Menace on the Horizon
Scenario: Fifteen to 20 minutes.
That’s all the time that tens of thousands of coastal residents and tourists will have to escape with their lives when the Cascadia Subduction Fault ruptures. It could happen tomorrow. Or in 50 years. No one is totally sure, since there is no way to predict when earthquakes occur.
But when the 700-mile-long fault in the Pacific Ocean that stretches just 70 miles offshore from Cape Mendocino, Calif., to Vancouver Island, British Columbia, last erupted in 1700, the earthquake-powered tsunami was so powerful it drowned a forest of 150-foot-tall spruce trees on the Oregon Coast and swamped a feudal castle in Japan.
This time, the loss of life and infrastructure damage will be worse because so many more people live in the Pacific Northwest and there is so much more to destroy.
Large sections of the coastline will drop by nearly 5 feet, and the shaking caused by the magnitude 9 earthquake will last as long as five minutes, affecting 140,000 square miles, including Seattle, Tacoma, Portland and Olympia. Aftershocks will continue for months.
The first tsunami wave — as high as 30 to 40 feet — will bury the coastal communities in unrelenting towers of water moving about 20 mph toward the shore, and as fast as 500 mph across the ocean. About 100,000 people live and work there, but the population grows by tens of thousands during tourist season.
Roads, bridges, railways and communication structures will be destroyed. Natural gas pipelines and water systems will be heavily damaged. There will be widespread, lengthy power outages in every city within 100 miles of the coast. Undersea transpacific cables will be severed.
Fatalities will total upwards of 13,000 — many more if the tsunami occurs during a weekend beach day in tourist season.
The coastline and low-lying areas of towns west of I-5, the main interstate on the West Coast, will be wiped out from Northern California to British Columbia. Higher ground will suffer moderate to severe damage.
Wood-frame buildings should withstand the earthquake, but not the tsunami. Masonry buildings may withstand the tsunami, but not the earthquake.
Fatalities will total upwards of 13,000 — many more if the tsunami occurs during a weekend beach day in tourist season.
The region never fully recovers.
Analysis: Total global economic losses from natural and man-made disasters in 2015 were $92 billion, according to Swiss Re. When the Cascadia Subduction Fault ruptures, that alone will be higher.
Official projections put the economic damage at $49 billion for Washington, $41 billion for British Columbia, $32 billion for Oregon and $4 billion for California, but many experts believe losses will be higher. Maybe 20 percent to 25 percent of economic losses will be insured, experts said.
Residents and small business owners usually do not have flood or earthquake protection. And standard policies for small businesses have limited coverage for business interruption, or extra expenses required to rebuild and recover.
“The basis for the panic is pretty solid. It’s not a tinfoil-hat kind of thing. We are way past the minimum from geologic records, but we are not in any sense, overdue.” — Dr. Chris Goldfinger, director, active tectonics and seafloor mapping laboratory at Oregon State University
National or regional companies may see higher payouts. As sophisticated insurance buyers, they will have higher limits for business interruption, contingent business interruption and for extra expenses. But the damage will take months and years to fix. No business can outlast that. Not if they remain in the area.
Homes and businesses on the coast will be destroyed. Plus, the entire coastline will be isolated by the tsunami’s devastation, cut off from the rest of the country.
In the bigger cities, such as Portland, Eugene and Seattle, many properties will be destroyed by the earthquake. Residents and business owners will face at least a month without electricity, several months without water, and years before bridges and major infrastructure are restored. And those are the optimistic projections.
Oregon businesses were stunned to hear it would take months and years to resume operations, said Dr. Chris Goldfinger, director, active tectonics and seafloor mapping laboratory at Oregon State University, who has been charting the frequency and severity of the zone ruptures.
“They said after a few weeks, we would have to leave,” he said. “We can’t just sit here and wait for years for bridges to be rebuilt. That was a sobering moment.”
Everyone Has a Stake
The average time between earthquakes is 400 to 500 years, Goldfinger said. It can be as short as 200 years, as long as 1,000. It’s now 315 years since the last rupture of the Cascadia Subduction Fault.
“The basis for the panic is pretty solid. It’s not a tinfoil-hat kind of thing. We are way past the minimum from geologic records, but we are not in any sense, overdue,” Goldfinger said.
“Everyone has a stake in it,” he said. “We all have a responsibility to do something.” — Jay Wilson, Clackamas County (Oregon) resilience coordinator
With bridges, highways and communication down, emergency response will be limited. Rescue efforts will have to come from outside the affected areas.
“The people we count on the most for smaller disasters and misadventures will be victims like the rest of us,” said Goldfinger.
Like many others in the Pacific Northwest, Jay Wilson, Clackamas County (Oregon) resilience coordinator, is working to reduce the number of victims. It’s a very site-specific exercise and an overwhelming task.
“Everyone has a stake in it,” he said. “We all have a responsibility to do something.”
“A Massive Planning Effort”
To aid tsunami survivors, the construction of about 43 “vertical evacuation structures” in coastal Washington have been discussed.
The first one — a refuge on the roof above Ocosta Elementary School in Westport, Wash., will be finished soon. It will hold 700 people. A planned berm — basically a big hill — behind an elementary School in Long Beach, Wash., will save about 600 more.
Officials and community members are also caching relief supplies on high ground near the tsunami zone so survivors will have provisions while they await rescue, said Nathan Wood, research geographer, U.S. Geological Survey.
“It’s a massive planning effort,” he said, noting that Oregon and Washington emergency managers have involved hundreds of experts, legislators, business leaders and the public in regional resilience planning.
“It will be catastrophic,” Wood said, “but we can make it more resilient. People are not burying their heads in the sand. Can they make everything perfect in one day? No. But it was really impressive how they are pulling everybody together.”
Still, Wilson said, it’s a hugely expensive proposition that will take years, and new buildings and infrastructure are still not being constructed to a higher level of resilience, such as is common in Japan and Chile, or even California, where earthquakes and tsunamis are more common.
“Until the business community starts demanding it and elected officials campaign on it, it’s still backroom conversation by a bunch of policy wonks like me saying, ‘What can we do to make this happen?’ ”
VIDEO: More than 470 Washington National Guard personnel took part in the Cascadia Rising earthquake preparedness exercise in June. Report from iFiberoneNews
That’s not to say there hasn’t been progress. In June, “Cascadia Rising 2016,” a four-day earthquake and tsunami drill began in Washington and Oregon to test emergency response measures. About 20,000 people, including the U.S. National Guard, and federal, state and local emergency responders, practiced saving lives and delivering services while testing ways to communicate with no electricity or cell service.
The region will also be getting support from the 100 Resilient Cities initiative of the Rockefeller Foundation. Seattle and Vancouver were added to the roster in May. Both will receive financial support for a chief resilience officer as well as access to best practices, service providers and partners.
Wilson had been hoping Portland would be chosen as well.
Recovery will be an immense challenge. The U.S. already has a $1.5 trillion shortfall for infrastructure maintenance, said Alex Kaplan, senior vice president, global partnerships, Swiss Re, who works with the 100 Resilient Cities initiative.
Finding the Money
“Where will the money come from?” asked Jamie Miller, head of property for North America, Swiss Re Corporate Solutions. And when?
One year after Superstorm Sandy, about 75 percent of federal funding still had not been dispersed, he said.
The challenges settling claims following Sandy’s devastation will surely reoccur, Miller said. And there will be a “huge gap” between insured and economic losses for small business owners.
“Where a policy does not cover earthquake or flood, an insured’s coverage may only include ensuing losses, such as fire resulting from a burst gas pipe.”
Business income protection and coverage for extra expenses will not come close to covering the costs required to return to operation, he said.
For larger companies, even the most sophisticated risk manager will be challenged to calculate — or protect — the business income and recovery losses.
Access to gasoline will disappear rapidly, so emergency generators will become useless. Customers will be nonexistent.
Construction crews will be overwhelmed and face labor shortages; their price will dramatically escalate, assuming it’s even possible to hire a crew, Miller said.
Built-in redundancies to use nearby facilities to get back in business will be useless since the entire region will be affected, and receiving supplies, impossible.
Plus, with the popularity of just-in-time supply chains, companies will likely have few resources on hand to facilitate production.
At the same time, U.S. and Asian companies that rely on goods from the devastated area will go lacking.
“The big question is, what are we going to do about it?” — Jay Wilson, Clackamas County (Oregon) resilience coordinator
After the Thailand floods in 2011, some car manufacturers delayed production for months because of a lack of components, while computer industry companies saw shortages and adverse impacts for six months to a year.
When large commercial enterprises file insurance claims, they may be dealing with as many as 20 companies.
“Getting them all to agree on an adjustment is a big challenge,” Miller said.
Insurers that did not adequately manage risk aggregation will face bankruptcy. That, in turn, will leave third-party vendors and service providers unpaid and work undone.
Steven Jakubowski, president, Aon Benfield’s impact forecasting team, said insurer solvency will be an issue. “We saw that in Northridge,” which was a 6.7 magnitude earthquake that hit Los Angeles on Jan. 17, 1994.
According to the Insurance Information Institute, Northridge caused $15.3 billion in insured damage, topped only by Hurricane Katrina, the attacks on the World Trade Center and Hurricane Andrew.
“We are so big on public/private partnerships because of this,” Miller said. “The resiliency initiative is all about creating awareness of overall risk.”
Swiss Re’s global partnerships business focuses on building long-term resilience, while helping governments transfer risk away from taxpayers and into the private market, aiming to reduce over-dependence on an increasingly strained federal disaster budget, Kaplan said.
Wilson said the aim of emergency planning is to create a two-to-four week recovery window. Right now, it’s months and years.
“We haven’t had anything this big in our country before,” he said. “For me, I just accept it. It’s gonna happen,” said Wilson. “The big question is, what are we going to do about it?” &
Crisscrossing the ocean floor, undersea optical fiber data cables are an essential component of an increasingly interconnected world, quietly carrying massive amounts of data communications between the Earth’s landmasses.
But they are not invulnerable. Individual cables are severed or damaged dozens of times each year, most commonly by fishing boat anchors, but also by storms, scrap collectors and even shark bites.
The U.S. and other major markets, like Europe and Japan, are served by numerous cables, providing enough redundancy that traffic from a single damaged cable is rerouted before end users even notice. Wider outages, however, can have more far-reaching effects.
VIDEO: IDG.TV follows along as undersea data cables are manufactured and then loaded aboard a ship to place them in the ocean.
That’s why in October 2015, when Russian ships were observed lurking near undersea data cables, U.S. military and intelligence officials were concerned about possible sabotage.
Some experts, however, see that as unlikely.
“Cables during peacetime are protected by law under the provisions of the United Nations Convention on the Law of the Sea,” said Keith Schofield, general manager of the International Cable Protection Committee, representing the submarine cable community of interest.
Attempted sabotage, he said, would likely be detectable and stopped before any significant harm could be done to trunk cable routes.
“Before 10 or 20 percent of them were affected, owners would realize that something pretty serious was happening and could respond appropriately.”
Sean Donahue, an assistant vice president and underwriter specializing in cyber and technology at XL Catlin, agreed.
“These commercial cables have too much intrinsic value,” Donahue said. “Anybody who may have that sort of capability, such as Russia … would be hurting their own self-interest.”
Seismic activity, however, has been known to damage enough cables to cause wide service interruptions and service degradation, even in areas with ample cable connections.
A 2006 earthquake in Taiwan severed several undersea cables, causing major disruptions in Asia and ripple effects that interrupted phone service to Europe. Smaller incidents can have far reaching impacts, as well.
In 2013, a string of separate cable cuts in Egypt caused widespread data slowdowns in large portions of Africa and Asia.
And a single cut off of Northern Ireland in 2015 sparked headlines claiming it had “sent broadband into meltdown.”
When cables are cut, rerouted data can overwhelm unaffected networks, causing slowdowns even for those not directly affected. Smaller countries with less redundancy — and the companies doing business with them — can suffer substantial repercussions from such events.
Even in the U.S., outages involving multiple cables could cause data traffic to be rerouted to undersea cables on the opposite side of the country, potentially triggering domestic slowdowns along the way.
As businesses become increasingly dependent on fast data communications, even minor slowdowns can impede business. For web-centric and cloud-based companies, as well as content providers, such slowdowns could be a serious problem.
According to TeleGeography, a data cable industry research firm, Google and Bing report that minor lags lead to decreased click-throughs and search result views, and “Amazon has claimed that every 100 milliseconds of latency reduces its sales by 1 percent.”
High-frequency trading companies sometimes own dedicated data cables, but others are dependent on the same networks as the rest of us, and if those networks slow down, it hampers performance and costs them money.
Built with Redundancy
The undersea cable industry goes to great lengths to ensure uninterrupted service.
“The systems are built with redundancy in mind,” said Peter Jamieson, chair of the industry group European Subsea Cable Association.
“You should always aim to have at least two cables from each operator so that if you lose one cable … you automatically switch onto the other one. The redundancy is built into the network on the global network as well.”
Excess capacity is also built into the system. Most cables were originally built to handle optical data traffic in a single wavelength, but they now use a technique called Dense Wave Division Multiplexing (DWDM), which handles many wavelengths.
“We are now getting potentially 400 times the capacity on one optical fiber than what you probably got 15 to 20 years ago,” Jamieson said.
Routing protocols ensure that in the case of a service interruption, data instantaneously finds alternate routes. And the different cable owners work together in various consortia to operate roughly 60 cable-repair ships throughout the world, which are on call to ensure that any damage is repaired quickly. Repairs generally take a minimum of four days to complete.
But according to Helen Thompson, director of commercial marketing at Esri, a software company specializing in geographic information systems, it is not inconceivable that the individual smart systems meant to ensure seamless rerouting could have unexpected results — much the way automated trading programs can produce dramatic and unexplained lows or highs in financial markets.
“Those individual response plans come together and aggregate in such a way that they themselves might have an impact,” Thompson said.
“It’s like the butterfly effect. … That’s increasingly the nature of connectivity and a consequence of the very widespread, multi-point-of-touch communications network that we rely on.”
While DWDM vastly increased capacity on data cables, demand and usage have been steadily catching up as businesses and individuals demand and depend on more and more data.
A company called Hibernia Express recently laid a pair of superfast transatlantic cables, the first new cables in 13 years. More may be on the way.
“The content people want to have their own fibers right now,” said Jamieson.
“Can you prove that you would have made X amount of dollars versus Y amount of dollars because of a degraded service?” — Sean Donahue, assistant vice president and underwriter, at XL Catlin
“So the Facebooks, Googles, Amazons and Microsofts of this world … they want to have their own fiber to control their own traffic on cable, so they are driving a lot of new systems as well.”
It is a sign of how seriously data-driven businesses take their dependence on fast, dependable transmission infrastructure.
As data usage skyrockets, Thompson cautioned against taking network resiliency and capacity for granted.
“We could be in a situation where ‘out of sight, out of mind’ [and] all these things are running at 99 percent capacity, and we’re one point … away from total failure.
“We don’t know. I’m not suggesting that is the case, but it behooves us to provide evidence that we have redundancy and resilience in the systems that we’ve become reliant on. We increasingly are engineering our future to be more dependent on them.”
Smart houses, self-driving cars, and other web-dependent gadgets and systems will not only add to data traffic, but to the list of systems that could malfunction in the case of outages and slowdowns, opening new areas of risk for homeowners, as well.
Protecting Data Flows
Traditional business interruption coverage focuses on perils like flood and fire, power outages and physical infrastructure failures.
“But, when we move to businesses where data is a utility, we have a different sort of business interruption, and that is going to be increasingly important to service-based economies,” said Thompson.
“We think about site liability and data breaches, but what I think we’re going to start moving to more and more is providing business interruption insurance around data.”
Cloud coverage insurance is still a rarity, but probably not for long. “Many more companies should think about cloud computing insurance,” she said.
“It will become a vital part of what’s included in business interruption insurance.”
Businesses should know their providers’ contractual obligations and dependent business interruption coverage in case of outages, as spelled out in the service level agreement, she said.
“More and more major businesses are expecting that as part of their service level agreement,” Thompson said.
“I think that will become an integral part of the transfer of risk and liability. If you’re completely dependent upon the web and the cloud to do business, and you don’t protect yourself with a service agreement on the cloud provider, you’re going to be subject to claims from other people. So, that discussion with your insurance provider should be absolutely central.”
Even with coverage, however, calculating business interruption losses, especially for traders and other market-dependent businesses, can be extremely difficult, particularly during incidents that may themselves be roiling the markets.
“Can you prove that you would have made X amount of dollars versus Y amount of dollars because of a degraded service?” Donahue asked. “There’s a lot of moving parts to that scenario.” &
Cyber: The Overlooked Environmental Threat
“Cyber breach” conjures fears of lost or ransomed data, denial of service, leaked corporate secrets and phishing scams.
But in a world where so many physical operations are automated and controlled by digital technologies, the consequences of cyber attacks extend far beyond the digital realm to include property damage, bodily injury, and even environmental pollution.
Industrial companies that deal with hazardous materials — like power plants, refineries, factories, water treatment facilities or pipelines — are heavily dependent on automated technology to maximize their efficiency. Other sectors use technology to control HVAC systems, power and utilities, placing their properties at risk as well.
Cyber risks like theft of personally identifiable data have been highly publicized in recent years, but physical risks like pollution sparked by a cyber breach may not be as obvious.
“It’s significant to lose 100,000 customers’ Social Security numbers,” said William Bell, Senior Vice President, Environmental, Liberty International Underwriters, “but can you imagine if a waste treatment facility’s operations get hacked, gates open, and thousands of tons of raw sewage go flowing down a local river?”
In many industrial complexes, a network of sensors gathers and monitors data around machinery efficiency and the flow of the materials being processed. They send that information to computer terminals that interpret the data into commands for the hardware elements like motors, pumps and valves.
This automation technology can control, for example, the flow of pipelines, the level of water or waste held in a reservoir, or the gates that hold in and control the release of vast quantities of sewage and other process materials. Hackers who want to cause catastrophe could hijack that system and unleash damaging pollutants.
And it’s already happened.
In 2000, a hacker caused 800,000 liters of untreated sewage to flood the waterways of Maroochy Shire, Australia. In 2009, an IT contractor, disgruntled because he was not hired full-time, disabled leak detection alarm systems on three off-shore oil rigs near Long Beach, Calif.
Just last year, cyber attackers infiltrated the network of a German steel mill through a phishing scam, eventually hacking into the production control system and manipulating a blast furnace so it could not be shut down. The incident led to significant property damage.
According to a leading industrial security expert and executive director of the International Society of Automation, “Today’s operational technologies—such as sensors, SCADA systems, software and other controls that drive modern industrial processes—are vulnerable to cyber attack. The risk of serious damage or compromise to power and chemical plants, oil and gas facilities, chemical and water installations and other vital critical infrastructure assets is real.”
“The hacks could come from anywhere: a teenager looking for entertainment, a disgruntled worker, or more sophisticated criminals or terrorists,” Bell said. “There are certainly groups out there with political and ideological motivations to wreak that kind of havoc.”
“We are working to bring the cyber component of environmental risk to the forefront. Cyber security is not just an IT issue. Industry executives need to be aware of the real-world risks and danger associated with an industrial cyber attack as well as the critical differences between cyber security and operational technology security.”
— William Bell, Senior Vice President, Environmental, Liberty International Underwriters
The cleanup cost of an environmental disaster can climb into the hundreds of millions, and even if a cyber breach triggered the event, a cyber policy alone will not cover the physical and environmental damage it caused.
The risk is even more pointed now, as resource conservation becomes increasingly important. Weather related catastrophe modeling is changing as both flooding and drought become more severe and frequent in different regions of the U.S. Pollution of major waterways and watersheds could have severe consequences if it affects drinking water sources, agriculture and other industrial applications that depend on this resource.
Managing the Risk
Unfortunately, major industrial corporations sometimes address their environmental exposure with some hubris. They trust in their engineers to remove the risk by designing airtight systems, to make a disaster next to impossible. The prospect of buying environmental insurance, then, would be superfluous, an expression of doubt in their science-backed systems.
Despite the strongest risk management efforts, though, no disaster is 100 percent avoidable.
“We are working to bring the cyber component of environmental risk to the forefront,” Bell said. “Cyber security is not just an IT issue. Industry executives need to be aware of the real-world risks and danger associated with an industrial cyber attack as well as the critical differences between cyber security and operational technology security.”
The focus on network security and data protection has distracted industry leaders from strengthening operational technology security. Energy, manufacturing and other industrial sectors lack best practice standards when it comes to securing their automated processes.
After the Homeland Security Act of 2002, the Department of Homeland Security began comprehensive assessments of critical infrastructure’s cyber vulnerability, working with owners and operators to develop solutions. It also offers informational guides for private companies to do the same. The National Institute of Standards and Technology also continues work on its cyber security framework for critical infrastructure. Although this helps to establish some best practices, it does not completely mitigate the risk.
Many businesses don’t see themselves as a target, but they need to look beyond their own operations and property lines. They could be an attractive target due to their proximity to densely populated areas or resources such as waterways and highways, or nationally or historically significant areas. The goal of a cyber terrorist is not always to harm the target itself, but the collateral damage.
The Role of Insurance
“Environmental liability is still by and large viewed as a discretionary purchase,” Bell said, “but the threat of a cyber attack that can manipulate those systems and ultimately lead to a pollution incident is added incentive to buy environmental coverage.”
Liberty International Underwriters’ environmental coverage could respond to many pollution conditions set off by a cyber breach event.
“Property damage, bodily injury and cleanup of any pollution at or emanating from a covered property would likely be taken care of,” Bell said. “The risk is not so much the cyber exposure but the consequence of the attack. The resulting claims and degradation to the environment could be severe, especially if the insured was a target chosen because of their unique position to have a large effect on the local population and environment.”
LIU also offers dedicated Cyber Liability insurance solutions designed to manage and mitigate the cost of responding to a cyber attack and any resultant loss of data and associated liability. Coverage includes proactive data breach response services designed to help organizations comply with regulatory requirements and prevent data breaches.
LIU’s loss control managers are also on hand to conduct assessments of insureds’ properties and facilities to examine potential environmental impacts. They can educate brokers on the importance of enhancing cyber security to prevent an environmental accident in the first place.
“People are relying more and more on their systems, automaton is increasing, and the risk is growing,” Bell said. “We’re all focused on protecting data, but the consequences of a cyber breach can be much farther reaching than data alone.”
To learn more about Liberty International Underwriters’ environmental coverages and services, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.