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?” &
Financing Pandemic Risk
Could capital markets offer an alternative to transfer the risk of financial losses caused by pandemics? The fast spread of the Zika virus in the past few months has made this question a valuable one for companies around the world.
The answer might well be yes. There are already instances of insurance and reinsurance firms selling pandemic risks to capital markets. And investors appear to be keen on buying them.
“We like to buy this kind of risk. It can be a good diversifier to a global portfolio,” said Christophe Fritsch, co-head, securitized and structured assets, at AXA Investment Managers.
The challenge of a pandemic risk bond is to define triggers and conditions for the coverage.
Past market transactions involve insurance-linked securities that transfer pandemic risks, often along with other excess mortality events such as terrorism. They are used by insurers and reinsurers as an extra tool to manage their regulatory capital reserves.
But an initiative by the World Bank to issue pandemic bonds could lead the way for other kinds of issuers to employ similar capital markets instruments. The World Bank’s bond employs a parametric trigger that helps speed up payments when companies may need some urgent cash flow.
Bill Dubinsky, a managing director at Willis Capital Markets & Advisory, said a likely candidate could be an airport that sees dramatically reduced traffic if there is a pandemic in the country.
If the risk had been transferred to the capital markets, he said, the airport could have a considerable degree of cash flow through the duration of the outbreak.
The challenge is to define triggers and conditions for the coverage.
The trigger of the World Bank’s bond, which should be placed with investors in the Fall, is linked to the level of confirmed deaths caused during a pandemic event. It might not be the best option in the case of pandemics such as Zika, where the number of deaths is fairly low, and companies face other effects such as the interruption of business or loss of revenues indirectly associated to the disease.
But other indicators, such as number of people infected in a limited period of time, could be employed, as is already the case with some parametric insurance coverage purchased by the tourism and airline industry.
The World Bank bond will test the market to assess whether there is appetite from investors for pandemic risks issued by players outside the insurance and reinsurance industries.
Priya Basu, a manager at the development finance department at the World Bank, said she expects the bond will pay a coupon of about 8.5 percent a year, which would be lower than the opening price for other CAT bond initiatives previously launched by the organization, such as the Caribbean Catastrophe Risk Insurance Facility.
The World Bank’s pandemic bond is part of a broader project called Pandemic Emergency Financing Facility, or PEF, which includes both a bond and insurance element, and aims to make $500 million available for pandemic emergencies at 77 poor countries.
The bond is expected to raise $300 million, while $200 million will be placed in the reinsurance market. Munich Re and Swiss Re are the insurance partners of the project.
The costs related to the bonds and insurance premiums are subsidized by donor countries, but the idea is that the facility will become a purely market-based one in the future.
“We are working both on a bond issuance and with the reinsurance market because we want to target a range of different investors with different risk appetites,” Basu said. “We expect that, over time, countries will be able to pay their own premiums and coupons.”
“One of the goals of the World Bank is to promote the utilization of market-based catastrophe schemes by governments that would otherwise struggle to provide urgent assistance to its citizens.” — Priya Basu, manager, development finance department, World Bank
The coverage would be activated when the aggregate number of deaths caused by a pandemic, as confirmed by the World Health Organization, reaches a certain limit. The formula also includes data about the rate of growth of the disease and the acceleration in the number of fatal cases. The index is calculated globally, but the payout is only released to the 77 countries covered by the program.
The facility is complemented by a cash component, worth between $60 million to $100 million, which can be employed in case of a severe pandemic that does not cause enough deaths to trigger either the bond or the insurance coverage.
According to Basu, that is the money that could be used for Zika outbreaks, where the number of expected deaths is relatively low.
“There is a financing gap from the moment it is clear that there is an outbreak with pandemic potential, but it has not become pandemic yet. That is when the PEF comes in,” she said. “The parametric trigger enables us to respond in a much quicker and more timely manner.”
One of the goals of the World Bank is to promote the utilization of market-based catastrophe schemes by governments that would otherwise struggle to provide urgent assistance to its citizens, Busa said.
In her view, the use of facilities such as the PEF could result in significant savings of public resources and, especially, in reducing losses of life. If PEF was up and running back in 2014, she said, international money to fight off the the Ebola pandemic could have started to flow to the affected countries more quickly.
Instead, it took extra months to gain any steam, resulting in the cost of billions of dollars and thousands of lives.
The disease covered by the $500 million bond and insurance facility includes some kinds of influenza, SARS, MERS, Ebola, Marburg and other zoonotic diseases like the Lassa Fever.
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.