VULNERABILITY : EARTHQUAKE
Business Interruption in
The Land of Earthquakes critical to assess appropriate
A large Japanese mitigation steps to meet corporate
risk tolerance guidelines.
earthquake could The second step is to consider a
have a devastating wide range of mitigation strate-
gies, ranging from traditional
effect on the continuity insurance products and alternative
of critical industries in risk transfer instruments to
practical engineering and technol-
the country and their ogy solutions. Quantifying the
relative cost-benefit received from
earnings each mitigation action can help
By Dennis Kuzak and optimise the overall risk strategy.
Direct mitigation measures
Masanori Kobayashi include strengthening property
structures, anchoring critical
equipment and using earthquake
A STUDY OF 32 Japanese compa- The Mid Niigata Prefecture 2004 hazard and damage. isolation systems to decrease a
nies in eight critical industries, earthquake, JMA Magnitude 6.8, While the ABS study is not repre- structure’s vulnerability to
published in November 2007 by struck a Sanyo Electric Company sentative of all Japanese compa- earthquake damage. Other
ABSG Consulting, reveals that a semiconductor plant in Ojiya City. nies, it demonstrates how the earn- mitigation measures may entail
very large earthquake could Although the factory buildings ings impact for many industries strengthening the supply chain to
generate property damage were not damaged severely, can be substantial. These risks are minimise business interruption
plus business interruption losses the production machinery was. not theoretical; they are real. risk and establish better
equivalent to two years of One part of the production lines Failure to implement prudent miti- emergency response procedures.
pre-tax earnings for the chemical was closed for two months, and gation options could prove Additional risk mitigation meth-
industry, and more than one year the entire recovery effort took extremely costly. ods may also include traditional
pre-tax in the precision machinery more than five months. Sanyo The study also showed that since insurance products or alternative
and petroleum sectors, in the Electric reported losses related to many of the industries in Japan are risk transfer instruments such as
absence of mitigation steps. Other direct equipment damage of interdependent for raw and catastrophe bonds and derivatives.
industries studied would also approximately 42 billion yen component materials, or related by Several leading organisations in
suffer severe consequences. ($439 million), and a business the just-in-time manufacturing Japan have successfully securitised
Japan is often referred to as the interruption loss of about 31 supply chain, additional their earthquake risk, among them
land of earthquakes. The Japanese billion yen ($290 million.) contingent business interruption the East Japan Railway.
Central Disaster Management According to JMA, there is a losses could add significantly to To limit the potential financial
Council projects that losses from 60-70% probability of a Magnitude the initial loss estimates. impact of earthquakes, and other
these disasters, including property 8.0+ earthquake in the Tonankai Additionally, in large earthquakes natural and man-made perils, each
damage and business interruption, trench within the next 30 years. extensive damage can occur in business must decide which miti-
would be measured in trillions of The Japanese Central Disaster public utility lifelines and other gation methods best suit its partic-
yen (I trillion yen = $9.3 billion). Management Council estimates infrastructure, including railways, ular situation. No one method is
The July 2007 Niigataken that the amount of damage from a roadways and harbour facilities. likely to be a panacea but lack of
Chuetsu-Oki earthquake, defined Tonankai-Nankai earthquake This must also be factored into the careful analysis and action could
as Magnitude 6.8 by the Japan would be 33 trillion to 48 trillion contingent business interruption be financially disastrous.
Meteorological Agency (JMA), yen ($318 billion to $462 billion), exposure analysis.
WEBLINKS visit: www.cat-risk.com
underscores the potentially damag- including business interruption. Japan’s business leaders and risk Earthquake could hit Japanese industries
ing business consequences of large Considering these risks in Japan, managers can reduce the potential hard
earthquakes. It damaged a factory ABS Consulting examined the consequences of such disasters by
owned by Riken Corporation, potential direct physical damage taking two specific steps. Dennis Kuzak is senior vice president
which had a 50% share of the and business interruption loss The first is to initiate a fresh and of EQECAT, a subsidiary of ABS
domestic market for the piston caused by earthquake shaking for detailed review of an Consulting.
rings required by automobile companies in the chemical, organisation’s exposure to Masanori Kobayashi is general
manufacturers. The overall recov- precision machinery, petroleum, potential catastrophes, with manager of the ABS Consulting
ery effort took two weeks, and auto- steel, nonferrous metals, special attention to possible busi- office in Tokyo.
mobile production dropped about automobile, electronic and ness interruption and contingent The complete research report, Earthquake
120,000 units for that period, creat- pharmaceutical industries. The business interruption loss. Property and Business Continuity Risk
Affecting Japanese Industries, can be
ing a significant contingent busi- study used EQECAT’s JapanQuake Understanding the frequency and downloaded from www.absconsulting.com
ness interruption loss. earthquake model to simulate the severity of potential loss is or www.eqecat.com.
18 Catastrophe risk management APRIL 2008 www.cat-risk.com