Category: Blog
Risk management, earthquake-prone buildings and insurance
How long will the effects of the Christchurch earthquakes be felt? For Christchurch residents, the tangible and intangible consequences may take years to fade. Familiar buildings and businesses will be gone, replaced by the "new normal". But for all in New Zealand, the consequences will have a range of impacts over the next few years.
For example, it is likely local authorities will take a tougher line on earthquake-prone commercial and industrial buildings. Strengthening to higher standards than previously proposed may be required and less time given to start the necessary work. This may dismay some property owners who thought they might have longer or be required to do less.
What might this do to property values? For older buildings needing strengthening, their value may drop if owners calculate the necessary work is not worthwhile. But in some cases, values could go up - the land might be attractive for redevelopment.
And what changes local authorities don't require, insurers may strongly influence through increased earthquake insurance rates and deductibles. For example, a site with five modern buildings, each valued at $10 million, might currently have an excess of 2.5% per loss. This means the owner would pay the first $25,000 for earthquake damage costing $1 million, with the insurer picking up the balance.
But in some parts of the country, deductibles may increase to 5% of the site value. And this will mean the same $1 million damage would carry an excess of $2.5 million (5% of 5x$10 million). In other words, the owner pays for all the repairs.
This assumes good quality, modern buildings. For older buildings, excesses and insurance rates may be higher, with some rates perhaps 20-50% higher. In some cases (eg, pre-1935 unreinforced masonry buildings) it may be impossible to get any insurance. This may make banks and other lenders uncomfortable.
Now try seeing this through the risk management lens. Risk can be characterised by showing how uncertain consequences impact on business objectives. Here the consequences have become more certain and their impact on objectives unacceptable to some - or presenting opportunity to others.
A property owner, focused on building a portfolio of older commercial buildings with a steady return on investment, may see such change as making investment less attractive. And those who like diversity in urban landscapes and who value heritage buildings may seek help with their retention through public policy responses.
For all businesses, there will be other consequences of the 7,000+ Canterbury earthquakes; some obvious, some raising questions.
- Stories abound of business owners unable to access their businesses in the "red zone". How much will this make more people think about contingency plans - how to keep customers, maintain cash flow and continue the business after a major event?
- Will "smart phones" be used to carry such plans, so reducing dependency on paper plans? But will such phones always be carried by their users?
- Will security concerns prevent people from using cloud computing, one business continuity solution whereby business data can be accessed from anywhere?
- Will e-commerce accelerate, such that loss of a physical "shop-front" is less important, even irrelevant?
- Will businesses want to be neighbours with any of the 3,000+ unreinforced masonry buildings (the most dangerous in an earthquake)? Their own buildings may survive intact but the neighbouring building may have collapsed across doorways.
- How will planned expansion elsewhere in the country proceed if the focus of the construction industry is on rebuilding Christchurch?
Answers to some of these questions will help drive innovation in how we do business. And in the next two years or so insurance, legislation and standards will undergo changes due to lessons from the earthquakes. This too creates more uncertainty. And more risk. And more opportunity.
Chris Peace