Black Swan: Tsunami

Menace on the Horizon

The Pacific Northwest will never fully recover from this tsunami and earthquake.
By: | August 3, 2016 • 8 min read

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.

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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.

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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.

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“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.

Nathan Wood, research geographer, U.S. Geological Survey

Nathan Wood, research geographer, U.S. Geological Survey

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?

Jamie Miller, head of property, North America, Swiss Re Corporate Solutions

Jamie Miller, head of property, North America, Swiss Re Corporate Solutions

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.

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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?” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.