Science into Policy Options for Risk Mitigation in Developing Countries Andrew Coburn Senior Vice...

Science into PolicyOptions for Risk Mitigation in Developing CountriesAndrew CoburnSenior Vice President, Risk Management Solutions

What Works and Does Not Work in the Science and Social Science of Earthquake Vulnerability

Oxford Meeting 28 & 29 January 2011

CONFIDENTIAL© 2011 Risk Management Solutions, Inc. 2

Where can science add most value in the mitigation of risk?

CONFIDENTIAL© 2011 Risk Management Solutions, Inc.

Earthquake Destruction is a Development IssueCountry Earthquake Year Loss

($bn)GNP that year

($bn)Loss

(%GNP)

Nicaragua Managua 1972 2.0 5.0 40.0El Salvador San Salvador 1986 1.5 4.8 31.0Guatemala Guatemala City 1976 1.1 6.1 18.0Greece Athens 1999 14.1 110 12.8Turkey Kocaeli 1999 20.0 184.0 10.9Yugoslavia Montenegro 1979 2.2 22.0 10.0Iran Manjil 1990 7.2 100.0 7.2Italy Campania 1980 45.0 661.8 6.8Romania Bucharest 1977 0.8 26.7 3.0Mexico Mexico City 1985 5.0 166.7 3.0USSR Armenia 1988 17.0 566.7 3.0Japan Kobe 1995 82.4 2900 2.8Philippines Luzon 1990 1.5 55.1 2.7Greece Kalamata 1986 0.8 40.0 2.0China Tangshan 1976 6.0 400.0 1.5Quindio Colombia 1999 1.5 245 0.6USA Northridge 1994 30.0 7,866 0.3USA Loma Prieta 1989 8.0 4,705.8 0.2

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Who Pays and How is it Spread?

Public SectorGovernmentCentral & Local

Private SectorCorporate IndustryCompanies and corporations

IndividualsFamilies

Exchequer Tax payers

Sovereign Wealth Funds

Private FinanceCorporate Property

InsuranceBusiness Interruption

InsuranceGroup Injury Insurance

Personal SavingsHomeowner insurance

Micro Insurance

Global Reinsurance

Industry

Capital Markets

Financial Industry

Insurance Industry

After a bad earthquake somewhere in the world your car insurance premium

goes up


The Development Trap

Emergent economies invest in infrastructure (roads and utilities) and property assets (factories and cities) which are then at risk of destruction from a natural disaster

Emerging economies generally invest in lower cost assets than those in industrialized countries, so are less robust and more vulnerable to damage

Investing in robustness for disaster resilience is more difficult to justify when boot-strapping economic growth with capital at a premium

This is both the constraints and the opportunity for private market stakeholders in catastrophe risk: – Insurance contributes to economic resilience by providing additional

capital

– Insurers also can provide know-how to improve the resilience of the property assets that need protecting

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The Emerging Insurance Markets

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Industrialized Countries

Emerging Markets

Non-Insurance Countries

Countries Richest 26 Countries 62 Countries 110 Countries

Life Insurance Premium $1,717 bn $256 bn $15 bn

Non Life Premium $1,281 bn $170 bn $10 bn

Total Insurance Premium $2,998 bn $427 bn $25 bn

Growth Rate past decade 1-3% 6-12% 1-5%

Market Share 87% 12% 1%

% of GDP 8.90% 3.60% 0.70%

Premium per capita $3,286 $76 <$1

Example countries in the Emerging Markets:

PR ChinaIndiaBrazilRussiaChilePakistanMexico

Costa RicaColombiaTurkeyRomaniaPhilippinesIranSerbia &

MontenegroGuatemalaIndonesia

Swiss Re, Sigma ,2006


An Example: Addressing the New Deadly Vernacular

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Old, vulnerable masonry buildings Poorly-built RC MRF structures

The 20th Century Earthquake Killer The 21st Century Earthquake Killer

80+% of EQ deaths in 20thC 20-40?% of EQ deaths in 21st C

Collapse at MMI IX: 10-60%

Low Ave Occupancy: 2-10 people

Construction cost: X

Collapse at MMI IX: 2-25%

High Ave Occupancy: 5-100s of people

Construction cost: 10-100X


Missing Ingredient: Skill

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Built by local building contractors to standard templates with very little professional engineering design or supervision

Design and construction quality is not policed in any meaningful way: municipal control systems are minimal

‘Codes’ are meaningless

Vulnerable faults include• Poor structural form, soft storey• Undersized structural members• Reinforcement detailing• Concrete quality, etc.

Appreciation of value of QA roles – clerk of works, inspector

Education & professional proficiency

Putting together programmes to address these requires costly investment decisions and complex administrative systems


Metrics of Mitigation: The disasters that haven’t happened

Mitigation benefits could become more visible through scientific concepts of risk

Risk is a complex and largely invisible concept

Risk metrics have become common tools for supporting decisions in the financial services industry that trades risk

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“Building a culture of prevention is not easy. While the costs of prevention have to be paid in the present, its benefits lie in a distant future. Moreover, the benefits are not tangible; they are the disasters that did not happen…”

Kofi Annan, Secretary General of the United Nations, 1999


Economic Resilience Against Disaster Economic growth is the most important factor in disaster mitigation,

providing society with the resources to protect itself and build a stronger and more resilient environment

Improving the reach and scale of societal wealth creation is an important objective for those of us who want to increase the effectiveness of mitigation

Financial support to emerging economy governments– Government post-disaster borrowing could be better budgeted as pre-

disaster saving plan (like major corporate risk management)– Sovereign wealth access to international pools and risk swaps– Catastrophe bonds in capital markets

Government support to emerging insurance markets– Encouragement of citizens to protect themselves– Micro-insurance and micro-finance for lowest income and most vulnerable– Government endorsement, plus strict regulation, to increase trust– Follow policies of empowering individuals to protect themselves rather than

promoting dependency culture

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Risk Assessment Frameworks Are Fundamental to Mitigation Activities

They are key to the ‘business case’ for investment in mitigation

They facilitate a rational benchmark for public safety standards

They underpin the economics of financial engineering for funding recovery and spreading the risk


Financial Economics: Risk Framework

Assessing the Frequency and Severity of Loss:

Occurrence Parameterization – location, frequency, magnitude and source characteristics of future events

Spatial Impact Estimation – Geography of ground motion, attenuation, frequency and

Vulnerability Assessment – likely levels of damage to different types of buildings resulting from ground motion

Inventory Audits – number and types of physical infrastructure and buildings, where they are, type and quality

Damage Costing – repair and reconstruction costs, loss productivity, variation in future supply and demand, economics and social impact

Financial Engineering – admin costs, risk loadings for uncertainty, premium pricing, net present valuation

Uncertainty

High

Med

High

Med

Low

Med


Uncertainty – Where Science Can Add Most to Policy We don’t need to know everything to structure good mitigation

decisions

Financial engineering adds loadings for uncertainty

We need to

– Assess what we really know

– Give a rigorous and honest assessment of what we don’t know

Science should help us assess:

– How incomplete might historical catalogues be?

– Uncertainty levels around location of faults

– Uncertainties around assessments of activity rates

– Uncertainties around loss modeling assumptions

– Identify other areas of greatest uncertainty in risk frameworks


Conclusions

Risk assessment frameworks facilitate the transfer of scientific knowledge to effective mitigation actions

There are major areas of uncertainty that reduce the willingness and ability of participants in mitigation

Science should address the greatest areas of uncertainty

Once of the greatest areas of uncertainty is assessing the level of uncertainty

Help us know what we don’t know…

Science into Policy Options for Risk Mitigation in Developing Countries Andrew Coburn Senior Vice...

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