Unexpected disasters are causing damage in unlikely places, forcing decision-makers in the public and private sectors to prepare for the most common disasters in their region as well as the rare, once-in-a-hundred-year ones. But strategies exist to help decision-makers prepare for the unexpected.
Across the U.S., the average annual total costs of earthquakes is $14.7 billion, with the average earthquake costing between $1.5 to $3 billion. Adopting the latest seismic resilience codes can make buildings more earthquake-resistant and financial instruments can help communities rebuild quickly.
The Epicenter defines infrastructure as the physical, economic, and social systems central to the functioning of an economy and a society. Resiliency in critical infrastructure is about the ability to withstand extreme climate impacts and recover from them quickly.
Across the U.S., the average annual total costs of earthquakes is $14.7 billion, with the average earthquake costing between $1.5 to $3 billion. Adopting the latest seismic resilience codes can make buildings more earthquake-resistant and financial instruments can help communities rebuild quickly.
There are approximately 500,000 detectable earthquakes worldwide each year. Roughly 20% of those, or 100,000 earthquakes, can be physically felt, and only about 100 cause damage. Like many billion-dollar disasters, earthquakes operate according to a power law: a disproportionately small number of events cause a disproportionately large amount of damage. David Applegate, the director of the United States Geological Survey (USGS), said in 2023: “We need to prepare for those rare but large earthquakes, as just one major event can eclipse the costs of the more frequent but smaller ones.”
Approximately 90% of global earthquakes occur along the “Ring of Fire” surrounding the Pacific Ocean, meaning that the states along the West Coast (California, Oregon, and Washington) have the most seismic activity in the United States. According to FEMA, California accounts for 65% of the nation’s average annual losses from earthquakes, and all three West Coast states account for nearly 80% of costs nationally related to earthquakes.
However, while the majority of seismic activity occurs along the contiguous West Coast, $3.1 billion of annual earthquake-related damages occur elsewhere in the U.S.
In this briefing, we examine the drivers and factors contributing to the high costs of earthquake damage and what levers are available to keep costs down, buildings upright, and people safe.
Across the United States, the average annual total costs of earthquakes is $14.7 billion dollars, with the average earthquake costing between $1.5 to $3 billion. Earthquakes are similar to tornadoes in the sense that a direct strike to a metropolitan area will cause more damage than an earthquake whose epicenter is in a rural or undeveloped area.
Building damage is the primary cause of earthquake-related death, injury, and property loss, according to the U.S. Resiliency Council. Unlike other disasters like wildfires, hurricanes, or hail storms where asset exposure and asset appreciation lead to more damages, the damage and costs associated with earthquakes are often reversed. This is because the most expensive buildings tend to be newer buildings, and those buildings are more likely to have been built in accordance with the most recent seismic codes, making them less vulnerable to earthquakes.
As a result, damages from earthquakes don’t follow the causal relationship found in other hazards where expensive assets in harm’s way often leads to higher physical damages. The opposite is true for earthquakes. The greatest risk of damages comes from areas where the built environment is older, less valuable, but more vulnerable to earthquake-related damages.
What makes some buildings more resilient and others more vulnerable? The answer reveals both the drivers that make earthquakes so expensive and the levers that can reduce their cost.
According to FEMA and the USGS, there’s good news and bad news. First, the good news: the U.S. is becoming more resilient to earthquakes by adopting new construction practices, modern seismic codes, and best practices from the latest science and earthquake-engineering research (more on this below).
However, recent earthquakes still show a pattern of “steadily increasing damages and losses.” According to FEMA, this is due to four main drivers:
There are specific levers that can reduce earthquake vulnerability, reduce costs, and ensure that our communities are fortified for the next earthquake, whenever that might be.
Earthquakes are not as destructive as they used to be, in part thanks to improvements in building materials and modern seismic codes. But the levers to reduce the impacts of earthquakes are limited, and they don’t neatly map over to the four levers outlined above. For example, attempting to shift population patterns away from earthquake-prone areas is unrealistic (both practically and because earthquakes are such rare occurrences). In California, for example, people might be more likely to relocate due to wildfires than earthquakes.
There are two main seismic-related levers to reduce the damages and increase the capacity for communities to rebuild after earthquakes.
The biggest and most effective lever to reduce the cost and damage of earthquakes is to make existing and new buildings more earthquake-resistant with resilient construction materials, practices, and reinforcements. This includes:
Every $1 invested in earthquake resiliency translates into $12 of benefit, according to the National Institute for Building Sciences. This figure is calculated by determining the costs saved from adopting more stringent building codes.
Over the last 100 years, changes in building codes—often the result of devastating earthquakes—have increased the required strength and stiffness of new buildings, which has led to less collapse and damage. In the highest-risk areas in the Western U.S., building strength and stiffness has increased by 50% over a 30-year period, meaning that a building constructed to the current code is 1.5x stronger than a building built under the 1988 building code.
However, this 12:1 benefit cost ratio (BCR) is not available everywhere in the United States. The greatest cost-benefit levers are found only in the highest-risk areas.
Consider the map of the United States below from the National Institute of Building Sciences. The darker the blue, the greater the leverage point. Requiring buildings in Detroit to adhere to the most modern earthquake codes would be a less valuable or efficient investment, as compared to the dark blue areas on the west coast
There are several new technologies and innovations in earthquake-resistant construction.
Existing buildings are legally required to adhere to code requirements that were in effect when the structure was designed and constructed. Seismic retrofitting of older buildings is voluntary in most jurisdictions (though some jurisdictions, especially in California, require mandatory retrofits). Old buildings, like unreinforced masonry structures which are known to be particularly vulnerable to earthquakes, are the single biggest contributor to damage from earthquakes in the U.S. today.
Similar to opportunities identified in The Epicenter's hurricanes and severe storms briefings to fortify the built environment, there are numerous private sector opportunities for developers, construction companies, building material manufacturers, Internet of Things (IoT) smart building technologies, and other real estate firms to build new construction up to code and to conduct seismic retrofitting on existing structures.
New parametric insurance policies and catastrophe bonds issued to private investors can more quickly pay affected communities after an earthquake hits.
The insurance company SwissRe has a QUAKE parametric insurance product that issues payments within 30 days of an earthquake for direct property damage, excess operational expenses, lost revenue, and other immediate needs. Unlike traditional insurance, the loss amount is pre-agreed in a parametric insurance policy. The policy pays out when earthquake-related ground shaking meets or exceeds a certain level. The state of Utah is a customer of SwissRe’s QUAKE product and took advantage of it in March of 2020 when a 5.7 magnitude earthquake hit the Salt Lake City area. Per the QUAKE policy, the state received a partial payout within four weeks of the earthquake hitting, helping to cover the immediate expenses associated with the losses.
Catastrophe bonds (CAT bonds) are another form of immediate payout. CAT bonds allow private capital markets to take on the risk of disaster financing in exchange for a premium. They rely on Near-Real-Time (NRT) earthquake information that helps those affected by the consequences of a disaster to access financial capital quickly. Like parametric insurance, CAT bonds are paid out based on proxies of damages—like the magnitude of the event and its location—instead of the precise damages themselves. This approach allows for faster payments to the most affected communities. The first CAT bonds were issued in the late 1990s, offering insurers with access to liquidity of broader financial markets while offering institutional investors (hedge funds, pension funds, and mutual funds), the opportunity to earn returns that are uncorrelated with the returns of other financial markets. The Federal Reserve Bank of Chicago provided the following diagram to outline their structure:
The insurance and financial products available across all types of disasters are getting more precise and more timely. This timing can make all the difference for communities seeking both immediate relief and resources to build with more resiliency before the next earthquake hits.
It is impossible to predict when and where an earthquake will hit. Earthquake forecasts anticipate the likelihood of an earthquake in a region, but there are no effective early-detection systems for earthquakes. The best we can do is build (and adapt) with resiliency in the areas most prone to earthquakes and help communities rebuild quickly in the wake of them. Fortunately, this dual approach is effective. It doesn’t make any place earthquake-proof, but it can ensure the damage is as minimal as possible.
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Unexpected disasters are causing damage in unlikely places, forcing decision-makers in the public and private sectors to prepare for the most common disasters in their region as well as the rare, once-in-a-hundred-year ones. But strategies exist to help decision-makers prepare for the unexpected.
There are no silver bullet solutions for the private sector to adopt to dramatically reduce the costs of winter storms. The biggest lever to bring costs down exists in modernizing and winterizing the grid—an endeavor that will require substantial technological, mechanical, and financial investments.
In just a few hours, a severe storm can cause billions worth of damage. Three levers offer opportunities to enhance resiliency and reduce the costs of severe storms: 1) Invest in more resilient roofing; 2) Adopt more resilient construction practices; 3) Invest in new innovations and technologies.
Population growth in areas prone to severe storms has increased asset exposure and the physical assets in harm's way are not designed to withstand high winds or hail. Meanwhile, building premiums to rebuild after severe storms are increasing.
