loss of customers due to damage to their facilities or inability to access the facility; or loss of employees due to death or injury. Little is empirically known about disaster-generated indirect economic effects on business in general, and less on the consequences for specific economic sectors.
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The participants reported that no systematic research has been conducted on the overall economic effects of a major disaster on the public sector, much less on trying to project these impacts for a future catastrophic earthquake; nor do models or data bases currently exist to estimate these different types of economic costs to government. Also, despite the fact that emergency service professionals have expended a great deal of effort on emergency-response planning for a destructive earthquake during the past two decades, these plans have never been used to estimate governmental budgetary needs.
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Insurance industry representatives at the forum expressed concern about the consequences to the industry if the need arises to cover a wide variety of personal and household loss claims from a catastrophic earthquake. In addition to shake damage, which is covered by an earthquake insurance policy, there may be additional indirect losses, such as workers' compensation, medical costs, life insurance, liability coverage, and automobile damage.
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Insurance and Mitigation Because of the insurance industry's stated concerns about the erosion of their surplus capital as a consequence of a catastrophic earthquake, some of the forum discussion focused on the feasibility of earthquake insurance as a mitigation tool. Many participants believe that earthquake insurance, as it is currently offered, is not an efficient mechanism to reduce economic impacts on homeowners and businesses, for several reasons.
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Because there was such a great emphasis among forum participants on the utility of these projects for government mitigation programs and fiscal planning, these research projects, as indicated by the participants, should also have multidisciplinary public- and private-sector advisory panels to assist in the refinement of research objectives and to provide ongoing input to the projects, including the provision of data for use in the economic models.
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, 1. Loss-estimation models would be improved if they could project direct losses to structures other than buildings, contents of buildings, possible fires following earthquakes, and the factors used in econometric models to describe economic change.
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10. Economic models that would provide government decision makers useful information for formulating mitigation and economic recovery policies can be formulated.
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