Building damage and economic losses resulting from a relatively modest (M6.0) earthquake on the American Canyon fault have been estimated to be as high as $4 billion by some sources. Time will tell what the actual economic impact was to the community and business. Napa Valley’s wine industry has been particularly hard hit, with damage to buildings and inventory. Damage to other industries is still substantial as well.
I am currently in the affected Napa region as part of a multi-disciplinary research team deployed to study the effects of the earthquake earthquake, including building performance, contents damage, roads, bridges, lifelines, geotechnical issues and the impact on the community. The team evaluates and reports on the findings through publications. The findings from post-earthquake reconnaissance often generate changes to Code design provisions, which could improve the performance of similar buildings to reduce damages in the next seismic event.
Shaking Up Risk Management
Following damaging earthquakes, my team often receives a number of calls from lenders and investors who are concerned about their portfolios or risk management policies. Indeed, this can be an opportune time to reevaluate your approach to protecting your portfolio against seismic risk. These recent client questions & answers may offer valuable information to anyone who has or lends on property in California, or other seismically active regions around the country:
Questions About Seismic Risk Management
- Is my seismic risk management policy sufficient?
Policies that proactively and comprehensively address damageability, business and life safety risks represent the safest approach. However, businesses, investors and lenders sometimes perform little or no evaluation of earthquake risks. Clients with large portfolios spread over a geographically diverse area may have a high tolerance for the financial impacts resulting from earthquakes; whereas individual businesses or investors, or those with a significant portion of the net worth invested in a single property, may be more sensitive to losses from a single event. Clients should work with consultants familiar with related seismic risks to develop policies suited to their individual needs.
- How seismically risky is my property or portfolio?
Studies ranging from a simple screening for critical factors through site-specific modeling and analysis can be used to identify properties which are most susceptible to damage. Seismic risk assessment, sometimes referred to as a probable maximum loss (PML) study, can provide useful information concerning the probability and type of damage expected at properties. Since this type of assessment combines structural and statistical analysis, it is important to clearly communicate your risk tolerance and objectives to assure the appropriate depth of investigation and selection of variables.
- I have a high-risk property in my portfolio. What are my options?
Structural modification or “retrofit” of buildings can significantly decrease the risk of earthquake damage, reducing life-safety, operational and financial risks. In some cases, retrofit may be required by local or state building regulations and ordinances, as discussed in this previous Globe St blog. Though financial risks can be partially mitigated by earthquake insurance, related fees can be cost-prohibitive, and this approach offers no protection from life-safety or operational risks. Only a retrofit can protect the safety of occupants. Thankfully, the timing of the Napa earthquake (it struck at 3:20am) meant that human injury was limited, but had the temblor occurred during the day the outcome could have been very different. This has highlighted the fact that for many property owners an approach that addresses collateral damage as well as life safety issues by tackling any structural weaknesses up front is the best approach.
There is a further financial argument for making structural improvements: a seismically sound building is a less risky investment, meaning it is more marketable and will meet more lenders’ requirements. Lowering Probable Maximum Loss also reduces insurance premiums. Common calculations estimate that the cost of a seismic retrofit can be recovered through savings in earthquake insurance premiums in 2-8 years.
Overall, the correct approach to the management or seismic risks will depend on the needs of each business, investor and lender. In some cases, a simple screening is adequate; while a more rigorous approach is more suitable for others. Every earthquake is a chance to learn, and to reassess risk management policies to make sure they are still best aligned with your exposure to and tolerance for seismic risk.