Science into Policy Options for Risk Mitigation in Developing Countries

1. Science into PolicyOptions for Risk Mitigation in Developing Countries What Works and Does Not Work in the Science and Social Science of Earthquake Vulnerability Oxford Meeting 28 & 29 January 2011 Andrew Coburn Senior Vice President, Risk Management Solutions

2. Where can science add most value in the mitigation of risk?

3. Earthquake Destruction is a Development Issue

4. Who Pays and How is it Spread? Financial Industry Exchequer Tax payers Sovereign Wealth Funds Public Sector Government Central & Local Capital Markets Global Reinsurance Industry Private Finance Corporate Property Insurance Business Interruption Insurance Group Injury Insurance Private Sector Corporate Industry Companies and corporations Insurance Industry Personal Savings Homeowner insurance Micro Insurance Individuals Families After a bad earthquake somewhere in the world your car insurance premium goes up

5. The Development Trap • Emergent economies invest in infrastructure (roads and utilities) and property assets (factories and cities) which are then at risk of destruction from a natural disaster • Emerging economies generally invest in lower cost assets than those in industrialized countries, so are less robust and more vulnerable to damage • Investing in robustness for disaster resilience is more difficult to justify when boot-strapping economic growth with capital at a premium • This is both the constraints and the opportunity for private market stakeholders in catastrophe risk: • Insurance contributes to economic resilience by providing additional capital • Insurers also can provide know-how to improve the resilience of the property assets that need protecting

6. The Emerging Insurance Markets Swiss Re, Sigma ,2006 Example countries in the Emerging Markets: PR China India Brazil Russia Chile Pakistan Mexico Costa Rica Colombia Turkey Romania Philippines Iran Serbia & Montenegro Guatemala Indonesia

7. An Example: Addressing the New Deadly Vernacular The 20thCentury Earthquake Killer The 21st Century Earthquake Killer Old, vulnerable masonry buildings Poorly-built RC MRF structures 80+% of EQ deaths in 20thC 20-40?% of EQ deaths in 21st C Collapse at MMI IX: 10-60% Collapse at MMI IX: 2-25% Low Ave Occupancy: 2-10 people High Ave Occupancy: 5-100s of people Construction cost: X Construction cost: 10-100X

8. Missing Ingredient: Skill • Built by local building contractors to standard templates with very little professional engineering design or supervision • Design and construction quality is not policed in any meaningful way: municipal control systems are minimal • ‘Codes’ are meaningless • Vulnerable faults include • Poor structural form, soft storey • Undersized structural members • Reinforcement detailing • Concrete quality, etc. • Appreciation of value of QA roles – clerk of works, inspector • Education & professional proficiency Putting together programmes to address these requires costly investment decisions and complex administrative systems

9. Metrics of Mitigation: The disasters that haven’t happened “Building a culture of prevention is not easy. While the costs of prevention have to be paid in the present, its benefits lie in a distant future. Moreover, the benefits are not tangible; they are the disasters that did not happen…” Kofi Annan, Secretary General of the United Nations, 1999 Mitigation benefits could become more visible through scientific concepts of risk Risk is a complex and largely invisible concept Risk metrics have become common tools for supporting decisions in the financial services industry that trades risk

10. Economic Resilience Against Disaster • Economic growth is the most important factor in disaster mitigation, providing society with the resources to protect itself and build a stronger and more resilient environment • Improving the reach and scale of societal wealth creation is an important objective for those of us who want to increase the effectiveness of mitigation • Financial support to emerging economy governments • Government post-disaster borrowing could be better budgeted as pre-disaster saving plan (like major corporate risk management) • Sovereign wealth access to international pools and risk swaps • Catastrophe bonds in capital markets • Government support to emerging insurance markets • Encouragement of citizens to protect themselves • Micro-insurance and micro-finance for lowest income and most vulnerable • Government endorsement, plus strict regulation, to increase trust • Follow policies of empowering individuals to protect themselves rather than promoting dependency culture

11. Risk Assessment Frameworks Are Fundamental to Mitigation Activities They are key to the ‘business case’ for investment in mitigation They facilitate a rational benchmark for public safety standards They underpin the economics of financial engineering for funding recovery and spreading the risk

12. Financial Economics: Risk Framework Uncertainty Occurrence Parameterization – location, frequency, magnitude and source characteristics of future events Spatial Impact Estimation – Geography of ground motion, attenuation, frequency and Vulnerability Assessment – likely levels of damage to different types of buildings resulting from ground motion Inventory Audits – number and types of physical infrastructure and buildings, where they are, type and quality Damage Costing – repair and reconstruction costs, loss productivity, variation in future supply and demand, economics and social impact Financial Engineering – admin costs, risk loadings for uncertainty, premium pricing, net present valuation High Med High Med Low Med Assessing the Frequency and Severity of Loss:

13. Uncertainty – Where Science Can Add Most to Policy • We don’t need to know everything to structure good mitigation decisions • Financial engineering adds loadings for uncertainty • We need to • Assess what we really know • Give a rigorous and honest assessment of what we don’t know • Science should help us assess: • How incomplete might historical catalogues be? • Uncertainty levels around location of faults • Uncertainties around assessments of activity rates • Uncertainties around loss modeling assumptions • Identify other areas of greatest uncertainty in risk frameworks

14. Conclusions Risk assessment frameworks facilitate the transfer of scientific knowledge to effective mitigation actions There are major areas of uncertainty that reduce the willingness and ability of participants in mitigation Science should address the greatest areas of uncertainty Once of the greatest areas of uncertainty is assessing the level of uncertainty Help us know what we don’t know…