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.

The Hypothetical Scenario:

Just after lunch on a summer Wednesday, more than 20 million people in Los Angeles feel the vibration underfoot. Immediately they know it is a major earthquake. Most people have felt distant or small tremors before. But this time they recognize the strong vibrations and the noise. The 30 seconds of shaking seems to last forever. This is no localized tremor.

High-rise office towers sway dangerously from side to side. Workers hold on to their computer equipment to prevent it from falling off their desks. Down below, drivers struggle to control swerving ears. After the sharing stops, there is a short silence. Outdoors, car alarms are going off across the city. Ta the south of downtown Los Angeles, a cloud of dust rises slowly into the Southern California sky. Office workers try to search the Internet for news but no sites are available. As they surf the Net, the power goes out. Many reach for their phones but the phone lines go dead. Cell phones show no networks are available. Managers walk through the offices telling everyone to go outside to their rally points.

News is coming through on car radios that the earthquake was a magnitude 7.0 centered in southern L.A. county, some 20 miles south of downtown Los Angeles. Some buildings have collapsed in the communities of Compton and Long Beach. Damage is being reported along stretches known as the Long Beach Freeway and the Harbor Freeway. Scientists from the United States Geological Survey have attributed the quake to a rupture of the northern segment of the Palos Verdes fault system. Emergency services rush to the area.

Coastal towns from Santa Monica in the north to Newport Beach in the south have suffered damage. The ground is deformed in many places and soft from steep slopes has slid into canyons.

EARTHQUAKE KILLS 400

Casualties are relatively light, given the amount of damage to buildings and infrastructure. A total of 400 people are feared dead and more than 3,000 people are injured. Many of them are employees injured in the workplace by falling equipment as well as collapsed partition walls and ceiling panels. Many people running out of buildings have been injured by falling debris. Ten people are reported to have been crushed in a shopping center by heavy building panels that came loose. Others are injured in car accidents. A few older structures have collapsed, including an eight-story office building occupied by a bottling company. Twelve people are pulled out alive, but another nine bodies are recovered. As many as 30 employees are missing. Search-and-rescue teams work into the night to cut through floors of pancaked concrete.

The high-rise buildings in downtown Los Angeles have escaped serious damage this time. But in the towns to the south and west, hundreds of thousands of buildings are damaged, including major commercial buildings. Tens of thousands more suffer lighter damage, but will require engineering surveys before they can be declared safe for occupancy. Repairs will take months. Many businesses face the challenge of trying to find suitable temporary office space.

PORT SINKS INTO ECONOMIC SLUMP

There has been extensive liquefaction and ground deformation around the port facilities. Areas around the Port of Los Angeles in particular are badly damaged. Container cranes, storage tanks and machinery rest at odd angles, as their foundations have slipped in the softened ground. Landings, berths and cargo terminals have also been damaged as their perimeter and retaining walls have moved and tilted. Bridges leading to Terminal Island are also closed pending detailed structural investigations. As all access to the port is impaired, non-essential workers are asked to go home.

The industrial areas of southwest Los Angeles Comity and Long Beach have suffered intense ground vibrations. The damage is heavy. Storage tanks and pipes have fractured. Emergency teams are dealing with hundreds of leaks. Minor fires are brought under control and extinguished. One fire in a tank farm takes two days to put out, even with dozens of firefighters. Some of the largest water treatment plants in the United States are badly damaged. There are reports of damage to power stations in Redondo Beach and Long Beach.

Los Angeles International Airport runways are cracked, and several terminal buildings have suffered damage. The crippled airport can only operate at very limited capacity.

With the exception of one section of the Harbor Freeway that slipped from its abutments, most of the major bridges appear to have remained in place, having been seismically retrofitted over the past decade. However, roadway cracks and differential settlement resulted in several arteries being closed to traffic in the southern part of the county. Faced with total gridlock, tens of thousands of drivers set out for the long walk home.

Electrical power is out across the whole city and is gradually restored to different parts over the next 72 hours. The Los Angeles central business district has power restored 24 hours after the earthquake. Managers attempting to restore business operations on Friday morning find, however, that they have no water services. Another day is lost.

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

RELATED ARTICLE: Orders of magnitude.

Despite intensive preparations and contingency planning, risk managers typically list earthquakes among their concerns. Besides the obvious concern about the performance of their own facilities, risk managers understand that the recovery of their businesses is also highly dependent on the survival of the transportation network, the utilities and communication systems.

Risk Management Solutions first developed a catastrophe model for earthquake loss in 1988 and has updated and revised this model several times over subsequent years to reflect new research. The model simulates 42,000 earthquakes that represent the frequency and severity of earthquakes likely to cause significant loss across the United States. It incorporates the latest view of seismic hazards published by the United States Geological Survey and leading academic research institutions. This model has been used to assess the 1 percent probability of loss occurring from earthquakes in the United States.

We have chosen to illustrate the impact of a sizeable earthquake defined by a 100-year economic loss return period and occurring close to a major city.

The magnitude 7.0 Palos Verdes event--the one described here--has a major impact on business activity and is of direct relevance to risk managers in understanding how disruptive catastrophes can impact their businesses.

Southern California is home to more than 20 million people and is a vital region for the U.S. economy. Key manufacturing, defense, high technology and financial institutions are based in Southern California. To support its economy and trade, the region has built one of the most complex networks of transportation and lifeline systems in the world, including highways, bridges, ports end airports, power and water systems, and communication networks.

The magnitude 7.0 on the Palos Verdes fault is not "the big one" that Californians have heard about. The losses from this event would be relatively moderate compared with a magnitude 7.3 quake on the Newport-Inglewood fault (total losses around $175 billion) or a magnitude 7.0 on the Puente Hills fault that cuts through downtown Los Angeles and is expected to cause losses in excess of $210 billion.

However, the losses from the magnitude 7.0 Palos Verdes earthquake would still be more than twice those of the Northridge quake in 1994. Economic losses, including secondary losses such as business interruption and loss of income, would be around $100 billion--of which about $27 billion would be assumed by the insurance industry (compared with $15 billion in the Northridge quake).

Due to the complexity of business interruption coverage one should expect a difficult process for the settlement of business interruption claims. Many companies are expected to wake up to the reality that their business interruption coverage may not be adequate because they have not considered such external factors. At the same time, insurers may have difficulties tracking data and understanding their liabilities from such an event due to cumulative claims coming from coverages such as business interruption, fire, workers' comp and general liability.

Depending on the time of the earthquake, casualties can vary significantly. An occurrence in the middle of the day would cause the most casualties with about 400 people dead and 3,600 injured. There is uncertainty around the total number of casualties depending on the number of building collapses and industrial accidents, including fires and toxic releases, and the ability of the fire fighters to control such events.

Looking at the urban growth that has taken place in California since the 1933 Long Beach earthquake, one can start to comprehend the significant impact a larger and more destructive Palos Verdes event could cause to Southern California. Scientists have yet to develop reliable tools for predicting earthquakes, but have made remarkable progress in understanding their mechanisms and in quantifying their impacts. With this knowledge, risk managers and executives, insurers and the public can develop preparedness, contingency and mitigation plans to reduce their losses and speed up their response and recovery from major earthquakes.

While Southern California, especially the Los Angeles area, is considered one of the most prepared communities in the world, the powerful nature of earthquakes coupled with the complexity of urban systems and infrastructure require careful planning and constant attention.

--Fouad Bendimerad

FOUAD BENDIMERAD, PHD., P.E,, is a principal scientist at Risk Management Solutions. He has 20 years' experience in catastrophe risk analysis and management. He is chairman of the United Nations Earthquakes and Megacities Initiative and has authored reports and articles on earthquake risk.