FINANCIAL RISK MANAGEMENT FOR NATURAL CATASTROPHES

Proceedings of a Conference

Sponsored by

AON GROUP AUSTRALIA LIMITED

Edited by

Neil R. Britton

Emergency Management Policy and Establishment Unit

Department of Internal Affairs

Wellington, New Zealand

and

John Oliver

Emeritus Professor of Geography

James Cook University of North Queensland

Australia

GRIFFITH UNIVERSITY

Brisbane, QLD 4111

Australia

Financial Risk Management for Natural Catastrophes. 1997. Edited by Neil
R. Britton and John Oliver. Proceedings of a Conference sponsored by Aon
Group Australia Limited

MAKING PROGRESS WITH BUSINESS CONTINUITY PLANNING

FOR NATURAL DISASTER MANAGEMENT

Neil R. Britton

ABSTRACT

The number and type of disasters and their costs continue to increase.
In the natural disaster context, one sector of society in particular,
the business community, has recently become a focal point for
researchers and insurers. A new advisory group - the business continuity
planner - has evolved to assist the business community confront natural
disaster issues. Despite the name, contingency plans offered by the
majority of business continuity planners tend to direct attention to
business survival rather than continuation. Typical approaches centre on
internal organisational mechanisms, such as encouraging senior
management buy in, developing emergency preparedness procedures, or
staff training programs. However, in the context of natural disaster
impact, a recent hazard shift within the research community reveals
additional external factors that are at least as important with respect
to business survival and continuity. These external factors have not
been firmly embedded within the business continuity planning framework.
This paper compiles some important external factors that recent disaster
research has revealed, and which provide a fuller explanation as to why
some businesses become victims of disaster. These findings provide
further encouragement for the insurance industry to continue taking a
more holistic approach to risk management.

THE CHANGING DISASTER WORLD

The number of natural and technological disasters, and their associated
global and economic costs continue to rise. A comparison of the decade
1986---1996 with the 1960s reveals a quadrupling in the number of major
natural disasters over the period. After allowing for inflation,
economic losses were eight times higher, while insured losses increased
fifteen-fold. Moreover, a reduction in this trend is not to be expected
in the foreseeable future. Figures compiled by Munich Re (1997) indicate
that the world suffered losses of more than \$US60 billion from natural
disasters during 1996, of which \$US9 billion was insured. Munich Re
registered 594 natural disaster impacts in 1996, a similar figure to
both 1994 and 1995, when there were 597 and 579 recorded impacts
respectively. During the 1996 period 12,000 fatalities were directly
attributed to natural disaster impact. For the same period, Asia was the
most severely affected continent, accounting for 31% of loss events, 80%
of casualties and 61% of economic losses. The USA suffered the most
insured losses with 81% of the total. Windstorm and flood accounted for
62% of all natural disasters, 85% of casualties, 90% of economic losses,
and 90% of insured losses (Munich Re, 1997).

On the technological hazard front, the situation appears to be a little
brighter. As a rule, major technological disasters seem to occur less
frequently than their natural counterparts. Yet, when they do, they have
similar, albeit different, far-reaching implications. In his most recent
analysis, Hewitt (1997) reports that in the five year period 1989 to
1993, an average of 110 serious technological disasters were reported
each year. This, according to Hewitt, can be 'taken to represent the
situation in the late twentieth century' (Hewitt, 1997, p.93). Three
major categories of technological accidents stand out: mass passenger
transport accidents, structural fires, and industrial/manufacturing
accidents (these are set out in Figure 1).

## Figure 1. Major categories of technologically-related disasters, 1989-1993.

(See included file)

Almost two thirds of the total major technological emergencies relate to
mass passenger transport accidents. Of these almost a quarter were as a
result of commercial aeroplane accidents. A more recent assessment
(Shapiro, 1997) indicates that from August 1996 to August 1997, 20
jetliner crashes occurred throughout the world, amounting to \$US647
million in huff losses. These two categories of technological hazards
tend to be uniform throughout the world. By comparison, major property
damage and/or deaths from structural fire is, in the main, a
'developing' nation problem, and where Asia predominates (international
Federation of Red Cross and Red Crescent Societies, 1996, p. 126).

In 'developed' nations, such as New Zealand, structural fires have been
declining systematically as a specific hazard agent. In New Zealand, a
14.2% decrease in the overall number of fires was recorded during the
1991--1996 period. A clearer picture can be discerned from the
1993--1996 period, where a 68% decrease in the number of structure fires
has been recorded (New Zealand Fire Service, 1997). While this downward
trend is welcome, it nevertheless can introduce unintended consequences.
In the New Zealand context, this has manifested in the form of major
industrial disputes as the fire-fighting sector undergoes reform to
reposition itself to changes in the external environment.

Similar to natural disasters, however, technological disasters directly
affect the economic life or credibility of business enterprises. They
cause lost productivity and usually reflect failures of administrative
responsibility and control. They threaten public confidence. Moreover,
with technological hazards, in particular, there is growing concern over
their cumulative impacts upon the environment and public health, These
effects draw businesses into broader debates about risk, which the
business enterprises community rarely succeed in winning (Hewitt, 1997).

The figures for both natural and technological hazard impacts lead one
to reflect on the vulnerability of our way of life, especially with
respect to increasing urbanisation and its concentration of people,
services and economic activity. The United Nations estimates that in
1950, about 30% of the world's population - then about 2.5 billion -
lived in cities. Now, about 45% of the world's 5.7 billion people live
in cities. This number is predicted to increase to more than 60% of an
estimated total population of 8.3 billion by the year 2025. At the same
time, the number of cities with more than 1 million inhabitants has
grown to 325 today, from 83 in 1950 (figures cited in Institution of
Civil Engineers, 1995). The growth in urbanisation has been particularly
a feature of major population concentrations of the developing world,
especially Asia.

Moreover, large population centres are spreading into, or consolidating
themselves around, highly exposed areas, such as, along rivers exposed
to flooding; along coasts exposed to storm surge, tropical cyclones and
other severe storms; and in areas exposed to landslide, rockslide,
earthquake, wildfire, and avalanche. At the same time, cities, as a
physical entity, exacerbate the hazards of nature in several ways,
including:

-   Intensifying storm systems due to thermal convection above warm
    cities.

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-   Increasing the exposure to flooding, as most of a city's area is
    sealed with concrete and asphalt, leaving much of the rainwater
    running above the ground.

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-   An increased loss potential of extreme hailstorms because of the
    concentration of both commercial and residential property.

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-   An increasingly frequent occurrence of lightning strikes because of
    towering buildings with masts (Munich Re, 1997, p. 10).

BUSINESS CONTINUITY PLANNING

Putting these issues into perspective, Frost (1994) has combined the
results of a number of surveys conducted in the UK that, among other
material, elicited information on business disruption causality. This
information is depicted in Figure 2. Frost has defined 'natural
disaster' (25% of the total) as incorporating events such as fire,
flood, storm, lightning, and epidemics of food poisoning. Frost defines
'deliberate acts' (23% of the total) to include bomb hoaxes (which Frost
informs us were almost all made by disgruntled employees) and sabotage.
The final category, 'accidents' (52% of the total) include badly
installed electrical systems, building or floor collapses, and the like.

Another source using different categories is provided by Comdisco, a
global commercial enterprise specialising in technology services
including business continuity planning (see Figure 3). This information
reveals that almost half (44.5%) of the 3048 cases of business
disruption cited originated from natural hazards. Unfortunately,
information of this type is not available for either Australia or New
Zealand.

Infrastructural Vulnerability and Utility Lifeline Failures

In addition, dwellers and business houses in large cities are more
dependent on an increasingly complex and inter-dependent infrastructure
comprising electricity, water, gas, transport and communications. These
infrastructural types are referred to as utility lifelines. Utility
lifelines are one of three inter-related lifeline groups: utilities, key
facilities, and structures (Britton, 1993). These lifeline groups
comprise the fundamental infrastructure of a modern city. Specifically,
utility lifelines

> Figure 2. Causes of business interruption in the UK.

(See included file)

comprise the transportation network, which includes the various types of
mass transit options (road, rail, air, sea) and their specific physical
infrastructural features, such as: terminals, bridges, tunnels, roads,
highways, tracks, and tarmacs; water supply, sewerage, garbage
collection and disposal; waste water systems; gas and oil pipelines;
power generation, transmission and distribution systems; communication
facilities (telephone, radio, television, internet, newspapers); and
other similar tangible assets.

To complete the picture, key facility lifelines comprise emergency
service systems and networks, such as: police, fire and ambulance
stations, local authority emergency management offices, and allied
resources such as hospitals. Structure lifelines denotes facilities,
such as: the wider medical-care network, food distribution networks,
schools, auditoriums and other building or service resources that are
likely to be called upon to house, feed, or otherwise assist an impacted
population in the disruptive period following disaster.

Numerous disasters over the past ten years, in particular, the 1989 Loma
Prieta earthquake in San Francisco, USA, the 1994 Northridge earthquake
in Los Angeles, USA, and the 1995 earthquake in Kobe, Japan, have shown
how vulnerable the utility lifelines of major cities are to breakdowns,
and how acute shortages in supply can develop within

Figure 3. Causes of business disruption (global selection).

(See included file)

very short periods of time. Within this context, almost every commercial
endeavour is also increasingly dependent upon a perfectly working
infrastructure, and hence, on the continuity of utility lifeline
services. The corollary to this is that commercial enterprises are
particularly vulnerable to major disruption, from a business continuity
perspective, when utility lifelines fail. The realisation of
infrastructural vulnerability, the consequences of the failure of
utility lifelines on businesses, and the relationship between businesses
in the disaster impacted environment that can result in business
discontinuities are, together, examples of a new hazard shift that is
currently taking place within the disaster research community.

Hazard Shifts

A hazard shift is the term given to different threats and their risks
that come to dominate collective thought at certain points in time
(Britton and Oliver, 1993, p.36). The commencement of a hazard shift can
often be a particular dramatic event, or series of similar dramatic
events that are atypical, unfamiliar, or in some way become connected
for the first time.

An example of a recent hazard shift is the realisation of threat from
technological hazard. A series of high technology mishaps, starting in
the late 1970s with the Three Mile Island nuclear power station
explosion, mobilised public opinion on, and concern about, technological
and ecological disasters. This event was closely followed by others:
Bhopal, Chernobyl, *Exxon Valdez* and Braer, interspersed with major
transport accidents involving jumbo jets, rail crashes and ferry
capsizes. Although technological risk and industrial society have always
gone hand-in-hand, it was not until these events occurred in close
temporal proximity, that public, followed by official, concern was
expressed. All these events were high impact and highly public events,
especially with respect to world media coverage. Until then, the word
'disaster' was more or less synonymous with natural hazard impacts
(which were often regarded as, 'acts of God'), at least in the minds of
most citizens and their political decision-makers.

A still more recent example of a hazard shift, and one which is the
subject of this paper, is the growing realisation that a particular set
of external events can have a major impact on the business survival of
an economic enterprise. This shift focuses on organisational
inter-dependency factors. More specifically, the focus is directed
toward understanding the significance of the inter-dependence between a
business unit and the consequences of failure of other business units
that are linked in an input-output relationship. An increasingly common
cause of enterprise cessation within this inter-dependency scenario is
the failure of utility lifelines during disaster impact.

The three earthquake events mentioned above (Loma Prieta, 1989;
Northridge, 1994; Kobe, 1995), individually and collectively, were
catalysts for this specific hazard shift. In essence, the Loma Prieta
earthquake created the initial awareness, which the latter two disasters
reinforced, first amongst the research community, and then amongst
utilities, local authorities and emergency managers. Loma Prieta created
an awareness that an entire area of knowledge had been comparatively
neglected in terms of understanding its overall consequences in the
disaster impact environment. In New Zealand, as elsewhere, considerable
work has been undertaken to fill this void (refer Centre for Advanced
Engineering, 1991; Wellington Earthquake Lifelines Group, 1993, 1994,
1995).

Another step in the consolidation of this hazard shift, commenced in the
early

mid 1990s when researchers at the Disaster Research Centre (DRC),
University of Delaware, started assessing the affects of the 1993 floods
in the USA midwest and the 1994 Northridge earthquake on the business
communities in the affected areas. More particularly, the DRC studies
focused on issues of inter-dependency and the significance of utility
lifeline failures on business continuation. Although research on
business organisations has understood the significance of
inter-organisational relations for a long time (see for example, Evan,
1966, 1976), the relationship between business interference within the
disaster context had not been systematically analysed.

While not a focus of their attention, the DRC studies nevertheless also
shed new light on important aspects that have been overlooked by
conventional business continuity planning. In many respects, the DRC
studies build on the implications of what economists refer to as
co-ordination failure: that is, where one business fails because of the
failure of others as a result of the inter-connectivity between them. In
this respect, coordination failure is similar to Weick's (1976) concept
of tight coupling, which has been widely applied in the organisational
analysis field. The salient findings of the DRC studies are summarised
in the second half of this paper. A short summary of the conventional
business continuity approach is provided first.

BUSINESS SURVIVAL: WHAT CONTINUITY PLANNERS SAY

In recent years there has been a proliferation of publications providing
information and advice on how to reduce disaster-related damage to
businesses. One primary source of this information is governmental
agencies that provide 'how to' manuals. The three-volume set produced by
Wellington City Council's Emergency Management Office is an example of
this (WEMO, 1995a, b, c). These manuals have subsequently been
reproduced throughout New Zealand.

Private consultants and business executives are another source of
business survival material. The availability of publications that
provide guidance on various aspects of corporate crisis management has
expanded considerably over recent years, and new journals, such as,
Emergency Preparedness Digest, Disaster Recovery Journal, Survive.1, and
Disaster Recovery World, have been established specifically to provide
assistance to the private sector. These sources take an eclectic view of
business disruption and recognise many factors that may result in
businesses being placed in jeopardy. As a general rule, they do not
focus exclusively on natural (or technological) disaster. While the term
'disaster' is used frequently in trade journals, it is seldom defined,
and appears to mean, any event that results in an individual business
enterprise suffering a major, possible, or terminal setback.

While they contain useful information, such publications tend to rely
either on single case studies or on findings from a small number of
cases, rather than larger-scale, more systematic research. Often the
connection between their recommendations and data on actual experiences
of businesses is unclear. A characteristic of the type of advice that
business continuity planners encourage clients to undertake tends to be
directed toward actions that are internal to the organisation. In this
respect, emphasis is aimed at the many ways in which a business
enterprise can undertake 'pre-disaster' preparedness actions in its
day-to-day functioning, based on its internal configuration and
functional speciality.

Table 1 is a composite of information gleaned from several papers taken
from Emergency Preparedness Digest, Disaster Recovery Journal, Survive!,
and Disaster Recovery World issues. The table illustrates what business
continuity planners perceive as the major issues that impede the
effective implementation of appropriate contingency planning within the
business sector.

Table 1 Example of information provided by business contingency planning
advisors to companies. 10 common pitfalls in contingency planning.

Problem

\(1\) Lack of Management Support

Solution

1\. Needed to promote the idea and rationale for contingency planning
and to make it a priority task.

2\. Appropriate type of support can only be assured when senior
management publicly commits to having a contingency plan based on
clearly dedicated resources.

3\. Contingency plans should be sold as an opportunity to be grasped,
rather than an "add on" task.

Problem

\(2\) Non existent or insufficient budget

Solution

1\. Contingency planning is often viewed as discretionary spending
rather than an essential organisational tool.

2\. By properly budgeting at the outset and developing a comprehensive
pro forma expense statement, contingency planning can be better
insulated from budget cuts.

3\. Spread the cost by seeking funding from each department/unit that
will benefit from the program.

4\. Funding should be commensurate with the type of program the company
ultimately wants. This requires a three to five year strategic program
rather than a year to year piecemeal basis.

Problem

\(3\) Planning only for Technology Recovery

Solution

1 . Contingency planning has many dimensions beyond technical issues,
and should encompass every area of the business.

2\. Most companies that have technology based disaster recovery
solutions lack effective well documented and tested plans.

Problem

\(4\) Selecting PC Products

Solution

1\. PC products are seen as a short cut to disaster planning. This
feature is often promoted by product designers to assist the 'busy'
company. Both miss the point that disaster planning is a process not a
product.

2\. Most planners place too much emphasis on selecting products with
'bells and whistles' rather than those that offer the greatest
flexibility for their planning needs.

3\. Lack of actual experience by product designers mean that products on
offer do not actually do the task.

4\. Lack of disaster planning experience often prevent companies from
understanding the product's applications.

5\. More time is spent by companies evaluating a product's features then
actually thinking and developing appropriate disaster contingencies,
(selection of software should not exceed 5% of the contingency planning
effort).

Problem

\(5\) Confusion between Records Management and Records Recovery

Solution

1\. Records recovery involves the recovery and restoration of records
essential to the continuation of critical business functions. Records
management involves day to day storage, retrieval, destruction of
records for accounting purposes.

2\. Many contingency plans have records retention matrixes but no
recovery and restoration procedures.

3\. A contingency plan must contain procedures and strategies for
recovering and restoring essential vial records.

Problem

\(6\) Lack of Substance

Solution

1\. The strategies and procedures contained in a plan must be rehearsed
through exercising in a variety of situations.

2\. People have to be trained to use the contingency plan.

3\. Unless plans are 'kept live' by continual updating and training, the
organisation may as well not bother.

Problem

\(7\) Lack of Mitigation (Risk Reduction)

Solution

1\. By carefully analysing its risks an organisation can implement a
mitigation strategy starting from the most obvious to the more esoteric.
Recovery strategies should be based on how quickly critical business
functions can be resumed at a company's present location rather than how
quickly the premises can be vacated so recovery can commence elsewhere.

Problem

\(8\) Unqualified Contingency Planners

Solution

1\. Management tends to assign responsibility for contingency planning
to whomever is viewed as having extra time for the endeavour without
recognising the fact that it is a mission critical task.

2\. Contingency planning needs to be in the hands of someone who
thoroughly understands the company's business, has the respect of the
senior management and a demonstrated track record of managing large
complex projects.

3\. A related issue is the product developer without actual disaster
management experience. Companies must possess a critical attitude toward
the overall value of purchasing 'off shelf' PC products: it may be a
case of 'the blind leading the blind'.

Problem

\(9\) Inadequate Testing

Solution

1\. Testing is a crucial aspect of contingency planning. It ensures that
the chosen recovery strategy and plan will work, and that every staff
member knows what role to play under a variety of circumstances.

2\. Testing must be a company wide activity.

3\. Testing must go beyond simply verifying that an operating system has
been restored. The test process should include emergency co-ordination,
vendor reaction, emergency services and other regulatory interaction,
end user and critical business function recoverability.

4\. Complexity of plan should determine how often it needs testing.

Problem

\(10\) Plan Maintenance

Solution

1.  Major company and environmental revisions need to be mirrored in the
    contingency plan:

-   organisational changes for example: discontinuing/forming and/or
    expanding /contracting departments; adding/moving facilities;
    managerial restructuring, new staffing/skill requirements.

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-   operational changes for example: adding/revamping discontinuing
    products, new equipment and/or processes, changes in application
    complexity (automation/different backup needs).

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-   external changes for example: new/altered legislation, new
    competition, new technologies, changing client requirements.

2\. Maintenance should be considered when the plan is being developed,
not when it has been completed.

3\. Create a linkage with existing corporate departments to share
maintenance of a plan: allows the contingency planner to focus on more
important aspects of planning process (for example, have the Human
Resource unit create/maintain team rosters, and keep addresses of
personnel current).

Table 2, which is another composite from the trade journals, illustrates
the types of procedures that continuity advisors recommend a business
enterprise follow. Table 3, another compilation from the same sources,
takes this advise further by suggesting how business continuity planners
recommend a business can put these emergency preparedness actions into a
wider risk management framework. It should be noted that all
recommendations in these three tables focus on the internal mechanisms
of the business organisation.

Table 2. Example of procedural detail provided by business continuity
advisors for developing a company recovery planning program.

(1) Create an Avoidance Plan

1\. Analyse hazards.

2\. Determine how well the company is protected from them.

3\. Plan should cover most important details to protect assets: Fire
protection systems. Building codes. Security measures. Adjacent
properties (hazardous activities). Geographic locations. Computer power
and security vulnerability. Networks.

\(2\) Develop Emergency Response Plan

1\. Ensure all aspects for human safety.

2\. Tasks to mitigate damage.

Example 1: Computer in a fire situation: Disconnect equipment. Increase
ventilation. Reduce humidity. Relocate equipment to a clean area.
Recover computer operations (hot-site, for example).

Example 2: Water damage: Disconnect equipment. Remove water from the
area. Call restoration firm which you contracted prior.

Example 3: Vital records: Back up and keep off-site prior to an
emergency. Singed and water soaked paper restoration vendors.

\(3\) Prepare Comprehensive Disaster Recovery Plan

1.  Conduct risk and business impact analysis.

Overview of business objectives.

Operating procedures.

Supporting Resources.

2\. Strategic planning.

# Series of options, with costs and activation times.

Internal and commercially available strategies.

Strategies to recover critical business functions.

Restoration of supporting resources if interrupted.

3\. Plan documentation.

4\. Organise recovery teams for availability and relief access.

5\. Document procedures to implement recovery capabilities.

\(4\) Test and Update Plan

1.  Testing, training and maintenance.

2.  Exercise recovery capability.

3\. Familiarise employees with procedures.

4\. Test the plan.

\(5\) Fund Recovery Process

1\. Review costs identified for first day, week, and so on.

2\. Prepare emergency line of credit ahead of time.

\(6\) Review Insurance Cover

1\. Check into insurance carriers claim paying practices.

2\. Up front payments.

3\. Percentage of costs.

4\. Discuss immediate expenses with carriers.

> Table 3: Example of a risk management action plan for companies
> provided by business continuity advisors.

\(1\) Board Agenda

1\. Does the Board appreciate the vulnerability of the business to an
unplanned event or business disruption?

2\. The first step is to create an awareness of the threat at Board
level.

\(2\) Risk Assessment

1\. The initial review which identifies critical processes and evaluates
existing standards and control measures.

2\. Benchmarking capability against others is particularly valuable.

\(3\) Business Impact Analysis

1\. Following identification of key threats, it is necessary to quantify
risks to include:

Financial exposure.

Potential loss of market share.

Customer goodwill.

Shareholder confidence, for example.

\(4\) Organisation and Responsibility

1.  A key part of the risk management plan.

2.  Failure to properly define responsibilities at this stage will
    result in poorly conceived control measures and contingency plans.

\(5\) Control Measures

1\. Stages 3 and 4 above will identify potential solutions to reduce
risk.

2\. Cost benefit assessment based on the business impact analysis will
ensure that resources are targeted at the priorities.

\(6\) Education and Training

1\. The importance of staff awareness and understanding cannot be
overstated.

2.  Involvement of key staff is essential if control measures are to be
    implemented and maintained in practice.

\(7\) Contingency Planning

1\. Rapid recovery of production, marketing and provision of servicing
in event of disruption.

1.  Involvement of the management team is essential in developing a plan
    which will work in practice.

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(8) Testing and Training

1\. The best way of assessing the plan is to put it to the test often.

2\. Weaknesses are always identified.

3\. It is a process of continual improvement.

(9) Audit Controls

1\. Integration of business continuity in the organisation's audit
arrangements is recommended.

2\. The audit should check that the management systems, control measures
and standards are maintained in place.

3\. Audit procedures will often identify a change in business process
which has not been incorporated into the contingency plan.

(10) Board Reviews

1\. Depending on the organisation's size, the Board may delegate the
review to an audit committee or review team.

2\. Feedback to the Board is a key requirement.

THE DRC STUDIES

As a result of research undertaken by groups such as the Disaster
Research Center (DRC), a more representative body of research on
businesses in the disaster context is developing. This can begin to
address how private-sector entities might effectively prepare for,
respond to, and recover from disasters or fail to do so. In this
context, disaster is defined as an event in which a community undergoes
severe danger and incurs, or threatens to, such losses to persons and/or
property that the resources available within the community are exceeded.

In 1994 and 1995 the DRC conducted two major studies that are of
particular interest to the topic under discussion. The first study,
conducted in 1994, focused on the ways in which the 1993 Midwest floods
affected the operations of businesses in Des Moines, Polk County, Iowa
(for example, Dahlhamer and D'Souza, 1995; Tierney, 1995; Tierney and
Dahlhamer, 1995; Tierney, Nigg and Dahlhamer, 1996). The second project,
completed in 1995, assessed the impacts of the 1994 Northridge
earthquake on business losses in Los Angeles and Santa Monica,
California (Dahlhamer, 1995; Dahlhamer and Reshaur, 1996; Dahlhamer and
Tierney, 1996; Tierney, 1996, 1997; Tierney and Nigg, 1995). These two
events have been amongst the most damaging in the history of the USA.
Research from these impacts is summarised in the following sections.

The floods that struck the Midwest of the USA during the summer of 1993
killed 48 people and resulted in direct damages totalling an estimated
\$US20 billion. A total of 325 counties in nine states, including all 99
counties in Iowa, were covered by Federal disaster declarations.

The Northridge earthquake currently ranks as the USA's most costly
natural disaster. The earthquake, which killed 57 people and injured
over 10,000 in the three-county impact region, resulted in an estimated
\$US30 billion loss, including \$US12-13 billion insured losses. The
number of earthquake related claims filed by disaster victims, and the
amount disbursed through various assistance programs, were the largest
ever for a USA disaster. More than half a million households applied for
Federal housing assistance and more than 50,000 businesses applied to
the Small Business Administration for loans to cover earthquake related
losses.

Both the Midwest floods and the Northridge earthquake forced a large
number of businesses to shut down. In Des Moines, the capital of Iowa
(the most impacted city), 42% of the businesses surveyed reported that
they had to close for at least some period of time. Rates of closure
were particularly high for large businesses categorised as 'other' (a
classification that included farming enterprises and utilities), both
small and large manufacturing and construction firms, and large
businesses in the service sector. The median length of time businesses
in Des Moines were forced to cease operations was four days. However,
the range was considerable, with business interruption extending an
average of five days for both small and large businesses in the service
sector and as long as ten days for small enterprises grouped in the
'other' category.

Following the Northridge earthquake, approximately 56% of businesses in
the DRC study closed for some period. In general, small businesses were
more likely to close than large ones. The one exception was large firms
in the finance, insurance and real estate (FIRE) sector, 63% of which
had to shut down for at least some period of time. On average,
businesses in the Northridge sample were closed for a shorter period
than those in Des Moines - about two days. The duration of business
interruption appears to have been roughly comparable across sectors,
except for small service related businesses; the median length of time
for these businesses being closed was three days.

Just under 8% of the businesses in the Des Moines sample were forced to
relocate as a result of the floods. For the overwhelming majority (88%),
the move was only temporary. About 5% of the Northridge businesses
surveyed had to relocate, and for two

thirds of these the move was also temporary rather than permanent.

What Characterises Businesses that Become Disaster Victims?

The DRC studies are part of a wider series of studies that have been
conducted, mainly by USA based disaster sociologists, over the past few
years. While numerically small overall, these studies provide some
interesting general characteristics that surround business disaster
victimisation. The main features of these wider research studies are
summarised below.

Although research into business related disasters identified managerial
and community characteristics related to business disaster preparedness,
by far the strongest predictors have been a series of firm
characteristics. The most consistent relate to firm size, usually
measured by the number of employees. In essence, the larger the company,
the higher the level of preparedness. This relates to firms that might
cause impacts (such as chemical companies), as well as those on which
impact is wrought.

These research studies also noted that smaller firms may also have fewer
resources and personnel to devote to preparedness.

Age is another business characteristic thought to be related to disaster
preparedness, although research findings are inconsistent. In some types
of business, such as the tourist industry (Drabek, 1994, 1996),
extensive planning occurred in firms that had been in business for six
or more years (the age of the firm after this threshold made little
difference). In other types of industry, such as the chemical industry,
newer chemical firms, usually those built in modern industrial parks,
were more likely than their older counterparts to engage in preparedness
activities, irrespective of legal requirements (Quarantelli, Lawrence,
Tierney and Johnson, 1979).

In another study, Mileti and colleagues (1993) found that business type
was indirectly related to preparedness for earthquakes in the San
Francisco Bay area counties. Health, safety and welfare organisations
that had agency staff with earthquake activities as part of their jobs,
and whose executives had higher levels of earthquake risk perception
were more likely to prepare for future damaging earthquakes. Previous
disaster experience has also been found to influence business disaster
preparedness programs. Drabek (1994a, 1994b) found that businesses with
previous disaster experience had engaged in more evacuation planning
than businesses with little or no disaster experience. Mileti's studies,
cited above, also found experience to be significantly related to
preparedness.

In summary, the small amount of research that exists suggests that a
series of characteristics are related to business disaster preparedness
which include:

-   Firm size (the number of full time employees).

-   Type of economic sector to which the business belongs.

-   Ownership patterns (owned or leased).

-   Whether the firm is an individual firm or part of a franchise or a
    chain.

-   Age of the firm.

-   Type of structure housing the business firm.

-   Financial condition of the firm prior to disaster impact.

-   Previous disaster experience.

-   Perception of risk among executives.

In addition, these studies revealed that businesses which had the most
difficulty recovering from disaster have been those that:

-   Were marginally (or not at all) profitable prior to disaster.

-   Lost expensive inventories as a result of disaster impact.

-   Small retail businesses that leased rather than owned premises.

-   Were dependent on favourable locations to attract local customers.

Expanding on these factors, in the earthquake context, previous research
suggested that the most vulnerable businesses were those with low ratios
of net worth to total assets, high ratios of net fixed assets, and those
highly dependent on sales turnover. Restaurants, travel agencies, and
grocery stores fell into this category. On the other hand, firms with
higher levels of net worth, lower levels of fixed assets, and lower
sales turnover had the best chances of survival. Accounting firms,
electronics firms, and computer firms fell into this category. These
business-specific studies suggest that factors such as the type of
business, pre-disaster profitability and whether the business property
is owned or leased, may be related to the recovery capacity of a
business.

Small businesses tend to suffer disproportionately following disasters,
for several reasons. They typically have lower financial reserves to
draw upon, and they tend to operate in single locations so that serious
damage can put them completely out of business. Small businesses also
tend to be less concerned about risk management than larger businesses;
they are less likely to be insured, and they have less money to invest
in mitigation and preparedness.

Winning or losing in the disaster context may also be related to whether
a business is an individual firm, or a franchise, or part of a chain.
Branch and franchise establishments have access to more resources, such
as credit, than independent firms, and they benefit from more national
advertising. Such establishments may be able to overcome factors such as
the 'liability of newness' that has long been recognised as a major
stumbling block for commencing businesses, since they enter into
organisational environments with a stable affiliation to an existing
firm. Partner and parent firms become a major source of advice and/or
credit for franchise and chain establishments. Additionally, single
firms with single locations may be more vulnerable to disasters because
their risk is more concentrated. Owning, as opposed to leasing, a
business property may also be important for business survival following
disasters.

Studies of the Loma Prieta and Kobe earthquakes, in particular, found
that the most vulnerable businesses were those that were dependent on a
local customer base. Extensive residential damage forced some customers
to relocate out of the area, resulting in lost business. Residents who
had to invest heavily in repairing and rebuilding their own homes had
less discretionary income to spend. Damage to surrounding businesses
also disrupted customer traffic. Such effects were felt even by
businesses that experienced little or no direct earthquake damage,
suggesting the need to look beyond what happens to individual firms and
rather focus on disaster-related disruption of neighbourhoods and
commercial districts. Irrespective of individual levels of damage and
disruption, firms have more difficulty if they are located in areas
where damage is widespread, indicating that ecological factors have an
independent effect on recovery.

WHY ELSE DO BUSINESSES FAIL FOLLOWING DISASTER?

Returning to the DFIC studies, the two disasters investigated by the DRC
teams revealed that disasters can have their own 'impact signature' on
businesses. Hence, specific impact patterns can be revealed:

-   In Los Angeles, physical earthquake damage was quite widespread,
    affecting well over half the businesses in the sample. In contrast,
    in Des Moines, physical flooding was confined to a relatively small
    segment of the business community, but lifeline service interruption
    was very extensive, with loss of water affecting eight out of ten
    businesses.

-   The disruption of utility lifelines was a key factor in business
    interruption in both disaster events. Loss of electricity, in
    particular, was mentioned by respondents in both cities as among the
    most important factors curtailing their operations. The data implies
    that business properties may escape direct damage yet suffer
    extensive disruption as a result of utility lifeline outages.

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-   Other factors besides direct physical damage and utility lifeline
    interruptions also contributed to business interruption in the two
    disasters. Key among these were disruption in the flow of materials
    in and out of businesses and loss of customers.

-   Relatively few Des Moines and Los Angeles businesses had either
    hazard insurance or business interruption insurance to cover losses.
    Large businesses were more likely to carry such coverage than
    smaller ones. Of those that had insurance, only a minority used it,
    and generally only a portion of losses were covered.

-   Business owners also showed a tendency not to use Federal disaster
    loan assistance and other formally designated sources of recovery
    aid. When such sources were used, they typically covered only a
    portion of the losses the business sustained.

-   Following two disasters, business owners generally used their
    personal savings to offset their losses. It appears that one of the
    significant short term effects of disasters is to drain profits and
    divert resources that could otherwise be used to finance business
    expansion.

-   The data indicate that disasters have disparate rather than uniform
    effects on businesses. Consistent with what other researchers have
    argued, the Los Angeles data in particular suggest that small
    businesses are especially vulnerable to disaster related losses and
    disruption.

Of particular interest is the impact of businesses from utility lifeline
disruption (Nigg, 1996; Tierney and Dahlhamer, 1995; Tierney and Nigg,
1995). Figures 4 and 5 detail the major reasons given by 448
owner/managers in Des Moines and that 617 other owner/managers in the
Northridge area gave why their businesses closed as a result of either
the floods or the earthquake. It is worth noting that in both these
situations disruption to several utility lifeline systems were stated as
major reasons for business interruption. In particular, loss of
electricity, water and telephone supplies caused significant disruption
to business houses. While not indicated in either of the figures
presented here, loss of natural gas was also identified by both groups -
7% of Des Moines; and 9% of Northridge respondents (refer Tierney, 1995,
1997). Similarly, 5% of the Northridge respondents also stated that loss
of sewer and wastewater systems were contributory causes for businesses
closing.

PROGRESSING THE BUSINESS CONTINUITY PLANNING FRAMEWORK

Figures 4 and 5 illustrate the importance of external factors that
impinge on business organisations in the disaster context, and which
have a significant effect on many aspects that directly affect the
ability of businesses to ride out major environmental disturbances.
Whether businesses are more prone to suffering terminal injury as a
result of utility lifeline interruptions than other types of organised
arrangements is something that requires further examination.
Nevertheless, and as noted earlier, most of the recommendations business
managers get from their advisors (Tables 1, 2 and 3) are of little help
to them in this respect, since business continuity planning has a
tendency to focus on internal mechanisms of business organisations.

The reason for widening the perspective to include the external
environment of the business should now be clear: empirical research
reveals that levels of pre-disaster preparedness which look only at the
internal mechanisms of a business enterprise do not have a significant
effect on reducing any of the many indirect consequences of disaster
impacts that result from inter-dependency factors such as physical
damage among a specific business enterprise's input output set and
lifeline loss. Moreover, this and other similar research suggest that a
significant amount of business disruption, at least from natural hazard
impact, cannot be remedied by individual businesses alone. Dahlhamer and
Reshaur (1996) suggest likely reasons for this:

> Figure 4. The twelve most cited reasons for business interruption
> following the 1993 floods in Des Moines, Iowa, USA. (See included
> file.)

One type of impact, lifeline damage and/or loss, tends generally to
originate outside the business property; for example, in damage to water
or electrical transmission and distribution systems. Preparedness
efforts at the level of the individual business are not capable of
making a difference in these types of impacts, although good planning
can help businesses cope with lifeline outages.

For some hazards, such as earthquakes, additional variables like the
type of structure housing the business, distance of the business
property from the earthquake epicentre, and the ground shaking intensity
experienced at the business site are all probably related to the damage
and/or disruption businesses experience.

> Figure 5. The twelve most cited reasons for business interruption
> following the 1994 earthquake in Northridge, California, USA. (See
> included file)

These, and other results from disaster related business disruption
studies, suggest that the current approach to encouraging loss reduction
promoted by business continuity advisors, which stress raising awareness
of the hazard problem and voluntary implementation of preparedness
measures, is currently not working. Furthermore, it will probably never
work, since it fails to address a significant type of co-ordination
failure problem facing the business firm.

As the DRC studies state, even in well known and relatively
well-understood hazard prone areas like Los Angeles, which is exposed to
multiple hazard (natural and technological) agents and has recently also
experienced major civil unrest (all of which have impacted severely on
businesses), it is still difficult for businesses to undertake basic
disaster preparedness measures. There is no doubting that Los Angeles
business owners are aware that their environment is hazardous. The
problem business owners face is not individualistic it is a collective
issue that has been created as a result of a collective stress occasion.
Hence, its solution is tied to a collective resolution.

It should not be assumed that business owners can resolve these problems
on an individual basis. The potential economic disruption due to
lifeline losses is a collective problem, beyond the capability of any
individual owner to address. This issue is one that needs to be
addressed from a collective basis, including lifeline service providers,
emergency management and community officials, and business
organisations.

A CONCLUDING COMMENT

There is obviously a 'gap analysis' problem here which has not been
picked up by business continuity planners. Neither, incidentally, has
the insurance industry, even though insurance companies have a lot to
benefit if businesses adopt better contingency planning programs. Table
4, is a first cut to develop an aide memoire for business enterprises.
It assembles a series of 30 attributes that pertain to appropriate
business emergency planning.

The table differs from Tables 1 through 3 presented earlier, in that the
first 20 recommendations in Table 4 are statements pertaining to the
internal mechanisms of the organisation; however, the final 10
suggestions direct the business manager to look outside the organisation
and focus on the business' external environment.

From the wider insurance perspective, extending business continuity
planning to encompass the external environment of individual
organisations should be encouraged. The logic of this has been captured
well by Ceniceros' (1997) summation of a panel discussion during a
meeting sponsored by the Insurance Institute for Property Loss
Reduction, in San Diego earlier this year:

> While property loss prevention steps taken by individual businesses or
> homeowners are valuable and should be encouraged, taking strictly an
> individual approach is not always sufficient to reduce business
> disruption after a disaster\... If the entire community suffers a loss
> of its transportation lifeline, utilities or emergency services, then
> companies also suffer from a loss of suppliers, materials and
> distribution channels \... (Ceniceros, 1997, p.28).

Table 4: An integrative business emergency preparedness framework.

1.  Check what the legal obligations are with respect to emergency
    management in the work environment (there may be specific
    legislation pertaining to employee and/or customer safety).

2.  Have a senior member of the business accept responsibility for, and
    prepare emergency management planning.

3.  Obtain a first aid kit and ensure it is in a safe location, that all
    staff know where it is, what is in it, and how to use it.

4.  Learn first aid (provide initial courses and updates for employees).

5.  Purchase business interruption insurance.

6.  Conduct disaster drills and/or exercises with staff.

7.  Provide copies of the office disaster planning guide to all members
    of staff (have as part of induction program).

8.  Ensure each staff member knows where essential utility service
    connections are and how to operate them (including under what
    circumstances they should be disabled).

9.  Maintain supplies in office (non-perishable food, water, batteries,
    lighting, for example), and replace regularly (unless they would be
    disabled, they should donate the perishables to a local charity and
    achieve a public relations coup!

10. Talk with employees about what to do in the event of a disaster
    occurring at work.

11. Talk with employees about what management's expectations of them are
    if a disaster occurs outside working hours. Maintain a register of
    staff unable to attend and make it clear to selected staff that
    their attendance is expected. Make sure there are alternatives to
    essential staff members.

12. Have portable generator, and have it serviced regularly.

13. Nominate a suitable staff member to be responsible to regularly test
    out emergency systems.

14. Hold disaster training programs for employees.

15. Have building structure assessed regularly by qualified specialist.

16. Have a 'cold site': make arrangements to relocate essential business
    items such as personnel files, client files, for example. Find out
    how long it may take to relocate and what specific resources are
    needed to achieve this.

17. Develop a business emergency plan (make sure it covers customers as
    well as staff; school holidays and Christmas breaks as well as
    routine business cycles).

18. Brace shelves and equipment.

19. Make arrangements to relocate business in case of district wide
    disruption.

20. Develop a business recovery plan.

21. Attend meetings or receive written information about disaster
    preparedness and risk management.

22. Ensure staff are familiar with and understand the local hazardscape:
    what might go wrong.

23. Discuss with suppliers and regular outlets what their specific
    emergency contingencies are, find out and plan how their (in)actions
    may affect your own operations.

24. Discuss with the local council what to expect from them and what
    they expect from you in the event if a disaster.

25. Discuss with the local emergency services what to expect from them
    and what they expect from you in the event if a disaster.

26. Discuss with the local utility operators what to expect from them
    and what they expect from you in the event of a disaster.

27. Discuss with the local emergency management office whether they
    regard you as an 'essential service' and if so, discuss what special
    provisions need to be made for key staff to access the premises.

28. Provide each staff member with a home disaster contingency guide.

29. Ensure your immediate business neighbours know what your emergency
    plans are.

30. Work with your business neighbours to develop an area contingency
    plan.

Understanding the effects external environmental factors have on
business survival and continuation has a significant bearing on the
capacities of businesses to respond effectively to hazards which have
the potential to undermine ongoing success and profitability. There are
aspects of advice and guidance about external factors of the type
highlighted by the DRC studies that bear upon insurance. It is
appropriate, therefore, for the insurance sector to consider how it can
best use this information. Since insurance is moving toward providing
comprehensive risk management advice to its clients (Mahoney and Punter,
1997), one way is for insurers to encourage business continuity planners
to develop integrative programs that include both internal and external
preparedness factors.

Similar to insurance, business continuity planning recognises many
causes of disruption or decline in business stability. They fall under a
variety of headings: technological risks, social change, political
upheaval, mismanagement, problems pertaining to costs and uncertainty of
raising capital, changing economic orientations (including shifts in
market demands expressing fashion changes or newly developed desires or
needs), and any circumstances which upset the stability or balance of
society (terrorism, war, community dissension); and not least the
failure of businesses to maintain high level expertise in their Chief
Executives or Board members. Such causes of business failure may not be
described as 'disasters' if one is thinking of short lived circumstances
which can seriously weaken business profitability. However, their
potential for causing business failure can be as dramatic (perhaps more
so) as natural or technological disasters.

The provision of comprehensive risk management advice is indicative of
the insurance sector's need to embrace a more holistic perspective.
Apart from recognising the diversity of issues identified above, this
development has come about by insurance linking with other sectors, such
as the research community. In the natural hazard context, there is also
the realisation that insurance has a vital role to play in immediate
disaster impact relief, as well as its traditional post impact recovery
function of reconstruction financing through payouts to insureds. In
both the USA and New Zealand, for instance, actions among insurance
umbrella agencies, emergency management representatives and utilities
have developed joint planning committees to integrate response planning.
Alliances between different sectors will not only assist the development
of more realistic preparedness actions, but will also help the
transmission of increased understanding. Both outcomes will enhance
community recovery which, in the long term, will favour individual
insurance companies as well as their respective clients.

Closer linkage between the needs of business continuity planning and
insurance is another example of appropriate alliances. The material
covered in this paper should promote thinking not only amongst
businesses and their continuity advisers (for example, how insurance
cover could be more useful to them to safeguard their business against
failure), but also to promote insurers to consider areas and aspects of
stimulating businesses (especially, but not only small businesses) to
give more thought to the value of insurance.

The DRC research suggests that what is lacking, is not awareness, but
rather resources, incentives, and technical assistance to help business
owners address sector wide hazard-related problems. For the business
continuity planner, these studies indicate quite clearly that the
conventional focus is too narrow in its perspective to enable business
managers to develop appropriate contingencies. There are opportunities
for insurers to 'sell their wares' more widely and energetically if they
collaborate with other sectors. By doing so, perhaps a hazard shift
might also occur within both the insurance and business continuity
planning communities.

ACKNOWLEDGEMENTS

The author is grateful to the Disaster Research Center, University of
Delaware, for granting approval to extensively cite research findings
conducted from studies undertaken by staff and students. Appreciation is
also extended to Rob Fleming and his team at the Resource Center,
Australian Emergency Management Institute, Mt. Macedon (Victoria,
Australia) for providing copies of papers gathered from business
continuity journals; and to John Worthington, Resource Limited \[NZ\]
who provided Comdisco material. Kathleen Tierney (DRC), John Oliver
(James Cook University) and Dave Brunsdon (Wellington Lifelines Group)
provided valuable comments on an earlier draft. Any issues pertaining to
the interpretation of the data or comments resulting from it, however,
rest with the author.

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