This week, a 5.5 magnitude earthquake struck Canada, with its epicenter at Ottawa, Canada’s capital city. Tremors from the quake were felt as far away as Ohio, Vermont and New York City. With attention justifiably focused on the developments in the Gulf Coast, this event was largely overlooked. But it serves as an important reminder to train all of your employees on the basic response to each major natural disaster, even if you believe that your business is located in a “safe” area. After all, we typically associate earthquakes with California or Japan, but that is not a safe assumption. Indeed, businesses in those locales are more likely to be familiar with safety procedures as they recognize the risks.

You can reduce the risk of injury due to tremors or other seismic activity by bolting heavy furniture to the office walls and ensuring that drawers and cabinet doors securely close, so that they don’t spill their contents out. I have a very heavy desk and wall unit which I bolted to the walls as I didn’t want the items to tip and fall on someone. Thankfully, I have not experienced an earthquake in my office, but as the tenants above me often stomp around and blast their stereo system, I often do experience the walls shaking, so I am glad to have taken the precautions!

Banking on Rebirth

On page 140 of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition paperback, 2009), I informed readers that when the President declares a federal disaster, early withdrawal penalties on time deposits are waived as residents and businesses will need additional cash resources to recover. Many banks are unaware of this requirement, so I recommended that if your bank is not, get the cash as soon as you need it and seek reimbursement of any early withdrawal penalties, time permitting, when you are further along in your recovery efforts. I also recommended that you immediately request forbearance on any and all loans and credit facilities. In disaster recovery mode, you will need every inch of breathing room you can get.

So I was delighted to read that Bank of America is putting into effect a disaster relief program in the 42 Tennessee counties designated federal disaster areas by the Federal Emergency Management Agency. The Bank’s disaster relief program provides that small businesses in the affected counties may qualify to avoid early withdrawal penalties on bank certificates of deposit. They may also receive emergency credit line increases on their bank credit cards and may modify or extend payments on loans, credit cards or lines of credit. This is exactly the way to proactively help small business customers in the aftermath of a disaster.

And may I make an additional suggestion to the Bank of America? In the aftermath of a disaster, many small businesses with otherwise pristine credit histories will develop blemishes on their credit reports though no fault of their own. The business will inevitably have some customers that were unprepared for the disaster and will be delayed or default entirely on their obligations, causing some strain on the business. This is the time for banks to show some flexibility and take these factors into consideration for loan applicants.

At a time when bashing banks has become politically fashionable, we should remember how they support our communities. In banking on Tennessee, Bank of America is being true to its roots. A.P. Giannini, the founder of Bank of Italy, the institution that is the predecessor to the Bank of America, saw the opportunity represented by the devastating San Francisco earthquake of 1906. As other banks succumbed to panic, his made emergency loans to customers, mostly immigrant owned businesses, earning the bank their loyalty. This cemented the Bank’s position as a leading financier to the film and wine industries in northern California.

Not Unique to California

On April 4, a 6.9 earthquake struck Baja California, Mexico, causing high-rise buildings in San Diego and Los Angeles to sway. No fatalities or serious damage were reported, but the event was a wake-up call to remind Californians of their vulnerability. While the earthquake’s epicenter was a rural area, a comparable quake just 70 miles north would cause massive destruction of homes and infrastructure. Yet only 12% of homeowners and small businesses carry earthquake insurance. Inadequate insurance coverage is likely the consequence of both ignorance of the nature of disaster relief aid and concerns about the high cost of coverage. Insurance generally excludes earthquake coverage, but many people may mistakenly believe that they are covered or, if not, that the Federal Emergency Management Agency (FEMA) will assist them should an earthquake strike. Not all disaster victims will qualify for FEMA aid and those that do will find it is mostly low-interest rate loans that must be repaid. Then of course there is a time delay in receipt of the aid and a significant process involved in applying for it. Insurance is a surer bet. But it can be expensive. The state-run California Earthquake Authority provides coverage, but the average policy has a 15% deductible, which must be satisfied before the first dollar of benefits would be paid. Californians should think carefully about their coverage options. It is one thing to elect foregoing coverage (and to set aside savings to replace damaged assets); it is another thing entirely to fail to educate yourself and later find that your assumptions about insurance coverage were incorrect.

Seismically Active Pacific Ring of Fire

The earthquake that struck Chile on February 27 was an 8.8 magnitude event, making it one of the most powerful in history. The earthquake killed hundreds of people and damaged more than one million homes. Preliminary estimates suggest economic losses in excess of $15 billion, with one quarter to one half of those losses covered by insurance. Even without taking into consideration the consequences of the follow-on quakes, this is likely to be one of the most expensive disasters for the global insurance industry. Chile is at particular risk for its location along one of the most active seismic zones in the world, the Pacific Ring of Fire. During my lifetime, Chile has experienced 13 earthquakes of at least a 7.0 magnitude, but most were removed from populated areas. Chile is well prepared to withstand earthquake shocks; it has appropriate building codes and a developed insurance market Indeed, even though the Chilean quake was 500 times more forceful than that of Haiti, it sustained several hundred casualties as compared with 250,000 in Haiti. It will likely take at least four years for the Chile to rebuild, owing to significant losses to its economy. With a recent seismic event in Turkey, this is a sad reminder that natural disasters pose the greatest risks to those with the least to lose.

Seismologists have measured minute movements within two massive tectonic plates over 25 miles below the Puget Sound basin of Washington State. Analysis of these tremor patterns, called “episodic tremor and slip”, suggested that an earthquake on the order of magnitude of 9.0 on the Richter scale, possibly followed by a tsunami, could strike much closer to Seattle than was indicated by earlier disaster scenario models. The most powerful earthquake ever to strike North America, the Great Alaska earthquake of 1964, measured 9.2 and resulted in a tsunami that struck that struck the northwestern United States. The 1906 San Francisco earthquake, the benchmark for earthquake fatalities, is believed to be an 8.3. The take-home message is that our understanding of catastrophic risks is changing owing to new threat scenarios. It is best not to assume anything based on geographic locale and instead prepare for the everyday disaster, which is the universal experience.

From Zurich to Milan

Yesterday, central Italy was struck by an earthquake which registered 6.3 in magnitude on the Richter scale. Nearly 150 people are believed dead as a result of the tragedy, which is Italy’s deadliest earthquake since November 23, 1980, when a 6.9-magnitude quake hit the southern part of the country, leveling villages and causing about 3,000 casualties. Emergency responders in Italy have reported strong aftershocks in the affected region. Compounding the tragedy is that relief aid to effectively respond to a disaster of this magnitude is limited by the weak economy. The American Red Cross has set up a site to collect donor contributions for this critical need.

The photograph accompanying this blog entry is one I took when I lived in Switzerland, showing the Cisalpino, the high-speed train that connects Zurich to Milan. As a senior executive of Swiss Re, I often had occasion to travel to Italy on business and of course, I also enjoyed spending weekends in Milan, Florence, Venice and Rome. I have very fond memories of my time in Italy and have contributed to the Red Cross’ relief efforts.

My former employer, Swiss Re, hosted a forum to discuss the issues around the New Madrid Seismic Zone. This area in the Midwest includes Memphis and St. Louis and while the probability of a major New Madrid earthquake is less than that for one in the San Andreas Fault zone, the catastrophic consequences in the Midwest are potentially greater than those of California. This is, in part, because of the economic dependence on transportation systems, power infrastructure and other critical facilities in that area. Experts believe that the loss potential of a major earthquake at New Madrid could range from $80 billion to $200 billion in damages. Indeed, over a period of just under two months in 1811 – 1812, three major earthquakes of a 7.7 magnitude occurred in New Madrid. This was the last major seismic activity in that area and it was second in severity only to the 1906 earthquake in San Francisco.  By comparison, the Northridge Earthquake measured 6.7 on the Richter scale.  Isn’t it extraordinary to think that an earthquake in the Midwest, an area we don’t typically associate with that peril, exceeded the strongest severity U.S. earthquake in our lifetime?

One of the speakers at the Forum was Chris Cramer, PhD and Research Associate Professor at the Center for Earthquake Research and Information, who made a number of interesting observations concerning the differences between New Madrid and San Andreas. It is more difficult to collect data from the New Madrid Zone, as the surface fault lines are not as readily available to study as they are in California. Dr. Erdem Karaca of Swiss Re added that, the challenges in collecting complete data notwithstanding, it is known that the soils of the Midwest are very different from those of California, with a greater risk of damage due to liquification, which often results in building settlement damages. Another concern raised by Mr. Michael Griffin, PE, a structural engineer with the CCS Group Inc., is that building construction methodology and local building codes are less robust, with respect to earthquake safety, than in California. In California, many of the more vulnerable buildings have been replaced with structures that are more resilient to seismic shifts.

Moreover, earthquakes originating in the Midwest may travel farther than would be possible in California, owing to the fact that the earth’s crust is older and more stable in the New Madrid Zone. For example, an earthquake with an intensity of 7.0 in San Francisco may cover 12,000 square miles, while the same earthquake intensity at New Madrid may cover 203,000 square miles. This larger zone impact brings additional challenges to coordination among emergency responders. In his presentation to the Forum, Jim Wilkinson, Executive Director of Central U.S. Earthquake Consortium, noted that the New Madrid Seismic Zone covers four FEMA zones, eight states and nine bordering states. The Central United States Earthquake Consortium was formed to help coordinate various governmental and private activities related to the New Madrid Seismic Zone. Mr. Andy Castaldi, Senior Vice President of Swiss Re and Head of Cat Perils in the Americas, moderated the Forum. In the near future, I will invite an expert to contribute a guest blog on earthquake risks for the benefit of our small businesses in the Midwest.