A big one, though not the big one: the earthquake scenario: despite the high level of earthquake preparedness in many parts of California, losses—both human and property—are still breathtakingly high when nature decides to shake things up with a magnitude 7.0 quake

Risk & Insurance, April 15, 2004 by Fouad Bendimerad

Although engineers work over the weekend, water treatment facilities, pumping stations and pipelines are too badly damaged to restore supplies to large parts of the city.

The following Monday, some businesses are able to reopen with the help of bottled water and temporary toilets. However, most industrial operations cannot function without proper water supplies and sanitation. For those unlucky businesses, there is no chance of getting back to work for another two weeks at least. Water supplies are restored gradually over the next three weeks. Sanitation services take six weeks to get back to normal.

SLOW TO RECOVER

Los Angeles International Airport, ranked fifth in the world in the number of passengers and tonnage of air cargo, is forced to run on a partial schedule for several weeks while runways are repaired. The slowdown causes hardship to businesses and to the 400,000 employees dependent on the airport economy.

The port is badly damaged and takes months mid tens of millions of dollars to repair. Limited access aggravates the quake's impact on trade and business. Replacement of special cranes and other damaged equipment will take more than a year. Before the earthquake, the port was the busiest port in the United States and the eighth busiest in the world. It generated tens of billions of dollars in sales every year in California, as well as thousands of local jobs. While it is repaired, rival West Coast ports siphon off much of the business. It will be a challenge for Los Angeles to regain its position.

Damage to residential real estate is significant. Nearly a million homes have been damaged. Fewer than one in 12 of the affected households have insurance with special additional earthquake coverage. Even those that have earthquake insurance find that the deductible levels on their policies leave them liable for a large portion of the repair bills. A political controversy ensues, and the governor demands that insurers settle claims promptly. The governor asks the legislature to create a new insurance structure for earthquakes.

Businesses recover only slowly, over the course of many months. The thousands of small businesses that need temporary office space find that rents in the unaffected parts of the city have gone up with the sudden demand. Some companies relocate business operations to their offices out of town, or even out of state.

Manufacturing and industrial facilities need to repair or replace damaged machinery, creating a surge in orders. The construction sector booms as contractors from all over California and nearby states pour into town to help rebuild.

Losses from Hypothetical Los Angeles Earthquake

Type of Loss                             Total Loss      Insured Losses

Property and infrastructure damage       $75 billion        $20 billion
Workers' compensation, life and
  health costs                            $1 million         $1 million
Direct costs of business interruption    $23 billion         $6 billion
Other costs (e.g. emergency response)     $1 billion         --

Total Direct Costs:                     $100 billion       $27 billion

Total number of people killed:               400
Total hospitalized with serious
  injuries:                                1,200
Total treated at outpatient clinics:       2,400

Source: Risk Management Solutions