After the fall: what
works best for homeowners?
BY DAVID F. SALISBURY
Today there is a great
deal of speculation but little consensus about the best
way to improve a community's performance in an
earthquake. Is retrofitting the best solution? What about
insurance?
One reason for the
uncertainty has been the lack of a technique that allows
decision makers to evaluate the overall effectiveness of
different earthquake mitigation strategies. But now a
Stanford doctoral student in civil engineering, Anju
Gupta, has developed a holistic approach designed to
provide these kinds of comparisons.
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Using data from Los
Angeles County, she has applied this method to seven
different strategies, including the California Earthquake
Authority insurance program. One of her conclusions is
that the controversial new insurance will actually
increase the average out-of-pocket expenses of
Californians in the next major earthquake because of the
low financial benefit that it will provide to affected
homeowners.
"Investing the same
amount of money in earthquake protection kits and seismic
upgrades on their house is a better investment for
Californians than paying the premiums on the policies
issued by the California Earthquake Authority," says
Gupta, who developed the method, which she calls strategy
effectiveness charts (SEC), as part of her doctoral
thesis completed in June.
SEC provides a formal
method to evaluate the effectiveness of various
earthquake preparedness and mitigation policies. It takes
more than loss of life and physical damage into account
by including qualitative impacts, such as the effect of
individuals' standard of living and their ability to
recover from the costs involved. It looks not just at
losses but also at response and recovery efforts,
mitigation priorities and the extent to which policies
will be implemented. It then presents this information in
a series of graphic tables designed to make the
information involved relatively easy for decision makers
to digest.
Strategy Effectiveness
Chart showing the estimated cost and effectiveness of
seven different earthquake mitigation strategies: LR,
low-level retrofit; MR, medium-level retroft; HR,
high-level retrofit; OI, old earthquake insurance policy;
CEA, California Earthquake Authority insurance policy;
NI, hypothetical new insurance policy; and EQK,
earthquake preparedness kits. In the legend, PI stands
for performance index and I stands for implementation
level. The cost and performance of each strategy is
calculated at two implementation levels: 100 percent and
the best estimate of the actual level.
"Having understood
the level of risk and causes of that risk, Anju's work
can develop optimum strategies to minimize that
risk," says her thesis adviser, Haresh Shah,
professor emeritus of civil engineering.
"Specifically, her work provides a clearer picture
of how various technical and non-technical strategies
improve the performance of urban areas in future
earthquakes. Her results could be of tremendous value to
local, state and federal governments in their efforts to
develop and implement cost-effective risk reduction
strategies."
Gupta's method is
considerably different from the cost-benefit analysis
that has been used for this purpose in the past.
Cost-benefit analysis focuses primarily on quantitative
factors such as physical damage and loss of life. All
factors are converted into monetary terms, forcing
analysts to put a dollar value on human life. According
to Gupta, cost-benefit analysis tends to underestimate
the benefits of a given strategy by ignoring qualitative
benefits and overestimate its effectiveness by assuming
total implementation.
One of the obstacles to
dealing with earthquake risks is the multidisciplinary
nature of the subject, involving geologists, structural
engineers, economists, insurance experts and
sociologists, says Richard Roth, chief property casualty
actuary with the California Insurance Department.
"Typically, experts in one field have very little
understanding of what experts in the other fields are
doing. So methods like the SEC that integrate these
disparate factors are extremely worthwhile," he
says.
Gupta used her method with
data from Los Angeles County to evaluate seven different
strategies based on the extent to which they improve the
way residences perform during a large earthquake:
- High-level retrofit
major structural modifications, such as adding
shear walls and strengthening foundations;
- Moderate-level
retrofit minor structural upgrades, such as
bolting houses to their foundations and
strengthening chimneys, and non-structural safety
measures;
- Low-level retrofit,
such as bracing contents within homes;
- Past insurance
policies with a 10 percent deductible;
- California Earthquake
Authority insurance with a 15 percent deductible
and $5,000 limit on contents;
- A hypothetical
insurance policy with a 3 percent deductible and
coverage up to 15 percent of the value of a
structure;
- Earthquake disaster
kits.
Of all these strategies,
the California Earthquake Authority (CEA) insurance
program performed the poorest, actually increasing
overall earthquake losses because its high cost keeps
people from taking other preventive measures. According
to Gupta, CEA premiums were averaging $3.40 per $1,000
coverage in Los Angeles before a recent rate reduction.
But the policy will not help most people after an
earthquake because the amount of damage to houses
typically falls within the 15 percent deductible, she
reports. CEA's recent rate reductions should improve the
program's effectiveness slightly, she says.
The past insurance system
with its 10 percent deductible provided at least a
marginal reduction in earthquake losses, she found. But
the most effective strategy proved to be high-level
retrofit targeted at the most vulnerable groups: people
living in older buildings constructed to lower standards,
typically low-income households. Not only could this save
lives but also substantially reduce the community's
recovery costs. Moderate-level retrofit, when combined
with the new insurance policy, was nearly as effective,
but is more expensive at the community level because more
people would take advantage of it due to the lower cost.
Gupta also looked at a
hypothetical strategy that combines a new 3 percent
deductible insurance with retrofitting. The basic idea is
that insurance companies would give homeowners reductions
of up to 5 percent on their insurance premiums if they
strengthen their houses against earthquakes. Insurance
companies would benefit by lowering their overall losses,
since the retrofitted buildings would suffer less damage,
and homeowners would benefit from reduced premiums.
"This could turn out to be a win-win situation for
both parties," Gupta says.
Gupta's method allows
experts to evaluate strategies from different
perspectives. If saving lives is the highest priority,
for example, then the high-level retrofit is the best
approach. It is also the best choice if the priority is
to improve the efficiency with which the community can
recover after an earthquake. If the major concern is to
reduce economic disruption, however, then the
hypothetical insurance policy looks preferable.
"Because the range of
issues involved are explicitly accounted for, SEC allows
us to identify the best strategies on the basis of real
benefits, not on theoretical ones," she says.
Each strategy
effectiveness chart is developed in three stages:
- Loss and recovery
data are generated for a range of earthquake
scenarios in a given region;
- The data are used to
determine the baseline performance of the area
and to develop a multidisciplinary performance
index;
- The effect that a
given strategy will have on the area's
performance is evaluated based on its cost,
coverage, influence and likelihood of
implementation.
When this information is
combined into a series of tables, SEC clearly identifies
who pays and benefits, quantifies the benefits received
from each investment, and identifies optimal
implementation levels for each strategy.
"This methodology is
intended to provide a foundation for efforts to develop
truly disaster-resistant communities," Gupta says.
SR
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