FEDERAL EMERGENCY MANAGEMENT AGENCY           FEMyA-200 I September 1;990
  Loss-Relduction Provisions
              of
    A Federal Earthquake
     Insurance Program
                               Final Report
   Issued in Furtherance of the Decade
   for Natural Disaster Reduction
DISCLAIMER
 Any opinions, findings, conclusions, or recommendations expressed in this
 publication do not necessarily reflect the views of the Federal Emergency
 Management Agency. Additionally, neither FEMA nor any of its employees
 make any warranty, expressed or implied, nor assume any legal liability or
 responsibility for the accuracy, completeness, or usefulness of any informa-
 tion, product, or process included in this publication.
 Particular viewpoints expressed in the publication also do not necessarily
 reflect the positions of other governmental agencies, the opinions of the ad-
 visory panel, or other major contributors, except for the project director.
       LOSS-REDUCTON PROVISIONS OF
A FEDERAL EARTHQUAKE INSURANCE PROGRAM
                    Final Report
                    Prepared for
  The Federal Emergency Management Agency (FEMA)
                       Under
            Contract No. EMW-88-C-2872
                         by
                DAMES & MOORE
               911 Wilshire Boulevard
                     Suite 700
               Los Angeles, Ca 90017
                   August 1990
                                    TABLE OF CONTENTS
ACKNOWLEDGEMENTS
EXECUTIVE SUMMARY
PROJECT SUMMARY
      INTRODUCTION AND OVERVIEW
1.0
                                                                                                    1-1
            Contractual Background
      1.1
                                         The $uo                                                    1-2
            General Background               Status
      1.2                           --
              Locus of Control
              Sources of Building Codes
              Economies of Scale
              Timing of Earthquake Policy Development
              Private Market Insurance System Considerations
              Disaster Relief Considerations
                  Robert T. Stafford Disaster Relief and Emergency Assistance Act
                  Seismic Safety of Federal and Federally Assisted or Regulated New Building Construction
                  lLimitations of Current Federal Involvement
              Conclusions
                                                                                                   1-11
            Project Scope
      1.3
              Definition of Loss-Reduction Measure
              Primary and Secondary Losses
              Financial Surpluses in an Insurance Program
              Feasibility of Federal Insurance
              Types of Federal Earthquake insurance involvement
                                                                                                   1-17
            Brief Summary of Methods and Procedures
      1.4
                                                                                                   1-19
            Summary of Content
      1.5
      SEISMIC RISKANALYSISMETHODSINAFEDERALEARTHQUAKE
2.0
      INSURANCE PROGRAM WITH A LOSS-REDUCTION COMPONENT
                                                                                                    2-2
            Risk Analysis Methods: Applications and Limitations
      2.1
              Basic Processes in General Risk Analysis
              Types of Seismic Risk Methods
              Uncertainties in Risk Analysis in a Federal Insurance Context
              Linkages between Risk Analysis Methods, Loss-Control, and Insurance
              Recommended Uses of Risk Analysis.
                                                                                                   2-10
            The Use of Risk Analysis in Insurance Rating Methods
      2.2
               Risk Analysis Methods Suitable for Use by Private Insurers
               Risk Analysis Methods Suitable for Use with Federal Insurance
                                                                                                   2-15
            Mapping Considerations
      2.3
               Seismic Zone Maps
               Mapping Local Hazrds.
               Mapping and Insurance Rating
                                                                                                   2-20
            Conclusions
      2.4
                           TABLE OF CONTENTS (Continuation)
3.0   THE IDENTIFICATION, DEVELOPMENT AND ECONOMIC
      EVALUATION OF PROMISING LOSS-REDUCTION MEASURES
      3.1   The Process of LRM Identification and Evaluation                               3-1
      3.2   The Identification and Selection of Technically Feasible LRMs                  3-4
              Information Search
              Application of Engineering, Scientific, and Risk Criteria
                  to Identify Possible Loss-Reduction Activities
              Landuse Measures
              Building Practices Resulting in Loss Reduction
              General Remarks on-Loss-Reduction Activities Selected for Analysis
      3.3   Socioeconomic Analysis of Technically Feasible
            Loss-Reduction Activities                                                     3-14
              Process of Socioeconomic Analysis
              Estimations of Costs and Expected Annual Direct Loss Reductions Resulting
                 from Implementation of Candidate Loss-Reduction Activities
              Results of the Economic Efficiency Analysis
      3.4   Summary                                                                       3-22
4.0   THE IDENTIFICATION, DEVELOPMENT AND EVALUATION OF
      ACCEPTABLE LOSS-REDUCTION MEASURES
      4.1   Economic Allocative (Stakeholder) Analysis                                     4-1
      4.2   Results of Economic Allocative (Stakeholder) Analysis                          4-2
      4.3   The Project Workshop and Final Advisory Panel Meeting                          4-4
              The Project Workshop
              The Final Advisory Meeting and Reviews of Draft Final Reports
      4.4   Cost-Effective LRMs Recommended                                                4-6
              LRMs and Supporting Activities/Elements Developed
                 Landuse LRMs
                 Supporting Elements for Landuse LRMs
                 LRMs Related to Building Practices
                 Supporting Elements for Building Practice LRMs
              Status Ouo Obstacles to Implementation of LRMs
      4.5   Summary                                                                       4-19
                             TABLE OF CONTENTS (Continuation)
      LOSS-REDUCMION MEASURES IN
5.0
      VARIOUS FEDERAL INSURANCE CONTEXTS
                                                                                           5-2
            Possible Federal Involvement in Disaster Insurance
      5J1
              Federal Insurance as Buffer
              Possible Roles
              Complexity of the Relationship between
                 Federal, State and Local Governments and the Insurance System
              Additional Challenges to Insurance and LRM Implementation
      52    Status Quo Policy and its Implications for the
            Implementation of ILRMs and the Purchase of Earthquake Insurance               5-9
              The Role of Lenders in the Status Quo with Respect to
                 LRMs and Insurance Purchase Requirements
              Implications of the Stafford Act for Loss Prevention
              LRM Implementation within Status Quo Policy as Defined by the Stafford Act
              Obstacles to Implementation within the Framework of the Status Quo
              Summary
                                                                                           5-17
            Insurance Rates and Loss-Reduction-Measures
      5.3
              Economic Inducements
              Risk-Based Rates as Incentives
              Flat Rates as Disincentives
              Current Underwriting Practice
              Conclusions
            Loss-Reduction Measures in a
      5.4
                                                                                           5-24
            Primary Federal Earthquake Insurance Program
               Potentially Increased Federal Liabilities and Rate Considerations
               General Linkages with the NFIP
               Possible Extension of Provision (d) of Section 406 of the Stafford Act
               Conclusions
      5.5   Loss-Reduction Measures in a
                                                                                           5-31
            Secondary Federal Earthquake Insurance Program
               Key Relationships
               Price Mechanisms and LRMs
               Conclusions
      5.6   Summary of Approaches to Incorporating LRMs into
                                                                                           5-38
            Various Federal Insurance Contexts
6.0   REFERENCES
                          TABLE OF CONTENTS (Continuation)
APPENDICES
A.   Biographical Sketches of Advisory Panel Members
B.   Estimation Bases for Risk Analyses of Promising LRMs
     B.1 Expected Annual Loss Basis for Calculation                       B-2
     B.2   Sample Intensity Frequency Estimates
           for Policy-Level Risk Analysis                                 B-3
     B.3 Estimates of Costs and Conditional Benefits for Analyzing
         Building Practice LRMs                                           B-5
     B.4 Illustrative Decision Alternatives to Analyze Landuse LRMs       B-13
C.   Assumptions Underlying Economic Efficiency and Allocative Analyses
     C.1   Considerations Affecting Economic Efficiency Analysis          C-1
             Temporary Housing Costs
             Losses Associated with Deaths and Injuries
             Losses Associated with the Cost of Money
             Premium Costs
     C.2   Bases Underlying the Economic Allocative Analysis              C-4
             Mortgage Default Assumptions
             General Liability Property Damage
             General Liability Injury Losses
             General Liability Workers' Compensation
             Governmental Costs
             Stakeholder Costs
D.   Federal Financial Assistance Considerations in Implementing LRMs
                                       LIST OF TABLES
1     Loss-Reduction Measures that are Recommended for
      a National Earthquake Insurance Program                           ES-4
1     Loss-Reduction Measures that are Recommended for
      a National Earthquake Insurance Program                             5
2     Potentially Hazardous Building Construction Classes Identified
      for Public Policy Purposes                                           9
3     Activities Needed to Support Recommended LIRMs                     11
3-1 Landuse Measures Analyzed                                            3-7
3-2 Building Practices Analyzed                                          3-9
3-3   Potentially Hazardous Building Construction Classes
      Identified for Public Policy Purposes                             3-11
3-4   Examples of Life-Safety Related Equipment                         3-12
4-1   Recommended Landuse IRMs                                           4-7
4-2   Activities Supporting Recommended Landuse LRMs                     4-9
4-3   Recommended Building Practice LRMs                                4-12
4-4   Supporting Elements for Recommended Buildi ng Practice LRMs       4-15
B-1 Summary TabIe for Diverse Intensity Estimates                       B-4
B-2 Estimated Retrofit Costs for Various
    Building Practice Loss-Reduction Activities                         B-6
B-3 Conditional Seismic Benefits for New Design by Seismic Zone         B-7
BA Conditional Seismic Benefits for Retrofit by Seismic Zone            B-9
B-5 Costs -andConditional Benefits for Building Measures Analyzed       B-11
B-6 Representative Landuse Measures for
    Policy-Level Risk and Decision Analysis                             B-14
B-7 Policy-Level Cost Considerations for Landuse LRMs Analyzed          B-16
B-8 Sample Costs for Projects to Minimize
    Liquefaction/Settlement Problems in New Developments                B-17
B-9 Conditional Benefits for Landuse Measures                           B-19
'C-1 Loss-Cost Factors for liability                                    C-6
C-2 Estimates Used for General Liability Bodily Injury Loss Potential   C-7
D-1 Expected Losses and Benefits of Illustrative Seismic Retrofit       D-2
D-2 Stakeholder Expected Losses and Benefits from Proposed LRM          D-3
                                     LIST OF FIGURES
1     Illustrative Seismic Zone Map for the United States                    ES-6
1     Illustrative Seismic Zone Map for the United States                       7
                                                                              2-3
2-1   General Risk Analysis Approach
2-2   Types of Seismic Risk Methods                                           2-5
2-3   The Centrality of Risk and Decision Analysis in
      Linking Insurance and Loss-Reduction Measures                           2-8
2-4   Illustrative Probabilistic Multisite Analysis Outputs                  2-12
2-5   Illustrative Seismic Zone Map for the United States                    2-16
3-1   Steps Used to Develop and Assess Recommended Loss-Reduction Measures    3-2
3-2   Steps in Socioeconomic Analysis                                        3-16
4-1   A Risk Management Model for Assessing the Process of
      Policy Formulation, Adoption, and Implementation                       4-18
5-1   Illustrative Network of Earthquake Disasters and
      Government Insurance Programs                                           5-3
5-2 Intergovernmental - Insurance System                                      5-5
5-3   A Simplified Diagram of Probable and Possible Relationships in
      a Secondary Federal Insurance Program                                  5-33
B-1 Equation for assessing expected annual losses                            B-2
B-2 Equation for determining the frequency
    of a given Modified Mercalli shaking intensity                            B-3
ACKNOWLEDGEMENTS
We wish to thank the sponsoring agency, the Federal Emergency Management Agency
(FEMA), the project officer, Dr. A. Zeizel, the project liaison, J. Taylor, and the Advisory
Panel for their superobligatory efforts on this project. We wish also to acknowledge the ef-
forts of al National Earthquake Hazrd Program (NEHRP) agencies, especially FEMA, the
National Science Foundation, the United States Geological Survey, and the National In-
stitute of Standards and Technology, for developing seismic safety programs and research to
the stage that the viewpoints expressed herein were made possible. As clarified in the dis-
claimer, this acknowledgement does not imply that the positions, represented in this report
reflect those held by any of the above persons or organizations.
In addition, we wish to thank the foll owing people for their assistance:
  Patricia Ann Coty and Jane Stoyle, National Center for Earthquake Engineering
    Research, Information Service, State University of New York at Buffalo, Bufalo,
    New York
  Robert Shapiro, The Law Offices of George K Bernstein, Washington, D.C.
  Darrell Ehlert, Allstate Insurance Company, Northbr4ok, IL
  R. L Bernknopf, United States Geological Survey, Reston, VA
  Carole Martens, Office of Emergency Management, State of Washington, Olympia, WA
  W. J. Kockleman, United States Geological Survey, Menlo Park, CA
  David Morton, Natural Hazards Research and Applications Information Center,
    University of Colorado, Boulder, CO
   CGary E. Christenson and Genevieve Atwood, Utah Geological and Mineral Survey,
     Salt Lake City, Utah
  Chris Arnold, Building Systems Development, Inc., San Mateo, CA
  Donald L. Armstrong, Division of Disaster & Emergency Services, State of Kentucky,
    Frankfort, KY
   Michael Cassaro, University of Kentucky, Louisville, KY
  Craig Nelson and Jerold H. Barnes, Salt Lake County Planning Division, Salt Lake City,
    Utah
  Brenda Boswell, Califo rnia Seismic Safety Commission, Sacramento, CA
  William Anderson, The National Science Foundation, Washington, D.C.
  Mike Lowe. Davis County Flood Control, Farmington, Utah
  Claire B. Rubin, The George Washington University, Washington, D.C.
ACKNOWLEDGEMENTS (Continuation)
   Kathleen Tierney, University of Delaware, Newark, Delaware
  Riley Chung, National Academy of Sciences, Washington, D.C.
  S. Joy Svihra, Earth uake Engineeng Research Center (EERC library),
      University of California at-Berkeley, Richmond, CA
  Glenn Johnson, Department of City Planning, City of Los Angeles, CA
  Paula Gori, United States Geological Survey, Reston, VA
  Les Youd, Department of Civil Engineering, Brigham Young University, Provo, Utah
  Richard N. Wright, National Institute of Standards and Technology, Gathersburg,
     Maryland
  Michael F. Robinson, Program Policy and Compliance, Office of Loss-Reduction,
    Federal Insurance Administration
  Ugo Morelli, Federal Emergency Management Agency, Washington, D.C.
  Robert G. Chappell, Disaster Assistance Programs, Federal Emergency Management
    Agency, Washington, D. C.
and
Project Workshop Participants (in addition to Advisory Panel members):
  Lee Barclay, Insurance Commissioner's Office, State of Washington, Olympia, WA
  Jane Bullock, Federal Emergency Management Agency, Washington, D.C.
  H.P. Campbell, Office of the State Architect, State of California, Sacramento, CA
  Harold T. Duryee, Federal Emergency Management Agency/Federal Insurance
    Administration, Washington, D.C.
  Laurie Friedman, Federal Emergency Management Agency, Region IX, San Francisco,
      CA
  Terry Hughes, Building Enforcement, Shelby County, Memphis, Tennessee
  Gary D. Johnson, Federal Emergency Management Agency, Washington, D.C.
  Gerald Jones, Codes Administration, Kansas City, MO
  Leo Jordan, State Farm Insurance Company, Bloomington, IL
  Howard Leikin, Federal Emergency Management Agency/Federal Insurance
    Administration, Washington, D.C.
  Michael Molesky, Federal National Mortgage Association (Fannie Mae), Washington,
    D.C.
ACKNOWLEDGEMENTS (Continuation)
  Joanne Nigg, University of Delaware, Newark, Delaware
  Shem Oaks, University of Colorado, Boulder, CO
  Robert Olson, VSP Associates, Inc., Sacramento, CA
  Charles Real, California Division of Mfines & Geology, Sacramento, CA
  Francis V. Reilly, Federal Emergency Management Agency/Federal Insurance
     Administration, Washington, D.C.
  Norton Rernmer, Norton S. Remnner Consulting Engineers, Worcester, MA
  Chris Rojahn, Applied Technology Council, Redwood City, CA
  Les Studer, County of Ventura, Ventura, CA
  Thomas L. Tobin, Seismic Safety Commission, State of California, Sacramento, CA
  Barbara Zeidman, Rent Stabilization Division, Community Development Department,
    City of Los Angeles, CA
along with Dames & Moore employees including
     C. Tillman,
     M. Taylor, and
     G. Barney.
CONTRIBUTORS
The main contributors to this report were
  C. Taylor, project director and principal investigator, Dames & Moore
  W. Petak, University of Southern California
  E. Mittler, University of Southern California
  J. Brown, George Washington University
  A. Porush, Dames & Moore
  H. Kunreuther, University of Pennsylvania
  C. B. Crouse, Dames & Moore
  N. Doherty, University of Pennsylvania
  A. Butler, University of Pennsylvania
  A. Kleffner, University of Pennsylvania
with pertinent contributions in previous working volumes by
   H. Seligson, Dames & Moore
   N. Donovan, Dames & Moore
   M. Grivetti, Dames & Moore
   R. McGuire, Risk Engineering, Inc.
   R. Hayne, Milliman & Robertson, Inc.
   R. Eguchi, Dames & Moore
   W. Graf, Dames & Moore
   S. Werner, Dames & Moore
technical editor
   S. Hunt, University of Southern California
ADVISORY PANEL (Please see Appendix A for detailed bibliographic sketches.)
  R. Roth, Jr., co-chair, Assistant Insurance Commissioner, State of California
  D. Ward, co-chair, Architect, Salt Lake City, Utah
  J.Beavers, Fellow, Martin Marietta Systems, Inc., Oak Ridge, Tennessee
  G. Bernstein, The Law Offices of George K Bernstein, Washington, D.C.
  0. Mader, President, William Spangle and Associates, Portola Valley, California
  F. McClure, Senior Structural Engineer Consultant, Lawrence Berkeley Laboratory,
        Berkeley, California
  E. Schwartz, Executive Officer, Department of Building and Safety,
        Los Angeles, California
  L Selkregg, Professor Emeritus, University of Alaska, Anchorage, Alaska
  W. Sommers, Commissioner of Public Works, Cambridge, Massachusetts
  D. Whiteman, Congressional Research Service, Washington, D.C.
PROJECT OFFICER
  A. Zeizel, Policy Manager (Hydrogeology), Federal Emergency Management Agency,
       Washington, D.C.
PROJECT LIAISON
  3. Taylor, Assistant Administrator, Federal Insurance Administration,
       Federal Emergency Management Agency, Washington, D.C.
                                  EXECUTIVE SUMMARY
      In anticipation of current proposed legislation concerning federal earthquake in-
surance or reinsurance, this report on the loss-reduction component of federal earthquake
insurance programs was prepared by Dames & Moore under contract to the Federal Emer-
gency Management Agency (FEMA) (No. EMW-88-C-2872). Significant assistance on this
project was provided by the University of Southern California, University of Pennsylvania,
George Washington University, Miilliman & Robertson, Inc., and Risk Engineering, Inc.
      Procedures utilized to conduct the study include a thorough examination of existing in-
formation on available earthquake hazard reduction activities and techniques, three meet-
ings of a nationally recognized advisory panel, and a project workshop. The project
workshop involved experts and representatives of many diverse agencies,. organizations, and
interests from through-out the country in order to construct acceptable findings. A nationally
recognized Advisory Panel provided critical review of project progress -and findings.
Major project findings include the following:
      There are cost-effective, technically credible earthquake loss-reduction measures
(1)
      (LRMs), chiefly in landuse and building practice, that are acceptable for inclusion in a
      federal earthquake insurance or reinsurance program. Table 1 summarizes those ac-
      ceptable LRMs identified in this project. Figure 1 provides a small-scale seismic zona-
      tion map that suggests where the LRMs in Table 1 can be applied to zones of seismic
      hazard (numbered 0 through 4) throughout the United States.
      Current earthquake risk analysis techniques -- in spite of their uncertainties -- are ac-
(2)
      ceptable for the evaluation of IRMs and the determination of both primary earth-
      quake insurance rates and secondary earthquake insurance prices.
      Two primary vehicles exist for the effective inclusion of the fifteen LRMs into a federal
(3)
      earthquake insurance Or reinsurance program. These are
      o earthquake ordinances for state and local government adoption and enforcement
        and
      o a system of partially risk-based insurance rates that provide financial incentives for
        the adoption and enforcement of earthquake ordinances.
                                      Executive Summary -1
(4)   An enhanced federal program of earthquake loss-reduction can be justified by the
      resulting reduction of existing contingent federal liabilities, especially with respect to
      public and private non-profit facilities in higher risk seismic zones (2 and especially 3
      and 4).
Based on project findings, we make the following recommendations:
(1)   The fifteen LRMs listed in Table 1 should be incorporated into a federal earthquake
      insurance or reinsurance program.
(2)   Small-scale maps for implementation of these LRMs throughout the nation should be
      developed by the insurance administrator, primarily on a scientific basis. Figure 1
      could be used in the interim.
(3)   FEMA should initiate an enhanced federal program designed to provide cost-effective
      LRMs and technical assistance and training to state and local governments. FEMA
      should seek the necessary resources to undertake this enhanced program.
(4)   Activities identified in this report should be initiated or continued to facilitate or sup-
      port the fifteen recommended LRMs.
(5)   Earthquake risk methods for evaluation of LRMs and for primary earthquake in-
      surance rating and secondary earthquake insurance pricing should be probabilistic --
      i.e., evaluate all potentially damaging earthquakes. For developing equitable financial
      incentives for the recommended LRMs and for avoiding other administrative pitfalls,
      earthquake insurance rating maps should be similar to maps for LRM application, and
      both should be risk-based.
(6)   In a primary federal earthquake insurance program, the earthquake insurance admini-
      strator should employ a combination of risk-based rates and earthquake ordinances in
      order to implement the recommended LRMs.
                                      Executive Summary - 2
      In a secondary federal earthquake insurance program, possible ways of inducing LRhMs
(7)
      include use of secondary pricing that reflects risks, agreements with state insurance
      regulators that risks be reflected in rates, and/or leverage from a combined primary and
      secondary program that requires earthquake ordinances.
      Continuous program monitoring, review, and improvement are essential features of
(8)
      any federal program initiated.
      Evaluation of the many issues -- in addition to loss-reduction -- related to the feasibility
(9)
      ofa federal earthquake insurance program should be undertaken.
                                       Executive Summary - 3
                                         Table 1
                       Loss-Reduction Measures Recommended for
                        a National Earthquake Insurance Program
Landuse LRMs (Applicable only in seismic zones 3 and 4)
New Development
LRM 1 Require in high liquefaction susceptible zones that geotechnical techniques be used
          to minimize potentia ground failures for
        o new commercial, public, and residential subdivision development and
        o major modifications of commercial, public and residential subdivision develop-
               ment. (Exceptions of scattered construction of single-family dwellings, may
               be considered in legal and administrative versions of this loss-reduction
               measure.)
LRM 2 Use zoning ordinances, subdivision ordinances, and other techniques to control new
      development in active fault zones, high site-amplification, landslide and liquefaction
      susceptible zones.
Existing Development
LRM 3 Permit reconstruction or replacement of existing development in areas identified as
      active fault zones, high landslide, or liquefaction susceptible zones experiencing
      damage of more than 50% of replacement value only if the identified risk is reduced
      to an acceptable level. Consider purchase of existing damaged properties in high
      landslide susceptible zones unless suitable measures are used to protect existing
      development from damage.
LRM 4 Proscribe additions to buildings in areas identified as active fault zones, high
      landslide or liquefaction susceptible zones unless the risks are reduced to an accept-
      able level, except additions to single-family dwellings up to 50% of the replacement
        cost, which can be made without such risk reduction.
Building Practice LRMs
New Construction
LRM 5 Eastern model codes shall be encouraged to incorporate (adopt by transcription)
      the latest version of the NEHRP seismic provisions. All model codes should incor-
        porate a geotechnical component that considers local site amplification effects on
        strong ground motion and minimization of potential ground failure effects.
LRM 6 Building regulatory authorities should adopt and enforce model codes that have
      adequate seismic provisions for buildings including one- and two-family dwellings
      and anchorage of mobile homes. The building code should apply also to repairs of
      earthquake-damaged buildings to assure that losses; are not repeated in subsequent
      earthquakes.
                                     Executive Summary -4
                                   Table 1 (Continuation)
New Construction (Continued)
LRM 7 In seismic zones 2,3, and 4, new essential buildings and public schools, including col-
      leges and universities, should be designed in conformance with current model code
      seismic provisions.
LRM 8 In seismic zones currently designated 2 with high seismic catastrophic loss potential
      (designated 2*) model codes should require the detailing requirements applied to
      zones of high seismicity.
LRM 9 For new construction in seismnic zones 3 and 4, a building "hazard rating" must be
      disclosed to potential buyers well before the close of escrow.
Existing Construction
LRM 10     In seismic zone 4, local jurisdictions should institute ordinances with require-
           ments for seismic retrofit of unreinforced masonry (URM) bearing wall build-
           ings. These buildings should be required to be upgraded to a minimum level or
           else demolished within a 20-year period.
LRM 11     In seismic zone 4, local jurisdictions should institute ordinances for the
           securing/strengthening of building parapets and external ornamentation within a
           20-year period.
LRM 12     In seismic zone 4, potentially hazardous (other than URM) essential buildings
           and public schools, including colleges and universities, must be retrofitted or
           phased out within a 20-year period.
LRM 13     In seismic zones 3 and 4, inspections of buildings including one- and two-family
           dwellings and anchorage of mobile homes should be performed prior to sig-
           nificant financial commitment or property transfer and hence well before the
           close of escrow. A report to the potential buyer should indicate whether or not
           a.   the dwelling is anchored to the foundation,
           b.   unbraced cripple walls are present, and
           c.   gas water heaters (if present) are adequately braced or strapped to the
                framning.,                  X
LRM 14     In seismic zone 4, state law should require that gas water heaters in multi-family
           dwellings (new and existing) be braced or strapped to structural framing.
LRM 15     In seismic zone 4, concrete tilt-up construction which does not have adequate
           roof-to-wall anchors and continuity ties shall be required to be retrofitted within
           10 years.
                                    Executive Summary- 5
                                                          MKI0   at=
                                                          : EXPLANATION
                                   For Adapting Figure .C-1, We Have Used the Following
                                   Relationships Between Seismic Zones and Peak
                                   Horizontal Ground Accelerations:
                                     Seismic Zone      Peak Ground Acceleration          Shaking
                                                        (Percentage of Gravity)        Hazard Level
                                           0                 -CO.05                       Lowest
                                           1                 2 0.05 and c 0.1
                                                             >O.1 and<O.2
                                           2
                                           31                > 0.2 and <0.4
                                           4                 -k 0.4                       Highest
          Figure 1. Illustrative Seismic Zone Map for the United States
(Adapted * from 'NEHR lRecommended Provisions for the Development of Seismic Regulations
 for New Build-ings," FEMA Publication 18 by the Building Seismic Safety Advisory Council, 1988)
                                     Executive Summary - 6
                                   PROJECT SUihMMARY
       The Congress of the United States is considerinig the establishment of a federal in-
surance program designed to reduce earthquake-caused mortality, morbidity, and economic
losses and to protect homeowners, businesses, and financial and public institutions from sud-
den and disruptive catastrophic economic losses. In anticipation of this current considera-
tion, the Federal Emergency Management Agency (FEMA) contracted for this study
(Contract No. EMW-88-C-2872) in order to have -addressed some of the key issues concern-
ing federal earthquake insurance or reinsurance. Specifically, this study has been contracted
to 'identify feasible alternative earthquake loss-reduction provisions and develop a strategy
to FEMA for incorporation of recommended loss-reduction provisions into a national
earthquake insurance prograrn" -- if one should be created by the Congress.
       Major project goals. were to
      o identify, evaluate, and recommend loss-reduction measures (LRMs) that are
        promising for incorporation into an earthquake insurance program involving the
        federal government,
      o indicate appropriate earthquake risk analysis methods for assessing and applying
        LRMs an or setting earthquake insurance rates, and
      o describe how recommended LRMs may be incorporated into a federal earthquake
        insurance or reinsurance program.
       Loss-reduction is considered by many to be one of the major objectives of any
earthquake insurance or reinsurance program involving the federal governrent. Many of
the other objectives of such a program, such as reducing the Federal deficit, providing
stability to homeowners and financial institutions after catastrophic earthquakes, and provid-
ing affordable insurance, involve considerations beyond the scope of this report.
     Diverse views are held regarding loss-reduction in a federal earthquake insurance
progra.L Specifically,. views differ on
   o the cost-effectiveness of specific earthquake loss-reduction measures and of
     earthquake loss-reduction measures generally,
   o the feasibility of Geological mapping of local seismic hazards, seismic building reviews,
     and other activities to support IMs and to-provide bases for earthquake insurance
     rate-setting (rating),
                                      Project Summary - 1
   o the proper role of the federal government, if any, in state and local landuse and build-
     ing practices generally and those related to earthquake loss-reduction specifically, and
   o the feasibility of incorporating cost-effective LRMs into either a primary or a secon-
     dary earthquake insurance program. (In a primary earthquake property insurance
     program, the insurance is provided directly to the property owner; in a secondary
     earthquake insurance program, insurance is provided to the insurer.)
      In order to understand these positions better, we have
   o held three meetings of a nationally-recognized advisory panel to identify and discuss
     diverse viewpoints regarding this study.
   o reviewed existing information on earthquake loss-reduction activities and measures,
   o identified from this information search loss-reduction measures that are technically
     sound,
   o subjected these technically-sound loss-reduction measures to economic analysis in or-
     der to determine which activities are cost-effective and who pays for and who benefits
     from these activities,
   o evaluated and revised selected measures at a workshop of experts and individuals from
     many diverse organizations throughout the United States,
As a critical part of these efforts, we have
   o identified fifteen LRMs that are technically sound, cost-effective, and politically and
     administratively feasible for inclusion in a federal earthquake insurance program,
   o identified activities needed to initiate, support or sustain these fifteen LRMs,
   o determined that earthquake risk analysis methods are currently adequate for LRM
     assessment for community use and for earthquake insurance rating,
   o clarified current contingent federal liabilities resulting from current federal disaster as-
     sistance and other federal policies and indicated how some of the activities required to
     initiate or to sustain recommended LRMs may justify an enhanced federal program of
     state and local programs and assistance to reduce these liabilities, and
   o demonstrated how the fifteen LRMs can be incorporated into earthquake ordinances
     which, along with the encouragement of risk-based rates, can serve to make the im-
     plementation of these LRMs consistent with a federal primary or secondary
     earthquake insurance program, and
   o provided forums permitting and encouraging the expression of a wide variety of view-
      points.
                                         Project Summary - 2
 Forums for Clarifying Project Issues
       Given the wide range of views on earthquake risk analysis methods, the acceptability of
laRMs, the desirability of supporting activities for LRMs and for rating, and the feasibility of
incorporating LRMs into a federal earthquake insurance program no unanimity of results
                                                                    1
was possible. Instead, the project approach was to permit this wide variety of positions to be
expressed, along with their rationales, so that these views could be used to modify project
results or to clarify issues addressed.
      For instance, a view that earthquake property loss-reduction may not be cost-effective
has derived from the observation that seismic codes are life-safety based; therefore, perfor-
mance of some buildings suffering total constructive loss from earthquakes is considered a
success because no casualties were sustained. To address this viewpoint, we have em-
phasized economic criteria along with technical, administrative, and other criteria in deter-
mining the acceptability of LRMs. Past earthquake investigations have shown that buildings
designed with little or no seismic resistance are much more likely to suffer higher degrees of
damage -- as well as be life-threatening - than are buildings designed to adequate current
model seismic code provisions. Hence, this study concludes that a strong relationship exists
between property-loss reduction and seismic safety even though model seismic codes could
give more emphasis to damage control.
Risk Analysis Methods
      This report contains a condensed -section on earthquake risk analysis methods ap-
propriate for a federal earthquake insurance program. Our examination of earthquake risk
analysis methods has found that
   o earthquake risk analysis has advanced sufficiently over the past twenty years to provide
      an-adequate basis for assessing LRMs and for determining earthquake insurance rates
      in spite of-large uncertainties;
  o current techniques are adequate for the development of small-scale seismic zone maps
    for use by a federal earthquake insurance administrator in spite of some differences in
    approach;
  o seismic risk methods for inclusion in a federal earthquake insurance program should be
    probabilistic and should evaluate all potentially damaging earthquakes and likelihood
    of occurrence; otherwise, both benefits of LR Ms and expected earthquake insurance
    losses could be either grossly underestimated or arbitrarily assigned; and
  o detailed engineering reviews of all buildings covered in a federal earthquake insurance
    program would be cost-prohibitive; moderate underwriting expenditures can provide a
    federal earthquake insurance program administrator with sufficient information for
    encouraging LRMs-and for setting rates; and
                                      Project Summary - 3
   o program monitoring of exposures and losses is essential for improving loss-reduction
     efforts and establishing rates along with continual review and application of pertinent
     research findings.
Recommended Loss-Reduction Measures
       We have identified fifteen LRMs, involving both improved landuse and building prac-
tices, that are suitable for inclusion in a federal earthquake insurance program. These are
summarized in Table 1.:
       Some of the LRMs in Table 1, namely building code requirements,-apply throughout
the country; however, the cost-effectiveness of implementing special building code require-
ments in low seismic zones has been questioned. Figure 1is used here to illustrate different
seismic zones that can be used for the application of LRM requirements in a federal
earthquake insurance program. Seismic zones 0 and 1 have the least earthquake'strong mo-
tion hazards. The low level of hazards in these zones implies very limited long term benefits
of LRMs. Consequently, requiring LRMs in these areas in exchange for the earthquake in-
surance benefit may as a rule be uneconomic. Nonetheless, there are benefits to inclusion of
such regions in the building code process. These benefits are derived from uncertainties in-
herent in the seismic zonation process which are highlighted when extremely low probability
damaging earthquakes occur in regions thought to be aseismic. When this occurs seismic
zone designations can be changed appropriately to reflect improved information. Purchase
of earthquake insurance at very low rates in low seismic hazard zones provides economic
protection against extremely low-probability events-.
       Figure 1 is adapted from FEMA publications (95 and 96), "NEHRP Recommended
Provisions for the Development of Seismic Regulations for New Buildings.' It is intended to
illustrate how the recommended LRMs become more stringent in the higher seismic zones
especially zones 3 and 4. Other seismic maps, such as those found in the 1988 Uniform Build-
ing Code or the 1982 American National Standards Institute Code are more or less consis-
tent with Figure 1.
       In all such maps, portions of California, Alaska, and possibly Montana have the highest
(zone 4) seismic zone designations. Portions of Arizona, Arkansas, Guam, Hawaii, Idaho, Il-
linois, Kentucky, Nevada, Puerto Rico, Tennessee, Utah, the Virgin Islands, Washington and
Wyoming may be high (zone 3) or higher seismic zone designations. Regions east of the
Rockies with seismic zone 2 designations with high catastrophic loss' potential may include
portions of states possibly affected by earthquakes in New Madrid, Missouri, or Charleston,
                                      Project Summary - 4
                                          Table 1
                        Loss-Reduction Measures Recommended for
                -
                         a National Earthquake Insurance Program
Landuse LRMs (Applicable only in seismic zones 3 and 4)
New Development
LRMI1 Require in high liquefaction susceptible zones that geotechnical techniques be used
      to minimize potential ground failures for
        o new commercial, public, and residential subdivision development and
        o major modifications of commercial, public and residential subdivision develop-
          ment. (Exceptions of scattered construction of single-famnily dwellings may be
          considered in legal and administrative versions of this loss-reduction measure.)
LRM 2 Use zoning ordinances, subdivision ordinances, and other techniques to control new
      development in active fault zones, high site-amplification, landslide and liquefaction
      susceptible zones.
Existing Development
LRM 3 Permit reconstruction or replacement of existing development in areas identified as
      active fault zones, high landslide, or liquefaction susceptible zones experiencing
      damage of more than 50% of rep]acement value only if the identified risk is reduced
      to an acceptable level. Consider purchase of existing damaged properties in high
      landslide susceptible zones unless suitable measures are used to protect existing
      development from damage.
LRM 4 Proscribe additions to buildings in areas identified as active fault zones, high
      landslide or liquefaction susceptible zones unless the risks are reduced to an accept-
      able level, except additions to single-family dwellings up to 50% of the replacement
      cost, which can be made without such risk reduction.
Building Practice LRMs
New Construction
LRM 5 Eastern model codes shall be encouraged to incorporate (adopt by transcription)
      the latest version of the NEHRP seismic provisions. All model codes should incor-
      porate a geotechnical component that considers local site amplification effects on
      strong ground motion and minimization of potential ground failure effects.
LRM 6 Building regulatory authorities should adopt and enforce model codes that have
      adequate seismic provisions for buildings including one- and two-family dwellings
      and anchorage of mobile homes. T'he building code should apply also to repairs of
      earthquake-damaged buildings to assure that losses are not repeated in subsequent
      earthquakes.
                                     Project Summary- 5
                                  Table 1 (Continuation)
New Construction (Continued)
LRM 7 In seismic zones 2,3, and 4, new essential buildings and public schools, including col-
      leges and universities, should be designed in conformance with current model code
      seismic provisions.
LRM 8 In seismic zones currently designated 2 with high seismic catastrophic loss potential
      (designated 2') model codes should require the detailing requirements applied to
      zones of high seismicity.
LRM 9 For new construction in seismic zones 3 and 4, a building "hazard rating" must be
      disclosed to potential buyers well before the close of escrow.
Existing Construction
           In seismic zone 4, local jurisdictions should institute ordinances with-require-
LRM 10
           ments for seismic retrofit of unreinforced masonry (URM) bearing wall build-
           ings. These buildings should be required to be upgraded to a minimum level or
           else demolished within a 20-year penod.
           In seismic zone 4, local jurisdictions should institute ordinances for the
LRM 11
           securing/strengthening of building parapets and external ornamentation within a
           20-year period.
            In seismic zone 4, potentially hazardous (other than URM) essential buildings
LRM 12
            and public schools, including colleges and universities, must be retrofitted or
            phased out within a 20-year period.
            In seismic zones 3 and 4, inspections of buildings including one- and two-family
LRM 13
            dwellings and anchorage of mobile homes should be performed prior to sig-
            nificant financial commitment or property transfer and hence well before the
            close of escrow. A report to the potential buyer should indicate whether or not
                 the dwelling is anchored to the foundation,
            a.
                 unbraced cripple walls are present, and
            b.
                 gas water heaters (if present) are adequately braced or strapped to the
            c.
                 framing.
            In seismic zone 4, state law should require that gas water heaters in multi-family
LRM 14
            dwellings (new and existing) be braced or strapped to structural framing.
            In seismic zone 4, concrete tilt-up construction which does not have adequate
LRM 15
            roof-to-wall anchors and continuity ties shall be required to be retrofitted within
            10 years.
                                       Project Summary - 6
                                                            ""aM fIu
                                                            * EXPLANATION
                                      For Adapting Figure C-1 We Have Used the Following
                                      Relationships Between Seismic Zones and Peak
                                      Horizontal Ground Accelerations:
                                       Seismic Zone       Peak Ground Acceleration     Shaking
                                                           (Percentage of Gravity)   Hazard Level
                                                              < 0.05
                                             0                                         Lowest
                                             1                20.05and<. DA
                                             2                   0.1 and < 0.2
                                             3                > 0.2 andc0.4
                                                      ~
                                             4                                         Highest
                                                               ! 0.4
   Figure 1. Illustrative Seismic Zone Map for the United States
(Adapted * from 'NEHRP Recommended Provisions for the Development of Seismic Regulations
for New Buildings,' FEMA Publication 18 by the Building Seismic Safety Advisory Council, 1988)
South Carolina, or possibly the northeastern United States. Regions west of the Rockies
having seismic zone 2 designations but with high catastrophic loss potential may include por-
tions of Alaska, Oregon, Utah and Washington.
      Figure 1 could be used on an interim basis for the implementation of LRMs in a federal
earthquake insurance program. One of the first steps in such a program should be the estab-
lishment of national seismic zone maps. Methods for developing these maps are currently
available and being updated. These maps are technically acceptable for the LRMs recom-
mended in this project.
      Economic analysis has determined the following loss-reduction measures as being
most cost-effective:
    o adoption of, compliance with, and enforcement of adequate seismic design provisions
      in new construction (LRMs 5, 6, 7, 8, and 9),
   o seismic retrofit of unbolted and/or poorly anchored wood-frame residences in seismic
     zone 4 (LRM 13), and
   o use of geotechnical techniques (supported by landuse planning) to minimize severe
     landslide, liquefaction, and/or subsidence hazards in seismic zone 4 (LRMs 1 and 2).
The remainder of the LRMs presented in Table 1 were determined to be adequately cost-
effective and acceptable to representatives of a broad range of geographic regions and inter-
ests.
      The LRMs recommended provide guidance to FEMA on which LRMs to include in a
federal earthquake insurance program. Administrative discretion should be used with
respect to such expressions as "50% of replacement value." Substitution of "50% of market
value," for instance, may prove to be administratively easier. The LRMs recommended are
expressed generally enough to represent a consensus among the professional engineers, lan-
duse planners, economists, and state and local administrators who participated on the
project. Additional specificity in terms used would require additional legal, public policy,
scientific, and engineering discussion and analysis.
        The emphasis in LRMs recommended lies in practices for new construction, especially
with respect both to adoption, compliance, and enforcement of adequate seismic code provi-
sions and to minimization of potential ground failure hazards during new development and
major modifications of existing construction.
        We have developed a list of major types of potentially hazardous construction for pur-
poses of characterizing "potentially hazardous" construction as referenced in Table 1. This
list is provided in Table 2. Other potential "hazard rating" categories include "Conforming"
                                      Project Summary - 8
                                     Table 2
             Potentially Hazardous Building Construction Classes
                     Identified for Public Policy Purposes
(1) Buildings with unreinforced masonry bearing walls which do not have
    complete or adequate load paths for seismic forces.
(2)   Concrete tilt-up or reinforced masonry structures with flexible roofs.
      Flexible roofs include those of wood or steel deck without concrete fill.
      Structures having one or more of the following inadequate features:
      (a)   wood ledgers used in cross-grained bending or tension,
      (b)   no bolts or anchor straps for anchorage of walls to roof diaphragm,
      (c)   excessive spacing or inadequate capacity of roof to wall anchors,
      (d)   chord elements that are discontinuous (not supplied with con-
            tinuity plates, etc.), and/or
      (e)   inadequate connection of tilt-up wall panels to foundation.
(3)   Non-ductile concrete frames -- concrete moment-resisting frames not
      conforming to the detailing provisions of the 1976 or later editions of the
      Uniform Building Code (UBC) and American Concrete Institute (ACI)
      Standard 318-77, including appendix A, (1977 edition or later) including
      "pre-cast" framnes.
(4)   Buildings with "soft"' or 'Weak' first stories -- particularly those having
      story strengths less than 65-percent of the strength of the story above, as
      per 1988 UBC.
(5)   Buildings having unreinforced or inadequately braced parapet walls or
      inadequately attached exterior ornamentation.
(6)   Buildings with inadequately attached or rigidly attached (inadequate al-
      lowance for story drift) exterior glazing or pre-cast concrete, masonry, or
      stone curtain wall panels.
(7)   Unreinforced masonry "infill" exterior walls.
(8)   Unreinforced masonry interior partitions or "infill" walls in stairwells
      and elevator shafts.
(9)   Buildings where no lateral force resisting system is present or can be
      identified either in the whole building or in a story of the building. Build-
      ings in which the seismic lateral force resisting system is incomplete or
      has significant gaps that could allow portions of the structure to collapse.
                                  Project Summary - 9
(to current model seismic code provisions), "Nonconforming" (to these provisions), and
"Retrofit" (to 65 percent of current model seismic design force requirements). For jurisdic-
tions in seismic zones 3 and 4 who comply with LRMs or other model seismic codes, the dis-
tinction between "Conforming" and other hazard rating categories will be between new and
existing buildings. Disclosure requirements of LRM 9 may further assist in providing disin-
centives for the prolonged use of potentially hazardous buildings in seismic zones 3 and 4. A
major objective of a federal earthquake program is to reduce over time the seismic vul-
nerability of the extremely large stock of existing potentially hazardous construction, espe-
cially in higher seismic zones.
Activities Supporting Recommended LRMs
      Loss-reduction measures cannot be implemented without adequate information,
resources, and organizational capability. A set of activities needed to initiate, sustain, and/or
support the fifteen recommended LRMs are listed in Table 3.
      As with the recommended LRMs, the supporting activities are defined generally
enough to achieve consensus among representatives of a broad range of interests and diverse
geographic regions. Further administrative and professional effort is required to define such
expressions as "minimum population" and "high liquefaction susceptibility".
      The supporting elements described in Table 3, for the most part, involve a continuation
of programs already underway in conjunction with both NEHRP programs and state and lo-
cal practices. For instance, mapping scales required by the supporting elements are no larger
than 1:24,000, and then only in higher seismic risk zones (zones 3 and 4) with significant ur-
ban development. Considerable data and maps already exist to help fulfill these require-
ments. As defined, the lack of full supporting elements should not delay implementation of
the most significant and cost-effective LRMs in Table 1. In view of the considerable progress
in NEHRP programs and the potential for future progress, the activities in Table 1 should be
regarded primarily as LRMs that are cost-effective to implement -- even considering costs of
supporting activities. Research that suggests additional cost-effective ways to reduce losses
from earthquakes should be used to periodically evaluate and improve the LRMs included.
The Community Basis of LRM Enforcement
      We recommend for adoption by appropriate state and local bodies earthquake or-
dinances analogous to those adopted under the national flood plain management program
within the National Flood Insurance Program (NFIP).
                                       Project Summary - 10
                                         Table 3
                   Activities Needed to Support Recommended LRMs
Activities Supporting Landuse LRMs
     (except for Li, applicable only in seismic zones 3 and 4)-
Li     For the entire United States, development of small scale maps (1:5,000,000) of
       ground motion, evaluated by -anexpert panel.
12     For urban areas with a minimum population (e.g., 50,000) development of in-
       termediate scale maps (1:100,000) of ground motion that include examination
       of local geological effects on strong ground motion (e.g., maps of relative site
       velocities for different spectra).
I3     Compilation and as necessary development of large scale maps (1:24,000) of
       lQuaternary surface faulting within a 50-mile band outside the perimeter of ur-
       ban areas having a miniimum population. Compilation and development of in-
       termediate scale maps (1: 100,000) elsewhere in seismic zones 3 and 4.
LA     Compilation and development of large scale liquefaction and landslide high
       seismic susceptibility maps (1:24,000) for urban areas having a certain mini-
       mum population. Greater attention should be placed on quantitative inter-
       pretation of such expressions as "high susceptibility." Areas mapped should be
       large enough to accommodate short-tern growth in undeveloped areas
       around the city.
15     Construction of information databases and transfer mechanisms so that the
       foregoing maps may be readily available and understandable to local officials,
       realtors, developers, insurance companies, and the general public.
L6     Requirement that general plans include a seismic safety element that sets
       development policy for local geological hazards including high relative site
       response factors, fault zones, and regions of high liquefaction and/or landslide
       susceptibility.
L7     Development of requirements for areas identified as -active fault zones, and
       high landslide or liquefaction susceptible zones that a geologic/geotechnical
       report be prepared for critical facilities, high-occupancy buildins, new sub-
       divisions, and major modifications of high-occupancy (and/or critical) build-
       ings, and that these be reviewed by a suitable licensed professional.
L      Development of guidelines for preparation and review of geologic/geotechni-
       cal reports.
L9     Provision of resources for state and local programs, procedures, and staffing to
       effect IRMs.
                                     Project Summary -11
                              Table 3 (Continuation)
Activities Supporting Building Practice LRMs
Bi   Definition of "potentially hazardous buildings" as in Table 2.
B2   Definition of seismic zone 2* as those seismic zone 2 areas with high seismic
     potential at extended recurrence intervals and/or with high seismic loss poten-
     tial.
B3   Definition of criteria and a program for seismic evaluation and retrofit of ex-
     isting buildings.
B4   Provision for limitations on liability of local jurisdictions and their building
     official(s) when they provide and permit criteria (as in B3) for evaluation and
     retrofit design which is less stringent than building code requirements for new
     construction.
     Permission for voluntary seismic upgrades without mandated upgrades for
B5
     non-safety related functions.
B6   Support for the development of programs and procedures and of professional
     state and local building staffing to effect LRMs.
     Support for dislocated or disadvantaged tenants during seismic retrofit
B7
     programs.
B8   Continued research directed at reducing costs for seismic construction, both
     new and existing.
     Continued work to incorporate a geotechnical component into model seismic
B9
     code provisions.
BlO Continued research into the development of codes that emphasize property
    damage control and maintenance of function over and above critical life-safety
    protection.
                                   Project Summary - 12
      The concept of earthquake ordinances recognizes that these LRMs are implemented at
                                                                                          the
state and local levels and that public agencies, as opposed to financial institutions, are
appropriate enforcers of these LRMs. The concept also recognizes that earthquake loss-
reduction implementation programs require coordination among various agencies within
municipalities, even though most of the currently active earthquake ioss-reduction programs
are handled exclusively by building safety departments. The LRMhs in Table I are accord-
ingly designed for adoption by state or local community-based programs. Especially in higher
seismic zones, individuals, firms, municipalities, or states may, based on life-safety,
                                                                                          im-
economic, political, or legal reasons, decide to use higher seismic standards than those
plied in Table 1. Moreover, selected insurers may provide detailed rate credits for seismic
                                                                                             a
safety practices. Table 1 LRMs generally require some degree of regulation and cover
wide range of possible cases -- not merely unique motivations or circumstances.
Loss-Reduction through Enhanced Current Public Policy
      We review existing earthquake loss-reduction programs at federal, state, and local
levels in order to examine the framework within which project objectives can be achieved.
                                                                                               ef-
We maintain that, in spite of the progress that has been made in these programs, further
forts at a federal level could be made to strengthen these programs and reduce existing con-
                                                                                              for
tingent federal liabilities. A strengthened federal program could in turn provide support
                                                                                                of
the higher cost activities listed in Table 3 through reduction of these liabilities. Provision
 resources for state and local programs, procedures, in particular, and staffing to effect LRMs
 (L9 and B6 for landuse and building practices, respectively) could be initiated based on such
 an enhanced federal program.
        Current public policy involves no direct federal involvement in earthquake insurance
 and has many constraints on local adoption and enforcement of earthquake ordinances and
 promotion of loss-reduction activities. These include lack of adequate staffing, competition
 within the building construction industry to keep front-end construction costs as low as pos-
                                                                                                sig-
 sible, and resistance to landuse planning that adjusts real estate values. One of the more
 nificant constraints is the Federal financial contribution toward repair, restoration, and re-
                                                                                                  of
 placement of damaged facilities. Once the President has declared a disaster, Section 406
 the Robert T. Stafford Disaster Relief and Emergency Assistance Act (P.L. 100-7107) com-
 mits the federal government to financing not less that 75 percent of the net eligible costs of
  repair, restoration, reconstruction, or replacement of public facilities and private nonprofit
  facilities. Expectation of the 75 percent federal cost share serves as a disincentive to the local
                                         Project Summary- 13
and state application of adequate seismic standards to construction and/or retrofit of public
and selected private nonprofit buildings.
       The Stafford Act does require that loss-reduction measures in the form of local codes,
specifications, and standards be applied to recovery efforts financed through any disaster
loan or grant under the provisions of the Act. The Act provides 50 percent financial support
for hazard mitigation activities and requires natural hazard evaluation in those areas receiv-
ing assistance under the Stafford Act.
       The January 5, 1990, Executive Order 12699 on Seismic Safety of Federal and
Federally Assisted or Regulated New Building Construction requires that each Federal
agency responsible for the design and construction of a new Federal building shall ensure
design and construction- with appropriate seismic standards. Further, new buildings con-
structed; and leased for Federal use or constructed with Federal financial assistance or regu-
lated by a Federal agency shall appropriately use seismic safety standards. Nationally-
recognized private sector standards and practices shall be used when possible or adequate
local building codes. Implementation of this order should reduce earthquake losses to
Federal, Federally subsidized, or Federally regulated new buildings.
       While the Stafford Act and Executive Order 12699 reflect considerable progress with
respect to loss-reduction efforts, the very significant contingent federal liabilities resulting
from current federal policies indicate the need for increased federal controls to reduce these
liabilities. Additional resources are needed to achieve the specific goal of reducing existing
federal liabilities associated with potential earthquakes, even without a federal earthquake
insurance program.
       Federal disaster relief policy, along with other federal policies such as taxation, Small
Business Administration (SBA), and Federal Deposit Insurance Corporation (FDIC)
policies, supports a significant federal government interest in state and local landuse and
building practices. Additional federal action to strengthen landuse and building practices for
earthquake loss-reduction is warranted. Financial support for training programs and for lo-
cal staffing, as was provided during the early implementation of the Clean Air Act, is an ex-
ample of such needed Federal program strengthening. Part of the support for LRMs iden-
tified in Table 1 can be provided through a wide variety of federal programs specifically
designed to reduce existing contingent federal liabilities.
                                      Project Summary - 14
Federal Involvement in Earthquake Insurance
      One possible change in programs would involve the federal government in earthquake
insurance. This would Initially increase direct federal liabilities in the short tern but with
premium inome and loss-reduction could decrease them over the long term. In order to dis-
cuss how this may affect the implementation of loss-reduction measures, we consider
   o earthquake risk analysis methods and their application in the selection and monitoring
      of LRMs and in insurance rate-setting, and
   o how insurance rating influences the implementation of loss-reduction measures.
We use expected reductions in annual losses to ensure that recommended LRMs are cost-
effective. However, traditional seismic loss estimation methods (expected annual loss and
probable maximum loss methods, respectively) are not suitable for earthquake insurance
rating purposes. Instead, new multisite methods exist which are better able to incorporate
both expected annual losses and extreme fluctuation in those losses into a coherent
framework for earthquake insurance rating. These methods can better deal with risk diver-
sification and rate reduction issues. These methods also can be used to determine suitable
prices in a secondary earthquake insurance context. However new these methods are with
respect to earthquake, they are similar to methods used since the onset of the National Flood
Insurance Program.
      Protection of the public, insurance rate-reductions, and economic stability of public
and private entities, with resulting benefits to individuals, would be major goals of a federal
earthquake insurance involvement. Another goal - the principal focus of this project --
would be to reduce future losses through the incorporation of loss-reduction measures into
federal earthquake insurance program involvement. Without these measures, expected
primary earthquake losses would increase, thus affecting adversely the safety, health, and
welfare of the nation's citizens and the economic stability of the nation's public and private
entities.
      Two primary vehicles exist whereby implementation of LRMs such as those listed in
Table 1 can be made compatible with and incorporated into a federal earthquake insurance
program: (1) adoption of and enforcement of state and local earthquake ordinances and (2)
a system of partially risk-based insurance rates -- rates that discourage poor seismic construc-
tion quality and encourage adoption and enforcement of adequate seismic standards.
Without a system of partially risk-based rates, federal earthquake insurance involvement
                                       Project Summary- 15
would be seriously incompatible with the loss-reduction measures proposed. With partially
risk-based rates, communities could be further encouraged to adopt, comply with, and en-
force loss-reduction ordinances. With primary federal earthquake insurance programs, a
combination of partially risk-based rates and ordinances can be strongly encouraged, as in
the NFIP. With secondary federal earthquake involvement, e.g., federal reinsurance
provided to primary earthquake insurers, earthquake ordinances can only indirectly be en-
couraged such as through secondary pricing that reflects risks of exposures to primary in-
surers.
      Various goals can be reached with the combined encouragement of earthquake or-
dinances and a system of partially risk-based rates. These include short-term goals of im-
proving the protection of the people and ensuring the nation's economic stability in the face
of potential catastrophic earthquakes and the long-term goals of reducing the losses resulting
from earthquakes.
Recommendations
    Based on project findings, we make the following recommendations:
(1)   The fifteen LRMs listed in Table 1 should be incorporated into any Federal earth-
      quake insurance involvement. These LRMs are scientifically and technically valid,
      practical and cost-effective and have been critically reviewed by experts and repre-
      sentatives from a wide variety of geographic regions and interest groups. The primary
      loci of direct enforcement for these LRMs are state and local government authorities,
      not financial institutions.
(2)   For implementation of these LRMs, small-scale seismic zone maps for the nation
      should be developed primarily on scientific and statistical bases. Figure 1 should be
      used in the interim and would be adequate for starting a federal earthquake insurance
      involvement incorporating LRMs. State and local jurisdictions can require additional
      seismic protection.
(3)   FEMA should initiate an enhanced federal program specifically designed to provide
      cost-effective LRMs to reduce existing contingent federal earthquake-related
      liabilities. FEMA should seek the necessary legislative mandates and resources to un-
      dertake this enhanced program. This report identifies many of those liabilities and
                                     Project Summary - 16
      demonstrates how they can be cost-effectively reduced to the benefit of the federal tax-
               This recommendation supports Administrative and Congressional deficit-
      payer.
      reducing themes discussed in Darman (1990) and GAO (i989a and b) and further sup-
      ports the loss-reduction goals described in the January 5, 1'990 Executive Order on
      "Seismic Safety of Federal and Federally Assisted or Regulated New Building Con-
      struction." An enhanced program of this sort would provide many of the supporting
      elements needed for incorporation of LRMs into any federal earthquake insurance
      program and would further ensure that public buildings, as well as private nonprofit
      buildings, serve as examples of good seismic practice.
      Should a federal earthquake insurance program be initiated, other supporting acti-
(4)
      vities as indicated in Table 3 should be initiated or augmented. In almost all instances
      these supporting elements are not marginally expensive. Cost considerations should
      not delay implementation of the fifteen LRMs. In other instances, especially B6 -- sup-
      port for the development of programs and procedures and professional state and local
      building staffing to effect LRMs, these should be considered as part of the deficit-
      reducing program suggested in recommendation (3).
(5) We recommend that probabilistic multisite risk analysis methods be used for in-
    surance rate-setting. Although actuarial and public policy analyses are needed to
    determine how rates are to be structured in a federal earthquake insurance involve-
    ment, preliminary conclusions pertinent to LRMs and rating methods were drawn. In
    order to account for both expected earthquake losses and potentially extreme filuctua-
    tions in those losses. Inventory of exposures should occur during application to the
    program. Second, we recommend partially risk-based rates that support and sustain
    the fifteen ILRMs proposed. To the extent that rates reflect risks, seismic zone maps in
    recommendations (2) and (4) will be similar to or mirror rating maps. In contrast, to
      the extent that territorial or jurisdictional or other considerations enter into this public
      policy analysis, seismic zone maps suggested for LRMs may diverge somewhat forn
      those for rating. To the maximum degree possible, a single mapping program should
      be used for both LRM application and insurance rate-setting. This offers decided ad-
      ministrative advantages over using widely divergent maps for LRMs. and for rates.
      The fifteen LRMs, proposed in this project can be incorporated into state and local
(6)
      governmentearthquake ordinances. In a primary federal earthquake insurance
                                       Project Summary - 17
      program, we recommend that the administrator employ a combination of partially risk-
      based rates and insurance availability conditional on cost-effective LRMs being
      adopted and enforced and by earthquake ordinances. These methods are analogous to
      methods effectively being implemented under the NFIP. A mandatory primary
      program and, hence, a monopolistic program, has the potential disadvantage that an
      administrator may wish to cut program costs that would otherwise be incurred in a
      competitive market situation. These include modest costs of underwriting partially
      risk-based rates. As a result, rating incentives for cost-effective loss-reduction
      measures must be built into the objectives of such a mandated program.
(7)   In a secondary federal earthquake insurance program, a federal insurance ad-
      ministrator will be faced with a difficult challenge in incorporating LRMs. The ad-
      ministrator may use secondary pricing that reflects risks, agreements with state in-
      surance regulators to ensure that risks are reflected in rates, or leverage from a com-
      bined primary and secondary federal earthquake insurance program in order to
      require earthquake ordinances. We regard the incorporation of LRMs into a secon-
      dary federal earthquake insurance program as being feasible but challenging.
(8)   Program monitoring, review, and improvement are essential features of the program
      envisaged here. Developments are ongoing in mapping earthquake hazards, assessing
      earthquake risks, and improving cost-effective risk-reduction technologies. A federal
      earthquake insurance program containing a loss-reduction element should systematize
      pertinent program information and should periodically review and evaluate this infor-
      mation against developments to assure continuing and improving program efficacy in
      loss-reduction.
(9)   Examination should be undertaken of the many issues -- over and above loss-reduction
      -- related to the feasibility of a federal earthquake insurance program. Actuarial,
      economic, and public policy analyses, for instance, are needed to examine various
      detailed issues concerning the protection of the Federal Treasury, the provision of af-
      fordable earthquake insurance, and the reduction of post-earthquake instabilities in
      the financial sector of the economy. Issues of mandating insurance purchase require-
      ments should also be examined. Further consideration should be given to how a
      government insurance program may and should differ from a private sector or com-
      petitive program.
                                     Project Summary - 18
         INTRODUCTION AND OVERVIEW
1.0
      This report constitutes the last of a series of deliverables under Federal EmergenCy
Management Agency Contract No. EMW-88-C-2872 entitled 'toss-Reduction Provisions of
a National Earthquake Insurance Program."
     Contractual Background
1.1
    Current concerns prompting this study are described in the contract "Statement of
Work" as follows:
      The Federal Emergency Management Agency (FEMA) is considering issues related to earthquake
      insurance. This reflects current discussions, of the need for a national earthquake insurance or rein-
      surance program involving the Federal Government. The Congress has been giving more emphasis
      to the use of insurance to deal with natural disaster losses instead of Federal disaster assistance.
      One of the major considerations by Congress and the Executive branch prior to approval of any
      Federally-assisted earthquake insurance or reinsurance program may well be whether loss-reduction
      is an integral part of the program's goals, objectives and procedures. ... Any national earthquake
      insurance program would require a significant financial commitment by both the Federal Govern-
      ment and the private insurance sector. The incorporation of loss-reduction provisions would reduce
      potential loss exposure to both parties and provide a basis for lower insurance premiums to the
      policyholders. (Contract, page 9)
Because
      There are different views on how best to include loss-reduction provisions within a national
      earthquake insurance program, what those provisions should be, and . . . whether such provisions
      would be technically, economically, socially, and politically feasible. (Contract, page 9)
FEMA contra cted this study in order to
      identify feasible alternative earthquake loss-reduction provisions and develop a strategy to FEMA
      for incorporaton of recommended loss-reduction provisions into a national earthquake insurance
      program. (Contract, page 9)
More specifically,
      The objective of this study is to identify, evaluate, and recommend feasible earthquake loss-
      reduction provisions, including safe land use and building practices, that can be incorporated into a
      national earthquake insurance or reinsurance program involving the Federal Government and the
      private insurance industry. (Contract, page 10)
The scope of the study, as described in the contract, was relatively broad:
      This study shall identify specific loss-reduction measures that can be applied to different structural
      classes of buildings, including almost every type of walled and roofed building. The scope should in-
      clude, at a minimum, new construction, existing hazadous buildings, and critical buildings such as
      those used for emergency operations, police, fire, and medical services, public assembly, and schools.
      The study shall identi loss-reduction measures that can be taken by State and local governments,
      the private sector, and individual homeowners. The scientific, technical, social, economic, and politi-
                                                          1- I
       cal aspects of the loss-reduction strategies and measures shall be addressed. Pertinent legal issues
       shall be discussed. (Contract, page 10)
       Deliverables submitted prior to this report (as required by the contract) have included
 the following working drafts:
    - "Project Workplan: Loss-Reduction Provisions of a Federal Earthquake Insurance
          Program" dated November 30, 1988.
       - "Summary of Principal Issues: Relating to the Incorporation of Loss-Reduction Provi-
           sions into a National Earthquake Insurance Program" dated May 31, 1989.
      - Report on earthquake risk assessment and portrayal methods (Contract, Task IV, page
          12) entitled "Risk Analysis Methods for a Federal Earthquake Insurance Program"
          dated May31, 1989.
      - Report of project team efforts to "assemble and evaluate all promising strategies and
          measures .. for earthquake loss-reduction" (Contract, Task III, page 11) entitled
          "Promising Loss-Reduction Measures In a Federal Earthquake Insurance
          Program," Volume I, Working Copy, July 1, 1989, and Volume It, Working Copy,
          July 20, 1989.
      - Report of Project Workshop results entitled "Workshop: Loss-Reduction Provisions-of
          a National Earthquake Insurance Program for the Federal Emergency Manage-
          ment Agency and the Federal Insurance Administration," September 30, 1989.
  - Two drafts of the final report, January 15, 1990 and March 31, 1990.
This document, constituting the "Final Report" required by the contract,
      proposes earthquake loss-reduction provisions along with a recommended strategy for incorporation
      into a national insurance or reinsurance program....             The supporting scientific, technical,
      socioeconomic, legal, and public policy data, analysis, findings, conclusions, and rationale shall be in-
      cluded. A general plan for continuing evaluation and modification of the loss-reduction provisions if
      they are incorporated into a national earthquake insurance program shall be included as an appen-
      dix. (Contract, page 20)
      In an effort to provide the reader with important background information, the
remainder of this section reviews the current status of federal involvement in earthquake-
related loss-prevention and disaster relief (1.2), describes limitations of the scope of this
study (1.3), summarizes the methods used in conducting this study (1.4), and presents an
overview of the content of this report (1.5).
1.2      General Background              The Status Quo
                                    --
      Consideration of the possible need for a national earthquake insurance or reinsurance
program involving loss-reduction provisions acknowledges the fact that current earthquake
loss-reduction programs are fragmentary.        This fragmentariness in earthquake loss-
                                                          1-2
reduction programs results from a number of factors which contribute to make up current
earthquake-related policy in the United States. Specifically, current fragmentariness is due
to
       o local/municipal 'locus of control",
       o the variety of sources of building codes,
       o the economies of scale necessary to implement loss-reduction,
       o irregular sensitivity of political bodies to earthquake-related concerns,
       o constraints on the insurance system, and
       o current disaster relief policies.
In order to understand the relationship between current efforts and a proposed national
program, one must first be familiar with the status quo. Recognition of challenges within the
status quo is made possible through considerable progress in research and other National
Earthquake Hazard Reduction Programs (NEHRP). However, frank discussion of
problems in the implementation of loss-reduction is needed to determine why fragmentari-
ness currently exists and how modified programs, including a federal earthquake insurance
program, can assist in meeting challenges for loss-reduction programs. The following discus-
 sion reviews these factors in order to establish the context in which this study was conducted.
Locus of Control
      Currently, the implementation of loss-reduction measures occurs on individual and lo-
cal levels. Although implementation of loss-reduction measures (as defined in section 1.3)
would continue to occur at local levels, the purpose of this project requires assessing loss-
reduction programs in terms of their connection to federal insurance programs. As a result,
several issues related to the locus of control of loss-reduction programs require discussion.
At the project workshop and elsewhere, participants emphasized the need to explain how
loss-reduction measures incorporated into a federal insurance program could adequately
serve national needs. Put otherwise, how would the loss-reduction program relate ap-
propriately to Boston, Minneapolis, and Atlanta as well as to San Francisco and Anchorage?
       In spite of many educational and post-disaster response advances, and other selected
advances in implementing loss-reduction measures, we maintain that current earthquake
loss-reduction programs are to a large degree fragmentary. This fragmentariness is reflected
by
    o inadequate seismic code provisions for most jurisdictions east of the Rocky Mountains
       (a problem significantly being addressed in recent developments by model code
       organizations);
                                               1-3
   o the absence of seismic retrofit ordinances for unreinforced masonry buildings (or for
     other potentially hazardous buildings) except in selected California municipalities
     (with more ordinances likely after the October 17, 1989, Loma Prieta earthquake);
   o the relative ineffectiveness of seismic elements of landuse planning programs, even in
     many California municipalities (Wyner and Mann, 1983); and
   o the extremely large stock of potentially hazardous structures that, as a consequence of
     the above factors, continues to increase.
Sources of Building Codes
      The fragmentary application of seismic codes to local jurisdictions is due in part to the
variety of sources used to develop codes. Three key model code organizations that publish
building codes are
   o the International Conference of Building Officials (ICBO), which publishes the
      Uniform Building Code (UBC);
   o the Building Officials and Code Administrators (BOCA), which publishes the BOCA
     National Building Code (formerly, the Basic Building Code -- BBC), and
   o the Southern Building Code Congress International (SBCCI), which publishes the
     Standard Building Code (SBC).
One major concern in developing a national program is how federal officials should work
with these model code organizations and a variety of other organizations (e.g., Structural
Engineers Association of California, Building Seismic Safety Council, and the American
Society of Civil Engineers) concerned with model code development.
Economies of Scale
      Earthquake loss-reduction activities require economies of scale (here, especially,
decreasing output costs per unit of labor or capital added) which typically include (1) large
front-end costs in order to make the activities effective and (2) high degrees of specialization
required to implement loss-reduction activities.
      Large front-end costs are required to support such activities as construction and
retrofitting to seismic standards. Unfortunately, those who must bear these costs are often
hard-pressed to justify the expenditures. Fundamentally, large capital outlays may not be
within the financial capabilities of many stakeholders with limited liquidity, including low-
income residents, small businesses, and nonprofit organizations. Moreover, returns to be
gained from high front-end costs may not be realized within short time frames. Many of
these "returns" may not be investment returns, but rather "spillover" benefits to those who
                                              1-4
occupy buildings, whether as tenants or as visitors, or to the government, which may spend
less for disaster clean-up. Builders, contractors, and short-term owners may not realize the
benefits of their outlays. In those cases where front-end costs prevent loss-reduction ac-
tivities, dangers resulting from potentially hazardous buildings and sites are to a large degree
involuntary, since stakeholders visiting, living, and working in these facilities individually
have extremely limited control over siting and construction practices.
       Coping with seismic design requires that design engineers, building officials, building
inspectors, contractors, carpenters, masons, main workers, and steel fabricators, among
others, be familiar with the technical elements of seismic code provisions. Even greater ex-
pertise is typically required for seismic rehabilitation programs.
       Thus, earthquake loss-reduction typically requires investments of significant capital
and technical expertise. Such funding and expertise are often not available at the local level.
Successful implementation would be very expensive if individuals or firms were to undertake
seismic loss-reduction programs on their own without organized social resources. These
economies of scale have been proferred -as one reason why seismic provisions of building
codes may be required, since it would be very inefficient for consumers to make these deci-
sions on an individual basis (See Milliman and Roberts, 1985).
Timing of Earthquake Policy Development
      Another cause of current fragmentariness is explained by champions of loss-reduction
programs who often speak of waiting for windows of opportunity -- typically earthquake dis-
asters -- to promote major legisiation, stronger ordinances, and improved private industry
practices. (See Cheney and Whiteman, 1987; Qlson et al., 1988.) With a few exceptions,
economic, political, and social systems are sensitive to earthquake risk issues only on an ir-
regular basis -- often in the unfortunate context of the disaster itself. Exceptions, for ex-
ample, occur largely in states west of the Rocky Mountains, principally in Californa, and are
expressed through biilding code practices, emergency preparedness drills, and other pre-
and post-disaster preparations which call attention to earthquake issues, existing commercial
and residential earthquake insurance purchases, and selected instances of seismic retrofit.
Private Market Insurance System Considerations
      Insurance system considerations are many, but principally include financial and func-
tional limitations on insurance companies in acting as enforcers of loss-reduction programs.
Financial limitations include the inadequate total capacity of the insurance market to cover
potential ciaims in a voluntary earthquake insurance market that lacks substantial risk diver-
                                              1-5
sification. Specifically, the risks are not sufficiently spread geographically to limit the
catastrophic loss potential to the total portfolio of an insurance company from single
earthquakes. This problem of inadequate capacity can to some extent be offset by rein-
surance, but the reinsurance market also has a limited capacity and raises reliability concerns
because reinsurers are currently largely unregulated. Business cycles in this reinsurance
market (see Cheney and Whiteman, 1987; Anderson et al., 1981) have dramatic effects on
earthquake insurance availability and prices. Federal taxation and other policies exacerbate
this capacity problem to the extent that insurers are less able to build up long-term reserves
to meet potential earthquake losses.
       Functionally, insurance companies are not necessarily in the best position to enforce
earthquake loss-reduction programs. Since they are private, competitive, regulated com-
panies subject to antitrust and other constraints, they cannot mandate earthquake insurance
purchase, they operate under severe limitations on the extent to which they can share infor-
mation for rate-setting and other purposes, and as private firms they have no direct concern
for the spillover (e.g., public) benefits of earthquake loss-reduction programs. Within this
context, decisions regarding how much to spend on underwriting and rating are largely
private, and company policies in this regard may vary considerably. Reinsurers are often in
an even less effective position, since they may have difficulty obtaining exposure data from
primary insurers.
Disaster Relief Considerations
      Causes of fragmentariness in earthquake loss-reduction efforts partly as a consequence
of disaster relief programs include the following:
(1) Prior to 1988, post-disaster funding (i.e., the use of funds to pay for existing earthquake
      damage) was characterized by the absence of a preventive inducement.
(2)   The 1988 Robert T. Stafford Disaster Relief and Emergency Assistance Act includes
      provisions for preventive loss-reduction. Nevertheless, for certain categories of opera-
      tions (e.g., those including publicly-owned or private nonprofit buildings) there exists a
      strong disincentive to engage in property loss-reduction measures, because disaster
      relief assistance assumes a large (75 percent) payback for damage incurred should a
      federal declaration be made.
(3)   Prior to 1990, federal buildings like state and local buildings only occasionally served as
      models of good seismic practice.
(4)   Many segments of the population appear to misunderstand the limitations of how
      much federal and state governments are obligated to pay after a disaster.
                                              1 -6
These considerations suggest that, to a larger degree than is desirable, earthquake costs are
"externalized," i.e., not borne by those who assume the risks. (See Atkisson and Petak, 1981
and Burby et al., 1990 for confirming evidence.) As a result, these constraints serve as disin-
centives to the implementation of loss-reduction activities. For smaller municipalities,
owing to inadequately developed risk management, these disincentives may be not explicitly
perceived as such. Nevertheless, reliance on state and federal programs for catastrophic
earthquake loss-reduction, especially outside California, suggests that the disincentives,
among other factors mentioned, are operable. (See Burby et al., 1990.) For purposes of
background clarification, the following discussions of the 1974 Disaster Relief Act as
modified in 1988 by the Robert T. Stafford Disaster Relief and Emergency Assistance Act
and of Executive Order 12699 (January 5, 1990) are provided. These discussions presuppose
that genuine needs are met through federal disaster assistance. This report by no means
provides a comprehensive account of disaster relief programs. The implications of current
practices for loss-reduction are, however, important in understanding how these practices
may be improved.
Robert T. Stafford Disaster Relief and Emergency Assistance Act
(P.L. 93-288 as amended by P.L. 100-707)
      Once the President has declared a disaster, Section 406 of the Stafford Act commits the
federal government to financing not less than 75 percent of the net eligible cost of repair, res-
toration, reconstruction, or replacement of public facilities and private nonprofit facilities.
This "net eligible cost" is based on
         the design of such facility as it existed immediately prior to the major disaster and in
         conformity with current applicable codes, specifications, and standards ....
Of particular importance is the fact that reconstruction costs are not confined to restoring
the facility to its original designs but may include redesign to current applicable codes,
specifications, and standards. Additionally, funding is not limited to 75 percent of allowable
recovery costs.
      In the context of loss-prevention programs, Section 406
          o provides for general risk reduction alternatives which include not only repair and
             replacement but also relocation when
                o the facility is and will be subject to repetitive heavy damage, and
                o the overall project is cost effective;
         o requires that currently applicable standards be used in federally assisted repairs
             or replacements..
                                                     1-7
                                                                                                    II
In section 409, the use of "applicable codes, specifications, and standards" is required as a
condition of any disaster loan or grant under the provisions of the Act. Thus, the Stafford
Act requires that loss-reduction measures be undertaken for damaged structures for which
federal grants or loans are made available. These standards, codes, and specifications must
"apply uniformly to all similar types of facilities within the jurisdiction of the owner of the
facility" (FEMA, March 1989, p. 11637).
      In the context of earthquake insurance, the Stafford Act, as amended, also includes
references. Section 311 of P.L 100-707 requires that applicants for assistance under section
406 shall
     assure that, with respect to any property to be replaced, restored, repaired, or constructed
     with such assistance, such types and extent of insurance will be obtained and maintained as
     may be reasonably available, adequate, and necessary, to protect against future loss to such
     property.
Determination of "availability, adequacy and necessity" requires certification by the ap-
propriate state insurance commissioner responsible for regulation of such insurance.
     Section 404 of the Stafford Act provides federal support for post-disaster hazard
mitigation activities related to undamaged public and private nonprofit buildings and all
commercial, industrial, and residential buildings. Specifically, the Act states that
     the President may contribute up to 50 percent of the cost of hazard mitigation measures
     which the President has determined are cost-effective and which substantially reduce the risk
     of future damage, hardship, loss, or suffering in any area affected by a major disaster. Such
     measures shall be identified following the evaluation of natural hazards under section 409 and
     shall be subject to approval by the President. The total contributions under this section shall
     not exceed 10 percent of the estimated aggregate amounts of grants to be made under section
     406 with respect to such major disaster.
Additionally, Section 409 (formerly part of section 406 under the 1974 Disaster Relief Act)
provides for the pre-disaster natural hazard evaluation process in which state and local
recipients of disaster loans and grants
  shall agree that the natural hazards in the areas in which the proceeds of the grants or loans are to
  be used shall be evaluated and appropriate action shall be taken to mitigate such hazards including
  safe land-use and construction practices, in accordance with standards prescribed or approved by the
  President after adequate consultation with the appropriate elected officials of general purpose local
  governments, and the State shall furnish such evidence of compliance with this section as may be
  required by regulation.
In theory, Section 409 may be used to enhance efforts to reduce earthquake risks after a
major flood, hurricane, or other non-earthquake disaster. However, after a thorough ex-
                                                     1-8
amination of this clause in practice, Atisson and ]Petak (1981) concluded that the hazard
mitigation evaluation process generally has been applied to only the peril which led to the
disaster for which recipients received relief and not to possible future disasters. Addi-
tionally, Brower et a. (1986) have concluded that past (pre-Stafford Act) hazard mitigation
planning activities under the above -clause have had little relationship to federal funding
decisions. As a result, local constituencies have had little incentive to conduct natural hazard
evaluations. (See Burby et alL, 1990 for a broader survey.)
      In review, The Stafford Act commits the federal government to significant financial
liabilities following a presidentially-declared disaster due to earthquake. The act is primarily
applicable to only damaged public and private nonprofit buildings. It does however promise
that seismic replacement and retrofit can be required, given adequate current codes,
specifications, and standards. Developments after the 1989 Loma Prieta, California,
earthquake are very promising for earthquake loss-reduction activities. (See The State/
Federal Hazard Mitigation Survey Team, 1990.) In addition, with state insurance regulator
certification, insurance purchase can be required for repaired or replaced buildings so that a
large share of the contingent federal liabilities for these buildings can be transferred to state
and local governments (FEMA, March 1989, p. 11639).
Seismic Safety of Federal and Federally Assisted or Regulated New Building Construction
(Executive Order 12699 of Janua 5, 1990)
      In support of federal efforts to develop and promulgate earthquake-resistant standards
for new construction, the President issued Executive Order 12699. This order requires that
      Each Federal agency responsible for the design and construction of each new Federal build-
      ing shall ensure that the building is designed and constructed in accord with appropriate
      seismic design and construction standards. (President, 1990)
The order specifies that local building codes affecting seismic design and construction be ap-
plied to all new construction of buildings to be "leased for federal uses or purchased or con-
structed with federal assistance." The order also applies in the federal regulation of the
structural safety of buildings. In effect, Executive Order 12699 enhances loss-reduction ef-
forts by exercising federal controls; however, only federally-related new construction is af-
fected by the Order.
                                                   1-9
  Limitations of Current Federal Involvement
        The principal goal of current disaster policy is to ensure that economic stability be re-
  stored in regions affected by a disaster. Concerns with respect to health, life, safety, and en-
  vironmental matters also exist. As a consequence, through the Robert T. Stafford Disaster
  Relief and Emergency Assistance Act, the federal government has accepted liability for
  financing a significant proportion of the cost of post-disaster recovery of public and private
  nonprofit facilities in presidentially-declared disaster areas. In practice, this federal liability
  serves as a strong financial disincentive for state and local governments to engage in pre-
 disaster earthquake loss-reduction projects. (See Cheney and Whiteman, 1987.)
        Unfortunately, as will be discussed throughout the remainder of this report, federal
 controls over activities which could reduce federal liabilities are not commensurate with
 these potential federal liabilities. (See Burby et al., 1990.) This suggests that stronger con-
 trols are needed over the activities which could reduce these federal liabilities. At the same
 time, advances in science and engineering, made possible largely through national programs
 such as the NEHRP (and also private industry programs), have made it feasible to advance
 the loss-reduction measures found in this report.
       As currently written, the Stafford Act mandates that communities affected by disasters
 employ hazard mitigation measures to reduce the risk from future disasters. These measures
 are not standardized; they are location-specific. Also, they are politically negotiated by state
 and federal officials rather than designed by damage mitigation specialists, and then they are
 amassed in a Hazard Mitigation Plan early in the recovery process rather than well-
 formulated prior to the disaster. From the standpoint of federal liability, given the Stafford
 Act and other existing federal policies, the federal government has a clear interest in state
 and local programs that affect potential earthquake losses, including those pertaining to
 state and local development, adoption, and implementation of seismic loss-reduction
measures.
       Additionally, current federal policy tools provide no means to achieve broad scale im-
plementation of loss-prevention activities because they are mandated only for new construc-
tion of federally leased, assisted, or regulated buildings and for rebuilding in localities
declared federal disaster areas by the President. Instead of being proactive and supporting
the implementation of loss-reduction efforts prior to earthquake events, the current disaster
policy is primarily reactive and triggered by unusual events. (See Burby et al., 1990.)
       Finally, while necessary to support recovery efforts, the current policy has no provi-
sions to address primary and secondary effects in areas other than Presidentially declared
disaster areas. Thus, by itself, current policy is even insufficient to deal with the full impacts
                                               1 - 10
of single disasters. The Stafford Act, therefore, is not by itself a policy that is capable of
preparing the entire United States for a catastrophic earthquake.
      In order to protect the United States from the effects of a catastrophic earthquake, the
current disaster policy is clearly insufficient. What is needed is a mechanism which reduces
both long-term and short-term losses associated with earthquakes. Such is the fundamental
goal prompting this study.
Conclusions
      Public policy vehicles currently available for reducing earthquake losses have not yet
produced a coherent large-scale or national program of loss-reduction implementation. In
addition, a pure market solution to the earthquake loss-reduction problem is not feasible,
since neither earthquake insurance nor loss-control markets operate according to idealized
conditions (e.g., adequate knowledge by individual consumers, absence of "adverse selec-
tio," absence of significant spillover effects). Current fragmentariness of earthquake loss-
reduction programs is a problem that needs to be addressed with sensitivity to local and
regional differences. Consequently, this report examines public poicy vehicles available for
guiding a national program. Section 5.0 includes discussions of how current public policy
vehicles may be augmented given a federal role in earthquake insurance.
         Project Scope
1.3
         The goal of this study is to
             identify feasible alternative earthquake loss-reduction provisions and develop a
             strategy to FEMA for incorporation of recommended loss-reduction provisions into a
             national earthquake insurance program.
Throughout the conduct of this project, questions arose regarding the depth and breadth of
results achievable. As specified in the project contract, the scope of the study was to include
      o different structural classes of buildings, including almost every type of walled and roofed building.
      o at a minimum, new construction, edsting hazardous buildings, and critical buildings such as those used
        for emergency operations, police, fire, and medical services, public assembly, and schools.
      -o measures that can be taken by state and local governments, the private sector, and individual
         homeowners.
      o The scientific, technical, social economic, and political aspects of the loss-reduction strategies and
         measures....
      o Pertinent legal issues ....
      o information and research available nationally and internationally. (Contract, page 10)
                                                         1       11
                                                             -
Early in the course of this project steps were taken to identify the boundaries within which
this study would be conducted.
Definition of Loss-Reduction Measure
       One primary issue addressed in determining project scope was how the expression
'loss-reduction measure" was to be used. In the Project Workshop we defined a loss-
reduction measure as requiring a physical activity or restraint thereon that reduces expected
earthquake losses. This definition accords with the definition of "hazard mitigation" for
purposes of implementing the Stafford Act. (See FEMA, March 1989, p. 11633.) The defini-
tion has both a physical and a statistical element. There must be a physical intervention in
the built environment and statistical evidence that the measure reduces loss'.
       This definition requires that a proposed loss-reduction measure be specified in terms
of a "fix" -- some action or set of activities that improve the expected seismic performance of
buildings or otherwise are expected to reduce earthquake losses directly. For new buildings,
this may involve selecting less hazardous sites, improving site foundations, or applying seis-
mic codes or other techniques in order-to improve the seismic performance of the building
system and its nonstructural systems and contents and to reduce life-safety hazards. Avoid-
ing especially hazardous sites in new construction falls under this definition insofar as alter-
native sites selected would be assessed to have lower risks. Density limitations may fall un-
der this definition to the extent that both the expected risks are catastrophic ones and that
the alternatives available to high-density developments reduce these expected catastrophic
losses. For existing buildings, the fix may involve altering usage, securing equipment, institut-
ing means to control fire following earthquake, and/or seismic retrofit of structural elements.
       Many activities such as research, mapping, workshops, and the like are required to in-
itiate, support, and/or sustain loss-reduction activities. We call these supporting elements.
For instance, educational and training programs of various sorts may be required so that the
many participants in building practices -- architects, building officials, structural engineers,
developers, owners, contractors, and subcontractors -- are aware of and experienced in com-
plying with model seismic code provisions.
       We also call both loss-reduction activities and supporting activities earthquake hazard
reduction activities. Hence, a number of earthquake hazard reduction activities exist which,
although integral to the process of loss-reduction, are not themselves loss-reduction ac-
tivities. For instance, research into the development of base-isolation techniques is an im-
                                              1 - 12
portant earthquake hazard reduction activity that makes technically feasible the loss-
reduction activity base-isolation techniques in seismic design or retrofit.
      The distinction between loss-reduction measures and supporting elements is vague in
some instances in which supporting elements arguably may be categorized as loss-reduction
measures. For instance, development of adequate seismic provisions in, model codes is in-
cluded as a loss-reduction measure insofar as some local communities unfailingly adopt and
enforce these model codes. In contrast, inclusion of seismic safety elements in comprehen-
sive master plans cannot be a loss-reduction measure unless this inclusion can be shown to
lead to physical actions or restraints thereon that reduce expected losses.
      A broader definition of loss-reduction measure may be suitable for a more comprehen-
sive project. For example, an activity that reduces total losses associated with earthquakes is
suggested in the Selkregg et al. (1984) account of mitigation as "a management strategy to
balance current actions and expenditures with potential losses from the future hazard occur-
rences." This broader definition would require consideration of administrative costs, in-
surance system costs, front-end structural and geotechnical engineering costs, marginal re-
search, mapping, educational costs, and costs of potential instabilities to financial systems.
Some of these considerations have entered into the selection of promising loss-reduction
measures. Consideration of the total cost of large-scale loss-reduction programs would
require many investigations beyond this project scope.
Primary and Secondary Losses
      Within the limitations of this definition of loss-reduction measure, this study is prin-
cipally concerned with building losses (i.e., costs for repair and/or replacement of buildings)
resulting directlv from strong ground motion or permanent ground displacement (not from
tsunamis, seiches, or flooding generally). We do not address utility or lifeline network losses,
nor do we emphasize secondary losses resulting from building damage (e.g., casualties, fire
damage, business interruption, governmental downtime, unemployment, mortgage defaults,
business insolvencies, and economic ripple effects generally), even though these financial
concerns are worth examining in greater detail elsewhere. (See Section 5.1 and Appendix C.)
Post-disaster programs are discussed in this report only to the extent that the 1988 Stafford
Act contains a mitigation element for which sigificant funds may be available for the im-
plementation of LRMs.
                                              1 - 13
      In the scope of the project as clarified in the project workplan, we examine a variety of
structures, whether identified by
      o structural class, including almost every type of walled and roofed building;
      o age, including both existing hazardous buildings and new construction; and'
      o function, including commercial/industrial, residential, and critical public and special
        private-sector nonprofit buildings (e.g., hospitals).
We do not examine a variety of infrastructure facilities, whether private or public, including
    o such electric power facilities as power plants and substations, and
    o oil, sewage, natural gas, water, or communications buried pipelines or conduits.
Among losses, we specially examine
    o direct property losses to (damage to'and collapse of) buildings and contents, includ-
       ing those resulting from landuse policies.
These direct property losses are very important causes of deaths and injuries -- matters of the
utmost importance in community safety programs. We also examine
     o other selected secondary losses (as a derivative concern) including
            o mortgage defaults,
            o fire following earthquakes, and
            o business interruption costs or costs of governmental discontinuity;
     o costs of reducing losses; and
     o premium costs.
We do not directly examine
     o damage to infrastructures including utility systems and secondary losses due to their
        failure (including casualties),
      o secondary losses to key sectors of the economy as a consequence of direct primary
        losses to buildings and contents,
     o loss implications of various proposed programs to reduce economic ripple effects of
       catastrophic earthquakes,
     o loss implications of alternative post-disaster emergency/claims adjustment proce-
       dures, and
     o specific cost estimates of underwriting in a primary or secondary reinsurance
        program.
Although we certainly endorse programs that deal with tertiary needs to reduce financial in-
stabilities and improve post-disaster emergency procedures, the goal of this project is to ex-
amine loss-reduction measures that reduce primary earthquake losses, and to that extent
                                             1-14
secondary earthquake losses. We have defined the expression loSs-reduction measure" with
this limitation in mind, but we encourage other studies to examine proposals to reduce
economic ripple effects of earthquakes and other large-scale disasters and to improve emer-
gency management procedures. In section 5.0, we explain how the objective of ensuring
financial stability on a nationwide basis after a large catastrophic earthquake provides a
major reason why incorporation of loss-reduction provisions into a federal earthquake in-
surance program is considered in this project.
       The entire issue of rating in an earthquake insurance program involving the federal
government requires many investigations beyond this study. This study confines itself to an
examination of risk methods suitable for earthquake insurance rating and to key discussions
of the role of rates as either powerful incentives or disincentives for undertaking loss-
reduction measures. Although the extremes of (a) very detailed underwriting or (b) virtually
no underwriting are not supported in this report, no precise underwriting costs have been
developed.
Financial Surpluses in an Insurance Program
      Another topic not within the project scope pertains to possible financial reserve
developments in any federal earthquake insurance involvement. This exclusion leads to the
following limitations:
      o our inability to determine whether or not earthquake insurance purchase should be
        mandatory,
     o limitations on our ability to examine possible consequences of mandatory
       earthquake insurance purchase such as who pays for and who benefits from this mo-
       nopolistic setting,
     o our inability to estimate with any degree of accuracy total costs associated with any
       of the possible types of federal insurance involvement, and
     o our inability to determine if funds to support loss-reduction program administration
       would be derived from the insured or the general taxpayer or both.
With respect to the last consideration, we do maintain that some of the costs of incorporating
loss-reduction measures may be borne by a taxpayer-based program specifically designed in a
cost-effective manner to reduce existing contingent taxpayer liabilities.
Feasibility of Federal Insurance
     Although this project addresses generally how loss-reduction provisions may be incor-
porated into a federal earthquake insurance program, we do not address the much broader
                                             1 -15
topic of whether or not a federal earthquake insurance program is feasible. This much
broader topic may include many public policy, legal, economic, actuarial, and risk analyses
that include discussions of many of the topics excluded from this project, such as
      o loss and cost implications of various proposed programs to reduce economic ripple
         effects of catastrophic earthquakes,
      o advantages and disadvantages of other alternative federal earthquake program
        changes such as strengthened federal legislation to control existing contingent tax-
        payer liabilities associated with earthquakes,
      o economic and political implications of the role of government as an "insurer" or
        "reinsurer," a role more traditionally assigned to business,
      o public policy and socioeconomic considerations affecting how rates should be es-
        timated in a federal program,
      o legal implications of various specific proposals for federal earthquake insurance in-
        volvements, and
      o the extent to which a federal earthquake insurance involvement combined with dis-
        aster assistance would solve all problems associated with very large potential
        earthquake losses.
Types of Federal Earthquake Insurance Involvement
     To a limited extent, the project scope includes discussion of various types of federal
earthquake insurance involvement, including
      (1) revision of the status quo (including the 1988 Stafford Disaster Relief and Emer-
           gency Assistance Act),
      (2)   the federal government as primary insurer,
      (3)   the federal government as reinsurer, and
      (4)   some combination of (2) and (3).
In considering these involvements this report does not include a detailed account of all pos-
sible stakeholder liabilities under all four types of federal earthquake insurance. Addi-
tionally, in examining these four involvements, we do not examine claims adjustment and
other post-disaster emergency procedures and other key features of disaster relief policy.
Nor does this report thoroughly examine all earthquake-related policies or the Stafford Act,
which from the limited standpoint here reflects progress over previous disaster relief policy
(which had less of a loss-reduction component).
      Since current contingent federal and state liabilities are a direct consequence of exist-
ing disaster relief provisions and tax statutes, the status quo must be regarded as a set of cir-
                                               1- 16
 cumstances that contains various potential strengths, liabilities, problems, and public policy
implications. The broader decision procedures used in this study treat the status quo as one
of many alternatives to be considered. Through consideration of the public policy implica-
tions of the stats quo, justification can be found for strengthening the mitigation component
of federal programs and thus taking advantage of the knowledge gained through NBHRP
(National Earthquake Hazard Reduction Program) programs.
       The strengths of NEHRP programs are not the topic under current discussion.
Nevertheless, this report recognizes that advances in the many disciplines supporting
earthquake loss-reduction efforts have been significant in the decades since the 1964 Good
Friday Alaskan earthquake and the 1971 San Fernando Valley earthquake. It is presupposed
in this report that federal disaster relief programs provide needed post-disaster assistance to
state and local governments, to small businesses, to private nonprofit organizations, and to
individuals with limited liquidity. Still, consideration of both earthquake loss-reduction and
of earthquake insurance suggests possible significant improvements in current federal
programs -- prorovements that build on past efforts.
IA    Brief Summarvy of Methods and Procedures
      In order to achieve the goals :of this project, a significant effort was directed toward
identifying, defining, and assessing feasible loss-reduction provisions and developing
strategies for incorporation of recommended loss-reduction provisions into a national
earthquake insurance program.
o A project team was assembled. Team members made very thorough searches of planning,
   scientific, and engineering information, in order to identify and exhaustively evaluate
   earthquake hazard reduction activities which could be useful in loss-reduction, programs.
   Steps were taken to ensure that these hazard reduction activities apply to diverse regions
   of the country, to diverse building usages, and to diverse landuse and building practices.
   This search produced a collection of 96 earthquake hazard reduction activities for con-
   sideration.
  The project team used expert judgment to select, synthesize, and restate hazard reduction
  activities as a smaller number of more technically credible loss-reduction measures
  (LRMs) to be subjected to more rigorous analysis. During the course of this process
  LRMs naturally fell into two groupings -- Lnduse Measures and Building Practices. Con-
  sistent terminology was applied throughout the two groupings, and supporting elements
  were restated so that practices needed to implement the IRMs could be encouraged.
  (See Section 4.2.)
  The project team developed an interactive socioeconomic risk-and-decision model in or-
  der to evaluate the technically promising loss-reduction measures on two grounds --
  economic efficiency and economic allocation. The analysis provided important informa-
  tion regarding the cost-effectiveness of candidate LRMs and estimated costs and benefits
  to various key stakeholders (e.g., the general taxpayer, lending institutions, owners,
                                             1-17
  tenants, insurers). This information was then compiled for presentation at a project
  workshop.
Concurrently,
o We held three meetings of an Advisory Panel whose nationally recognized members rep-
  resent a broad range of professions, interests, and geographic regions. (See Appendix A
  for biographical sketches.) The main purpose of the Advisory Panel was "to ensure that
  the broad range of scientific, engineering, planning, insurance industry, and public policy
  information and viewpoints [were] considered in the study." (Contract, p. 11) We did not
  ask the Advisory Panel to concur with project findings, and this report reflects only their
  inputs, not necessarily their viewpoints.
  We held the first meeting of this panel on January 25, 1989. At this meeting the panel
  reviewed the project workplan and, in an open discussion, considered the scope of the
  study and the evaluation. criteria for identifying promising loss-reduction measures.
  Throughout the project, some participants wished to restrict the project scope to con-
  sideration only of residential construction and to obviate all discussion of the relationship
  between rates and LRMs.
  At the second Advisory Panel meeting, held on June 8, 1989, panel members were intro-
  duced to preliminary results of project team efforts to identify loss-reduction measures, a
  review of the methods being used, and supporting documentation. The panel reviewed, in
  particular, the Issues and the Risk Analysis working reports.
o On August 15 and 16, 1989, we held a Project Workshop composed of recognized experts
  and interested and affected parties representing a very broad spectrum of interests,
  professions, and geographical regions in order to review and comment on previous
  project findings. In particular, those findings pertain to proposed loss-reduction provi-
  sions and their strategy for implementation in a national earthquake insurance program.
  The workshop was to provide for further consideration of the views of diverse interest
  groups and help assure that the proposed measures are professionally supportable, and
  acceptable to communities, the insurance industry and policyholders. The workshop was
  structured to encourage the introduction of new information and innovative ideas.
o The Project team synthesized, in a draft of this report, results of previous project steps.
  Specifically, these procedures resulted in the identification of a number of loss-reduction
  measures (LRMs) considered to be promising in some sort of federal program. These in-
  clude LRMs involving both landuse planning and building activities, covering all
  geographic regions including both existing buildings and new developments, and covering
  residential, commercial/industrial, and institutional buildings. Also included are support-
  ing elements, i.e., activities or measures required to initiate, support, or sustain promising
  LRMs. (Section 4.0) These promising LRMs are here regarded as applicable in defining
  potential "earth quake ordinances" (earthquake-resistant standards) for various portions
  of the country. In section 5.0, we examine how earthquake ordinances fit into various
  types of potential federal earthquake insurance involvements.
o On January 18, 1990, a third meeting of the Advisory Panel was held to review and discuss
  the content of the draft report in order to ensure that the results of the study would fully
  meet the contractual requirements in the project charge. At this meeting, lively exchanges
  took place regarding
                                             1-18
      o the possible role of earthquake insurance rate incentives for either encouraging or dis-
        courang LRMs,
      o how risk-based rates reflecting landuse LRMs should be encouraged along with risk-
        based rates reflecting building practice LRMs,
      o how a federal insurance program differs significantly from a private insurance
        prograna,
      o ow direct federal rate-setting in a secondary federal insurance program may usurp
        rights of state insurance regulators,
      o the extent of a federal interest in state and local practices,
      o whether or not the draft report unintentionaly exaggerates weaknesses in current
        federal prograrns at the expense of their strengths, and
      o whether or not the fifteen recommended IRMs were acceptable to scientists, en-
        ,gineers, economists, and state and local officials over awide geographic region.
o On March 31, 1990, a revised final draft was submitted for review by the Advisory Panel,
  the project officer, and, through the proj ect liaison, to federal offi cials on the interagency
  task force on earthquake insurance.
1.5     Summary of Content
        This report
        o examines risk methods for both assessment of IRMs and for earthquake insurance
          rating,
        *o analyzes earthquake hazard reduction activities on technical, administrative, social,
           economic, political, and legal grounds as a means to develop recommended loss-
           reduction measures, and
        o for the fifteen recommended LRMs, identifies general strategies whereby these can
          be incorporated into a national earthquake insurance program.
      Section 2 addresses the topic of risk analysis as it applies to earthquake-related
(seismic) concerns. Rather than simply summarizing currently available risk analysis
methods, -andtheir functions, strengths, -and limitations, this discussion stresses, the suitability
and application of various risk methods for the assessment of the cost-effectiveness of loss-
reduction measures and for insurance rating. Specifically,
      2.1 outlines the basic steps in risk .analysis, describes the types of seismic risk analysis
            methods available, addresses questions of uncertainty in seismic risk analysis in
            insurance contexts, and recommends applications appropriate to implementation
            of loss-reduction measures, and earthquake insurance.
        2.2   examines the application of risk analysis methods to evaluating and setting
              earthquake insurance rates, under different contexts of federal involvement.
        2.3   addresses earthquake hazards mapping activities, essential to incorporating loss-
              reduction provisions, in a federal earthquake insurance program.
                                               1-19
       Section 3 identifies earthquake hazard reduction activities and analyzes these on tech-
nical, administrative, and economic grounds.
       3.1 summarizes the process used to identify, define, and assess possible loss-
             reduction provisions appropriate for inclusion in a national program for in-
             surance or reinsurance.
     3.2   reviews the results of thorough efforts to identify earthquake hazard reduction
           activities which would satisfy the definition of loss-reduction measure and which,
           on technical and administrative grounds, also appear to be worth further ex-
           amination as possible recommended LLRMs.
           reviews the process of socioeconomic analysis of these possibly acceptable
     3.3
           LRMs, details the methods used to estimate costs and loss reductions, and
           reports the findings of socioeconomic analyses conducted to determine whether
           or not the technically feasible LRMs could be considered cost-effective.
       Section 4 reviews the procedures used to ensure that recommended loss-reduction
provisions would be considered acceptable on political and legal as well as social, economic,
technical and administrative grounds and identifies loss-reduction provisions which poten-
tially could be incorporated into a national insurance or reinsurance program.
       4.1 describes the stakeholder analysis conducted in conjunction with this study.
           presents the results of this analysis.
     4.2
     4.3   describes the Project Workshop at which cost-effective LRMs were discussed,
           revised, and refined to be acceptable to a wide range of knowledgable and inter-
           ested parties.
     4.4   presents a set of loss-reduction measures (LRMs) and necessary supporting ac-
           tivities that can be used in developing "earthquake ordinances" or earthquake-
           resistant standards for communities throughout the country.
     Section 5 considers how loss-reduction provisions may be incorporated into three
general types of federal earthquake insurance constructs.
     5.1 presents an overview of the possible roles the federal government could play in
           the provision of earthquake insurance and discusses how the incorporation of
           LRMs fits generally into federal earthquake insurance and disaster relief objec-
           tives.
     5.2   reexamines current earthquake-related policies and contingent federal liabilities,
           reemphasizes the fragmentariness of current national earthquake-loss-reduction
           policies, suggests means through which existing programs to effect many of the
           supporting elements of an LRM program, and recommends enhancement of
           those programs specifically to reduce in a cost-effective manner existing contin-
           gent federal liabilities.
                                               1 - 20
5.3   considers how the rate structure of an earthquake insurance program will affect
      the implementation of such loss-reduction provisions as are recommended in this
      report.
5.4   considers as one major change in public policy the federal government as a
      primary earthquake insurer and how LR       may be incorporated into such a
      primary federal earthquake insurance program.
5.5   addresses how LRMs can be incorporated into a secondary federal earthquake
      insurance programs.
                                     1-21
2.0     SEISMIC RISK ANALYSIS METHODS IN
        A FEDERAL EARTHQUAKE INSURANCE PROGRAM
        WITH A LOSS-RIEDU ON COMPONENT1
      Seismic risk analysis methods and their possible applications in a federal earthquake
insurance program involving a loss-reduction component are central to this project Risk
analyses are needed to answer such questions as:
   o Will the implementation of a loss-reduction measure be cost-effective and a sound
     policy decision? How is this affected by differences in seismic zone?
      o How will the implementation of proposed LRMs affect various stakeholders?
      o How can equity among stakeholders be assured in a rate-setting system for earthquake
        insurance?
      o To what extent can a rate-setting system for earthquake insurance consider both
        catastrophic losses that may occur in the near term and expected losses over the long
        term?
This section uses findings developed in Eguchi et al., (1989) and in the project workshop in
order to help answer these questions. by discussing:
   o the types of risk methods available and their applications and limitations.,
  o risk methods appropriate for assessing LRMs and for use in setting insurance rates, and
  o risk mapping considerations.
       Section 2.1 outlines the processes and methods involved in seismic risk analysis. We
maintain that two decades of science and engineering have reduced uncertainties in seismic
risk analyses, but that systematic efforts, such as post-disaster damage and loss studies, are
desirable to reduce uncertainties further (NRC, 1989; Eguchi et al.,1989. In FIA, 1971, un-
certainties in seismic risk analysis methods were considered to eliminate any consideration
of a federal earthquake insurance program with a loss-reduction component.) We illustrate
the linkages between risk analysis methods, loss-contro, and insurance and then summarize
project recommendationsr for uses of risk analysis.
       Section 2.2 describes the types of methods suitable for earthquake insurance rate-
setting. Because such rating requires comparison of reserves with all possible earthquake
losses affecting them, these are probabilistic methods, not probable maximum loss (PML) or
1. The reader who desires fuller details of the risk analysis methods discussed here may refer to the project
report by Eguchi et al. (1989).
                                                     2- 1
other deterministic methods. Fuller accounts of earthquake insurance rating methods are
provided in Eguchi et al. (1989) and Taylor, Hayne, and Tiliman (1990).
      Section 2.3 discusses pertinent mapping considerations. For the application of loss-
reduction measures, we recommend initially small-scale consensus maps as shown in Figure
2-5. Progress on such maps may soon include information regarding local shaking hazards
and seismicity. (See Whitman, 1989.) Hence, small-scale maps should be constantly
reviewed and updated. In higher seismic zones (3 and 4), larger-scale maps of clear local
potential ground deformation hazards may be suitable. Research on estimating probabilities
of various degrees of permanent ground displacement and on associated losses is desirable
to make microzonation more effective in a federal earthquake insurance program. At first
glance, and even at a small scale, seismic maps for LRMs are different in kind from seismic
maps for insurance rate-setting; however, making radically different maps for rates and
LRMs would have severe administrative weaknesses in a federal earthquake insurance
program.
2.1   Risk Analysis Methods: Applications and Limitations
     This subsection provides an overview of
         o steps required in risk analysis,
         o types of risk methods available,
         o major uncertainties of interest in a federal insurance context, and
         o recommended risk analysis methods and uses.
In Section 3 we use risk analyses to identify cost-effective LRMs for incorporation into a
federal earthquake insurance program. In Section 5, we show how risk analyses may be used
to develop partially risk-based insurance rates as one major tool for the incorporation of
LRMs into this federal program.
      A fuller discussion of detailed risk analysis methods available is found in the working
report developed for this project.
Basic Processes in General Risk Analysis
     Figure 2-1 provides an overview of the essential steps in risk analysis.
                                              2-2
             Identify and                                      Define
                                               >a
             Assess Hazards                             Vulnerabilities
                                     Assess Risks
                        Figure 2-1. General Risk Analysis Approach
       Exposure definition is an inventory process central to the collection of information for
use in risk analysis. This involves use of a geographic system (e.g., longitude-latitude,
Universal Transverse Mercator,, State Plane Coordinates, township-and-ranges, zip codes) in
order to identify facilities (e.g., buildings) and record, other pertinent information such as
facility descriptions, replacement cost estimates, building contents, number of occupants,
and equity position.
       Hazard identification and assessment involves examination of the natural sources and
effects that give rise to risks (e.g., such potential natural hazard sources as floods, earth-
quakes, and hurricanes and such local hazards as liquefaction susceptible sites).
       Vulnerability analysis determines the degree to which exposures (e.g., buildings, their
contents, business operators, and people) are susceptible to damage as the result of specific
hazard occurrances at various degrees of severity. A quantitative account of vulnerabilities,
as of hazards, is needed in order to produce a quantitative assessment of risks.
       Risk assessment takes into account identified exposures and their vulnerabilities to
identified hazards.
      These processes are often used individually as low-cost means to make specific deci-
sions. This is very appropriate when other elements of the decision are known within
reasonable bounds. For instance, the strong motion hazards to a building and its contents in
Los Angeles may be known well enough to warrant recommendation of anchorage to critical
equipment; however, a specific large-scale program of equipment anchorage needs to be
guided by risk-reduction analysis methods.
                                             2-3
      Under most circumstances, however, used in isolation, the individual steps in the risk
assessment process provide ineffective approaches to guide and monitor risk reduction
programs. The identification of exposures by itself indicates little or nothing about the
presence of hazards or the vulnerabilities involved. Hazard assessments by themselves indi-
cate little about the vulnerabilities of various exposures or the types of exposures. Vul-
nerability assessment indicates little or nothing about the severities and likelihoods of the
hazards or the values involved. Risk analysis methods are better suited to formulate, guide
and monitor risk-reduction programs.
       As suggested in Figure 2-1, when used in risk analysis, these basic processes of exposure
definition, hazard identification and assessment, and vulnerability definition are not con-
ducted independently or even sequentially. The exposure definition process must be closely
tied to the other steps in the risk analysis process so that the hazards assessed and the vul-
nerabilities defined can be correlated with the facilities inventoried and the types of risk out-
puts desired (e.g., risks to schools versus risks to residential construction). Thus, the inven-
tory process is central to the management of information that can be used in risk analysis,
and contains elements that are neither hazards nor vulnerabilities.
       Hazard identification and assessment becomes part of risk analysis and risk reduction
efforts to the extent that (a) exposures are identified relative to hazards and (b) these ex-
posures are determined to have vulnerabilities relative to the hazards. Quantitative risk es-
timates are possible only if hazards are defined so that the likelihood of the hazard occur-
rence can be assessed. For instance, identifying a region highly susceptible to landsliding is
not enough to quantify risks. One needs to quantify the likelihood of landsliding either un-
conditionally or conditionally as a result of triggering events and then apply these probabil-
ities to existing structures in the landslide area.
       Risk analysis, then, employs the data accumulated through exposure definition, hazard
identification and assessment, and vulnerability analysis to develop statistics that can be used
to evaluate the extent to which specific exposures with their vulnerabilities are at risk to
specific hazards. In the sense used here, risk assessment may terminate at the production of
risk statistics or may involve a more complex procedure of assessing the significance of those
statistics for risk evaluation and risk-control purposes.
                                              2- 4
Types of Seismic Risk Methods
     Figure 2-2 summarizes types of risk methods available for analyzing LRMs and for
earthquake rating purposes.
      I                   DETERMINSTIC                      PROBABIUSTIC             1
                             Deterministic                     Probabilistic
          SITE-
          SPECIFIC           Site-Specific                     Site-Specific
                                Methods                           Methods
                             Deterministic                     Probabilistic
          MUULTI-              Multisite                          Multisite
          SiTE                 Methods                            Methods
                         Figure 2-2. Types of Seismic Risk Methods
       Deterministic methods are those in which "one or more earthquakes are postulated
without explicit consideration of the probability that those events will occur" (NRC. 1989, p.
20). Often these postulated earthquakes are large, but deterministic methods may be used
which postulate smaller magnitude events. (See Spangle, 1987; Algermissen et al., 1988.)
       Probabilistic methods include probabilities for the entire suite of earthquakes poten-
tially damaging an exposure or group of exposures.
       Site-specific methods model each site as an independent exposure unit -- whether or
not detailed geologic hazards and/or building vulnerability stu dies are performed.
       Multisite methods model exposures (buildings) at two or more sites as potentially suf-
fering losses from the same earthquake.
     Examples of deterministic site-specific methods. include analyses of the potential
damageability of a specific building relative to a selected "response spectrum". Examples of
deterministic multisite methods include many regional studies which have examined in detail
the consequences of postulating selected, often large-magnitude earthquakes. (See Alger-
missen et al., 1973; Davis et al., 1982; Hopper et al., 1975; Algermissen et al., 1976; Alger-
missen et al., 1988; and Spangle, 1987.) Analyses of multiple sites which predict probable
maximum losses (PMLs) are instances of deterministic multisite methods.
     Examples of probabilistic site-specific methods, typically estimate expected annual
earthquake-related losses. These estimates of annual earthquake losses are used to calculate
                                             2- 5
"pure premiums" -- premiums which do not include loadings for administrative, claims ad-
justment, and other costs and fees - for earthquake insurance rating of annualized benefits
of proposed LRMs. (See Liu and Neghabat, 1972; Wiggins et al., 1974; Whitman and Cor-
nell, 1976; Whitman, 1975; Taylor and Ward, 1979; Petak and Atkisson, 1982; and Boisson-
nade and Shah, 1985.)
      Examples of probabilistic multisite methods simulate a large number of potential
earthquakes affecting facilities at diverse locations. (See Algermissen, Steinbrugge, and
Lagorio, 1978; Taylor et al., 1985; Ostrom and Gould, 1986; and Taylor et al., 1990.) As we
shall see in the following discussion, these models are most valuable for estimating extreme
losses in the short term as well as overall annual expected losses. As a consequence, while
more mathematically and computationally sophisticated than other methods, these can yield
important information related to rates and to various types of benefits from proposed LRMs.
Similar methods were used by Friedman and Roy to develop rates for the National Flood In-
surance Program. (See Kaplan, 1971-72.)
Uncertainties in Risk Analysis in a Federal Insurance Context
       Twenty years ago uncertainties in risk- and loss-estimation methods made the actuarial
basis for an earthquake insurance rate-setting system very dubious (FLA, 1971). Methods for
estimating seismic risk have advanced over the last twenty years, but significant uncertainties
remain. We regard the discussion of suitability of methods (Section 2.2 as an example) as key
to removing some major ambiguities or uncertainties.
      As a consequence of considerable studies over the past two decades, the uncertainties
in seismic risk analysis are no longer by themselves sufficient grounds for maintaining that
earthquake perils are uninsurable. (For a much fuller discussion of the insurability issue see
Butler et al., 1988.) Nevertheless, further advancements are needed if risk analysis is to meet
the needs of a federal earthquake insurance program. In particular systematic efforts are
needed to:
   o collect and publish post-earthquake loss dat
  o collect exposure data including building structure values and locations at risk,
  o assess probabilities of ground failures induced by liquefaction and landslides and to
    correlate to these phenomena both buildings and land values,
  o examine macroseismicity (seismicity on a regional basis and "rock" attenuation func-
    tions -- how seismic waves attenuate in amplitude as they pass through "rock").
  o examine the feasibility of microzonation for relative ground motion site response fac-
    tors.
                                             2-6
The relative importance of each of these types of information in risk analysis is a matter of
some debate. Even though it has been maintained that regional seismicity factors are
dominant in risk analyses, several different applications of seismic risk analyses have sug-
gested that under some circumstances applications, of loss models for diverse seismic con-
struction classes may be dominant. (See Algermissen et al., 1988; Taylor et al., 1988.) Under
other circumstances (e.g. the 1989 lDoma Prieta earthquake and the 1985 Mexico City
earthquake), relative site response factors become extremely critical. Hence, continued
progress in macroseismi city studies is needed to remove uncertainties in seismr icity and at-
tenuation parameters, but other parameters cannot be ignored and should be investigated.
       The need for systematic recovery and accumulation of earthquake loss data has been
repeatedly emphasized throughout earthquake-related literature. (See NRC, 1989, and Wig-
gins and Taylor, 1986.) For application to a federal program, current institutional con-
straints on systematization and publication of existing loss data need to be overcome.
       Since inventorying can be mundane, costly, and time-consuming, many investigators of-
ten fail to meet the critical need for systematic exposure data collection (NRC, 1989).
Project workshop participants suggested that inventory data be collected as properties are
included in a federal insurance program. Systematic development of basic exposure data on
locations, values at risk, and general building structure types is critical for both primary and
secondary federal earthquake insurance programs, since prospective liabilities in those
programs cannot be assessed and effectively reduced without these data.
     As suggested in this report, current weaknesses in scientific models estimating losses
caused by permanent ground deformation make it difficult to assess the probable success of
LRMs associated with potential ground failures. These include virtually all landuse LRMs.
In order to improve the state-of-the-art in landuse planning for earthquake loss-reduction, it
is necessary for planners also to begin to consider how to reduce the effects of high relative
site response factors (the likelihood that a site will respond severely to an earthquake), which
are potentially very high contributors to risk. This consideration may enter indirectly in
seismic building code provisions as knowledge regarding site factors evolves along with
microzonation identifying relative site response factors.
Linkages between Risk Analysis Methods, Loss-Reduction, and Insurance
      When risk analysis (as defined above) is used as a tool in decision-making, the com-
bined process is known as risk and decision analysis. As illustrated in Figure 2-3, risk and
decision analysis is central to addressing the objectives of,this project.
                                              2-7
                                   L
                                              Define
                                            Decision
                                           Alternatives
                                       F                        Assess Technically
               Develop                      Risk and                Feasible
              Insurance                     Decision             Loss-Reduction
               , Rates                                              Measures
                                            Analysis
                         Define Implementation Steps
                  Figure 2-3. The Centrality of Risk and Decision Analysis
                    in Linking Insurance and Loss-Reduction Measures
   Decision alternatives considered in this project include incorporation of proposed
LRMs in the following contexts:
       o the status quo (no major program changes),
       o federal government as primary insurer,
       o federal government as secondary insurer, and
       o federal government as both primary and secondary insurer.
       In the assessment and selection of loss-reduction measures, risk and decision analysis
methods assist in
   o estimating the aggregate benefits and costs of various proposed LRMs, and
   o estimating the benefits and costs to various key stakeholders.
Thus, these applications are very important in assuring that monies are directed toward those
activities that have the greatest returns. Moreover, analysis of diverse stakeholder benefits
and costs is useful for determining what types of existing and potential incentive systems
(e.g., policy instruments such as subsidies and/or tax breaks) may be used to remove possible
inequities and to incorporate cost-effective LRMs under the four decision alternatives.
These applications are elaborated further in Sections 3 and 4 of this report.
                                              2-8
       Risk analysis methods are also required to develop insurance rates. Although rate
determinations depend on a number of reserve development and cost considerations which
are beyond the scope of this project,, seismic risk analysis does play an important role in
facilitating the relationship between insurance rates and LRMs. Some rate determinations
can be counterproductive to instituting LRMs. From a broader perspective, risk analysis
methods can be used as a tool to determine the trade-offs between costs of finer rate deter-
mination.s and the benefits of loss-reduction. For instance, benefits of detailed mapping of
poor site conditions and of establishing rate differentials based on site conditions can be
compared to costs of developing and applying these rate differentials.
      Successful implementation of insurance rating schemes and of proposed LRMs
depends on how both factors together affect governments, individuals, and other types of
stakeholders. For instance, federally subsidized rates may be desirable if the loss-reductions
otherwise involved offset potential federal liabilities. For another instance, finer rate deter-
minations may be desirable if the resulting rates induce implementation of loss-reduction
measures and if the costs of these LRMs are not unduly borne by any of the individual
stakeholiders, including insurance companies, insurance regulators, and the general taxpayer.
Implementation also requires monitoring of programs. Risk and decision analysis methods
are needed both to predict and to evaluate the success of implementation of proposed rating
schemes and loss-control measures.
       In sunmmary, risk and decision analysis methods serve as important tools in examining
insurance rate-setting and LRMs within the context of a federal program. Nevertheless, the
risk analysis procedures that we have been discussing are primarily directed toward specific
actuarial, professional, economic, and technical considerations, with relevance to other fac-
tors. For the purposes of this study, a broader approach which incorporates an even wider
range of considerations was needed. The STAPLE (social, technical, administrative, politi-
cal, legal, economic-- but also, as H. Kunreu-ther has indicated -- actuarial, procedural, ethi-
cal, environmental, professional, and so on) approach discussed by Petak (1981) was used to
ensure consideration of all relevant issues. The further application of risk and decision
analysis methods to the selection of cost-effective LRMs is a major concern of Section 3 of
this report. The variety of additional considerations such as political costs and legal con-
straints that are involved in assessing diverse decision alternatives is considered in Section 4
of this report. Their application to insurance rate-setting is discussed in Section 5.
                                              2-9
Recommended Uses of Risk Analysis
       Based on the foregoing considerations and on the project workshop, the following uses
of risk analysis are highly recommended:,
   o providing the basis for benefit-cost analysis in order to determine the suitability of
       building practice LRMs for inclusion in a federal program;
      o providing nationwide estimates of losses and casualties and of reduced losses through
        unplementation of specific measures;
      o providing estimates for monitoring and modifying loss-reduction programs
        undertaken;
      o providing a basis for developing premiums, deductibles, and limits of liability for an
        earthquake insurance program;
      o providing a basis for proposed zoning schemes (macrozonation and/or microzona-
        tion) to be used in a federal program;
      o clarifying the degree to which one should place confidence in seismic loss estimates and
        perhaps improving the reliability of these estimates;
      o clarifying those parameters which contribute most to the uncertainty in seismic loss es-
        timates and suggesting various approaches to reducing this uncertainty.
         Although rated less highly in the project workshop, the following uses also deserve
consideration:
      o providing estimates that serve as a basis for examining potential derivative losses to dif-
        ferent sectors of the economy (the stakeholder analysis in Section 4 is an example of
        this method);
      o examining in greater depth the earthquake damageability of critical or essential
        facilities and determining the most cost-effective means of reducing this earthquake
        damage (see especially Section 3.3);
      o providing a basis for estimating the cost-effectiveness of various landuse programs such
        as specific programs designed to reduce seismically-induced landslide losses (see Sec-
        tion 3); and
      o providing a basis for estimating time-varying reserves and subsidy levels within the con-
        text of an earthquake insurance program (see Section 2.2).
2.2  The Use of Risk Analysis in Insurance Rating Methods
     In this section we examine the application of risk analysis methods to evaluating in-
surance rates under different federal involvements in earthquake insurance.
                                                2 -10
Risk Analysis Methods Suitable for Use by Private Insurers
       Eguchi et al. (1989) and Taylor, Hayne, and TillInan (1990), have maintained that for
private insurers (and reinsurers) probabilistic multisite methods (variants of ruin analyses
used in actuarial science to ensure that insurance companies do not face high risks of
insolvency) are most suitable for defining insurance rates (premiums deductibles, and limits
of liability). Succinctly put, they argue mathematically that:
    o Probabilistic site-specific methods, which develop rates based on expected annual
       losses (as in Boissonnade and Shah, 1985), fail to take into account extreme short-tern
       fluctuations in earthquake losses. These extreme short-term fluctuations can lead to
       insurer and/or reinsurer insolvencies which in turn harm consumers and more prudent
      insurers/reinsurers.
   o Deterministic multisite methods, such as "probable maximum loss" (PML) methods in
      Anderson, 1981, add some information regarding possible extreme events. But these
      PML methods do not by themselves necessarily cover expected losses, and the ratio of
      PML to expected annual loss varies too extremely -- by a factor of twenty across dif-
      ferent regions of the United States -- for PML to be an equitable basis for rate-setting.
      Indeed, adverse selection may be encouraged by a PML rating method inasmuch as
      higher risks have lower ratios of PML divided by expected annual loss. The informa-
      tion provided by these PML methods, even with respect to extreme events posing short-
       term solvency concerns, can be made much more coherent through probabilistic
       methods.
    o Products of probabilistic multisite methods (see Figure 24 for examples) can be used
       to determine rates relative both to short-term fluctuations (the catastrophic element
       needed to assure that contractual obligations with consumers are fulfilled) and the ex-
       pected loss element (needled to cover costs). (Taylor et al., 1985, justify the use of 2-
       4(b), a model better known for application to individual sites, for application to mul-
       tiple sites.)
Thus, it can be concluded that private insurers (status quo) currently benefit froom probabil-
istic multisite mrethods. which incorporate expected annual loss and catastrophic loss poten-
tial into a coherent framework.
                                              2- 11
                                                                 a1)
R
                                                                 -J
-tc                                                              .2
                                                                 0
                                                                 a-
2
                                                                                 l
                                                                               SI 2                   L-Q /2
                   Loss Level
                                                                       Distance of Rupture Center Along Fault Trace
                                                             (b) Illustrative Loss Levels for a Portfolio Relative to a
      (a) Illustrative Probabillity of Loss
      as a Function of Loss Level Output                         Specific Fault Trace and Magnitude of Interest
                                                                 (L is Total Fault Length; .Q is Rupture Length)
U)
                                                                 0
                                                                  2-1)
                                                                  a
0                                                                 U)
                                                                  a)
0.g
0
V
                                                                 cr
(L
                                                                                                      V
                     Time
                                                                                          Time
         (c) Illustrative Simulation of                                 (d) Illustrative Simulation of Effect of
         Portfolio Losses Over Time                                          Portfolio Losses on Reserve
                        Figure 2-4. Illustrative Probabilistic Multisite Analysis Outputs
Risk Analysis Methods Suitable for Use with Federal Insurance
      With direct federal involvement in earthquake insurance, the above conclusions may
need to be revised in view of public policy considerations required to guide actuarial rate
assessment work. Public policy analysis is needed to determine which of the following will
guide actuarial analysis:
   o The net reserve is positive trending (premium income exceeds expected program costs
      including expected earthquake losses).
  o The net reserve is zero.
   o The net reserve is negative-trending (a subsidy situation).
Moreover, public policy analysis is needed to assure that short-term potentially extreme fluc-
tuations in losses can be handled within the political system (e.g., that these extreme fluctua-
tions will not create extreme program instabilities). In addition, detailed public policy and
economic analysis would be needed to assess possible regressive or progressive effects of
various rate structures such as effects of specific proposed rate structures on low-income
citizens. (No systematically documented work on this subject is known to the project direc-
tor.)
       Obviously, public policy evaluation of these topics will depend on the type of federal in-
surance involvement considered (as a primary insurer, as a secondary insurer, as a banker"
of last resort) and the distribution of and types of properties covered. A mandated program,
with monopolistic implications, will differ from a voluntary program. A residential program
will differ from a commercial program.
       With respect to a mandatory priAmary federal earthquake insurance involvement (as
for selected classes of buildings) expected annual loss (probabilistic site-specific] methods
may suffice in order to develop crude approirmations for earthquake insurance rates. As ex-
plained in Eguchi et al. (1989), although these expected loss methods contain important un-
certainties and are often performed incorrectly, they include advantages derived from many
developments originally designed for the building code and nuclear power plant industries.
(See Algermissen, 1983; Bender and Perkins, 1987; McGuire et al., 1988.) Probabilistic m.ul-
tisite methods are helpful in studying extreme short-term loss fluctuations which may be sig-
nificant in a mandated primarv progam. but such results will be less important for required
programs than for voluntary programs.
                                              2- 13
       In voluntary primary programs, problems of adverse selection can easily arise if in-
surance rates do not adequately reflect risk levels. This is particularly the case when the in-
sured knows more about his risk than the insurer. Cases of adverse selection may involve in-
dividual exposures, such as when the insured is in a highly risky location and the insured
building is more vulnerable than the "typical" building used for rate-setting. Cases of
"adverse selection" in a broader sense may also involve aggregate (more than one) ex-
posures, such as when many property owners in one small seismic region purchase insurance
and so create a catastrophic loss potential that has not been anticipated fully in rates.
Problems of adverse selection are reduced to the extent that rates reflect risk. Nevertheless,
the "adverse selection" or unanticipated catastrophic element involving aggregate exposures
still poses problems for a voluntary program. To anticipate this latter problem, probabilistic
multisite methods are most useful in rate development for voluntary primary federal in-
surance programs.
      Secondary federal earthquake insurance involvements will typically require examina-
tion of higher earthquake loss-potentials. Hence, in the typical case, the suitable methods to
be used will be those that consider the extreme tails of the distribution suggested in Figure 2-
4(a). Expected annual federal liabilities can be calculated from such a distribution, and so
can be used along with administrative and other cost factors to estimate expected aggregate
prices for federal involvement. Thus, probabilistic multisite methods are desirable for as-
sessing potential federal liabilities (if any) in a secondary federal program.
      In order to apply these methods, one critical factor will be inclusion of inventory data
on       o values at risk,
         o locations, and
         o general types of structures.
Although inventory problems can be severe, and aggregation methods will be needed (e.g., to
estimate exposures by zip code or by county), workshop participants suggested that these in-
ventories can be developed at the time of purchase. This proposal appears to apply best to a
primary earthquake insurance program. Development of exposure data to support risk
analysis in support of a secondary program presents a formidable task, given the obstacles
that currently exist to systematic recording and transfer of exposure data within the insurance
and reinsurance industries. (See Section 5 for information on a secondary federal earth-
quake insurance program.) Also essential to the implementation of these methods are
                                             2 - 14
      o use of earthquake source zones (and further examination of sensitivities of rates
        developed to alternative selections of source zones),
      o use of "rocklr attenuation functions for different regions of the country, and
      o use of soft soil factors (whether to microzone or merely to assess more accurately
        overall potential federal liabilities).
      The first two factors have been well developed in procedures for model building code
organizations and the nuclear power industry. The third factor is included by the project
director on the grounds that soft soil site dynamic amplification factors have contributed sig-
nificantly to the degree of damage resulting from varying shaldng intensities in many past
earthquakes (see Hays, 1980, 1981). In regions of very low seismicity,, sensitivity analyses
may be used to determine whether or not rates would fluctuate significantly should these soil
factors be included. In regions of higher seismicity (certainly zones 3 and 4) microzonation
of soft soils is needed to determine aggregate earthquake loss potential within these zones.
       In summary, deterministic methods, including probable maximum loss (PML) ap-
proaches, have extremely limited utility for both socioeconomic evaluations. of LRMs and
earthquake insurance rate-setting. For most earthquake insurance rating purposes, prob-
abilistic multisite methods are appropriate. Under a mandatory primary national program,
probabilistic site-specific methods may be adequate for basic rate-making even though mul-
tisite methods would be desirable to assess short-term expense fluctuations in losses. Further
applications of these approaches are discussed in Section 5.
      Mapping Considerations
2.3
      In this section, we discuss briefly mapping considerations in a federal earthquake in-
surance program involving LRMs. We first discuss the sorts of small-scale maps used for
building codes. Next, we discuss generally larger scale maps for lLRMs. Third, we discuss
how rating maps could diverge significantly from maps for LRMs. We maintain that the ad-
ministrative difficulties of employing two widely divergent sets of maps, one for LRMs and
another for rating, provides a strong reason for developing to the extent possible a single set
of maps for both LRMs and rating.
Seismic Zone Maps
      Figure 2-5 is an adaptation of one small-scale consensus seismic zone map. Tlhe
original map uses probabilistically derived contours of strong ground motion values (in this
                                              2- 15
                                                          mtar II=
                                                      * EXPLANATION
                                   For Adapting Figure C-1, We Have Used the Following
                                   Relationships Between Seismic Zones and Peak
                                   Horizonta Ground Accelerations:
                                    Seismic Zone       Peak Ground Acceleration         Shaking
                                                        (Percentage of Gravity)       Hazard Level
                                          0                 < 0.05                       Lowest
                                          1                 2 0.05 and < 0.1
                                          2                 2 0.1 and<0.2
                                          3                 2 0.2 and c0.4
       V.&U
                                          4                 2 0.4                        Highest
         Figure 2-5. Illustrative Seismic Zone Map for the United States
(Adapted from "NEHRP Recommended Provisions for the Development of Seismic Regulations
for New Buildings," FEMA Publication 18 by the Building Seismic Safety Advisory Council, 1988)
                                              2 - 16
case, peak ground acceleration values derived by conversion from peak ground velocity
values). Scientifically derived contours are subjected to a consensus process that assures
consideration f a wide variety of scientific, engineering, and bulilding construction practices
within the contours produced. These consensus maps are designed primarily for uses in
design and in construction and in the development of seismic building codes. The adaptation
in this report has resulted in seismic zone designations O.1, 2, 3, and 4. The resulting map in
Figure 2-5 differs from other seismic zone maps. For instance, seismic zone designations in
the 1988 edition of the Uniform Building Code will be higher in Oregon, portions of Alaska,
California, and other states west of the Rocky Mountains. Since we do not urge modifica-
tions of the seismic provisions of the Uniform Building Code, Figure 2-5 can serve as a min-
imum initial basis for the LRMs proposed in this report. However, in a federal earthquake
insurance program, development of consensus seismic maps will be a first priority both for
insurance rating and LRMs.
      From the standpoint of science and engineering, the basis for such maps has evolved
significantly over the past twenty years, especially as a result of the national hazard mapping
program and also as a result of special studies of major sites and facilities. Continued re-
search (see Whitman, 1989) is ongoing in an attempt
       o to combine geological and historic earthquake data,
      o to estimate "rock& attenuation patterns, and
      o to estimate effects of soft soils and special geologic configurations in amplifying the
        effects of strong ground motions.
In regions with limited seismicity, or where historic seismicity may not be an adequate clue to
expected seismicity, estimates of seismicity may vary, and these may lead to large variations
in loss estimates. Thus, in the administration of a federal earthquake insurance program,
updates of seismic hazard information and loss estimates will be needed periodically as
scientific and engineering knowledge grows. Also, it should be noted that the effects of these
variations on proposed rates may be as significant in moderate-to-high seismic zones (zones
3 and 4) as they are in lower seismic zones. In lower seismic zones, costs of underwriting can
become a significant consideration in rate development; that is, given the low expected an-
nual losses estimated in these regions, minimum rates may be required merely to cover costs
 of writing the insurance.
       In using such maps, administrators must be aware of the constant possible progress in
 refining such maps. Specifically, incorporation of soft soil site dynamic amplification factors
                                              2-17
into such maps is imminent. (See Whitman, 1989.) In the near term, new seismic maps are
expected to be developed that reflect
       o additional studies of seismicity, including studies of the eastern U.S., and
      o relative site-response factors critical in assessing potential losses.
As a result, federal officials should be aware that seismic maps are constantly being aug-
mented and that refinements in the next few years likely will be more consistent with the
LRMs proposed in this report. While all such new maps developed undergo consensus
processes which in many cases may take decades to implement into building and landuse
practices, they should be readily available for use in implementing LRMs and evaluating in-
surance risks.
Mapping Local Hazards
      Although relative site response factors are becoming integral to seismic zone maps for
building codes, and although this information is critical to estimating losses (as discussed in
Section 2.1 and Eguchi et al., 1989), the use of ground failure potential maps for purposes of
local loss-reduction is far more ambiguous. While techniques are currently available for
delineating surface fault rupture, landslide, liquefaction, and subsidence local hazards, am-
biguity results from
   o the lack of data with which to estimate losses associated with various types of ground
      failures (except in clear cases such as when total constructive loss would be expected),
      and
   o the lack of convincing methods to calculate on a regional basis the probability of
     ground failure or its severity.
As an example, with respect to liquefaction zones, it is currently not known how much poten-
tial ground deformation can be expected given earthquake magnitudes of less than 6.5. (See
Taylor et al., 1988.) Yet, since occurrences of magnitudes below 6.5 are far more likely than
those above 6.5, the contribution of these lower magnitude levels to expected losses is very
great. (See Taylor, Atkisson, and Petak, 1981.) Likewise, seismic risks from landslides have
not been examined thoroughly. Furthermore, mapping on a local level appears to be expen-
sive. We recommend investigations to develop economical mapping procedures before any
large-scale mapping program is initiated. Validation of the assumption that old landslides
serve as good indicators of potential earthquake-induced landslides could, for instance,
produce economic means for mapping potential earthquake-induced landslides.
                                            2- 18
      In spite of these caveats, it is clear that permanent ground failures do cause losses and
that there are clear-cut cases of very high potential for such ground failures. Adverse selec-
don can result if these local hazards are ignored in insurance rate-making. Hence, in Section
4, we maintain a pragmatic attitude toward these hazards, and recommend initial compila-
tion of existing sources of information and an intermediate scale (not larger than 1:24,000)
mapping program only in high risk seismic zones (3 and 4). These supporting activities are
modest in cost given projects already completed through the United States Geological Sur-
vey and through state and local programs. Review of findings on probabilities and potential
extent of these hazards, and also on losses associated with these hazards, will assist in later
program developments.
Mapping and Insurance Rating
      An earthquake insurance program could be designed in ways in which maps for LRMs
diverge somewhat significantly from maps that provide insurance "rating zones." Unlike the
National Flood Insurance Program, which begins with large-scale maps and integrates them
into the insurance rating process, an earthquake insurance program may begin with small-
scale maps. Public policy considerations must be addressed before maps for earthquake in-
surance rating can be developed.
      For instance, chiefly for political, jurisdictional, or administrative reasons, it may be
decided that rates should be developed relative to political boundaries that do not cross-
subsidize each other. If probabilistic multisite approaches are used, then the catastrophic
loss potential in a given territory will have significant impact on how rates are developed.
      Moreover, key decisions affecting rate-setting in a federal insurance program will per-
tain to
   o how detailed the niicrozonation should be for rate development,
   o how detailed the seismic building vulnerabilities should be (what proxies may be used
     to estim ate roughly these vulnerabilities, which may be very great for the large majority
     of buildings in the United States, especially older buildings or buildings located east of
     the Rockies), and
   o whether a subsidy situation, a net zero financial gain, or a surplus reserve is desirable.
Before such issues are addressed, it is unclear what insurance rating maps should look like.
For instance, if seismic building vulnerabilities vary from region to regiorn then contours of
expected or average annual losses (so-called pure premiums, or premiums without
catastrophic loadings -- the terminology varies among actuaries) will not necessarily be iden-
tical with contours ofprobabilistic peak strong ground motion values. If political boundaries
                                              2-19
are used with different catastrophic loadings for different-territories, then contours of basic
premiums (pure premiums loaded to account for catastrophic occurrences) may differ from
contours for expected annual losses. Moreover smoothing techniques may be used that
produce jurisdictional rating maps rather than maps based primarily on loss potential.
Hence, mapping for earthquake insurance rating purposes will not necessarily mirror map-
ping for LRMs.
      Various administrative pitfalls occur if maps for LRMs diverge too greatly from maps
for insurance rating. The first is internal - the program would involve separate functions,
each producing maps of a very different sort and hence not working on a common basis. Use
of a risk basis for maps would avoid this internal administrative problem. The second is ex-
ternal -- it would become readily apparent to the public-at-large and to their representatives
that maps for rating did not correspond to maps for LRMs. Hence, for administrative
simplicity, maps for LRMs should correspond as closely as possible to maps for rates. We
later conclude that to encourage cost-effective LRMs, partially risk-based rates are
desirable. A risk basis for both LRM maps and rating maps would offer a further very large
administrative advantage.
2.4   Conclusions
      In this section we conclude that:
o Although uncertainties still characterize seismic risk analysis methods, these uncertainties
  have been significantly reduced through many studies over the past two decades so that
  seismic risk methods are now acceptable for use in a national earthquake insurance
  program.
o Deterministic methods including probable maximum loss (PML) approaches have ex-
  tremely limited utility in either socioeconomic evaluations of LRMs or earthquake in-
  surance rating. For most earthquake insurance rating purposes, probabilistic multisite
  methods are appropriate. Under a mandatory national program, site-specific probabil-
  istic methods may be adequate for basic rate-making even though multisite methods
  would be desirable to assess short-term fluctuations in losses.
o Small scale seismic zone maps at a national or regional scale are critical to the implemen-
  tation of LRMs.       Various theoretical and practical limitations exist to large-scale
                                            2-20
micozonation mapping, but these may soon be largely overcome through research tar-
geted to resolving issues related to assessing probabilities of permanent ground displace-
ments. Severe administrative disadvantages occur if maps for LRMs, especially at a small
scale, diverge too significantly from maps for rating.
                                            2-21
        THE IDENTIFICATION, DEVELOPMENT AND ECONOMIC EVALUATION
3.9
        OF PROMISING LOSS-REDUCTION MEASURES
      The primary objective of this project is to identify feasible alternative earthquake loss-
reduction provisions and develop a strategy to FEMA for incorporation of recommended
loss-reduction provisions into a national earthquake insurance oT reinsurance program.
      In order to achieve this two-part goal it was necessary first to identify earthquake loss-
reduction provisions for recommendation. To be recommended, a loss-reduction measure
muist be technically sound, cost-effective, and otherwise acceptable to a wide variety of in-
dividuals who will be affected by the measure.
      'This section reviews the procedures used to accomplish this task and presents the
results of efforts to identify and develop cost-effective loss-reduction measures, (LRMs)
which could serve as loss-reduction provisions within the context of a national insurance or
reinsurance program. Specifically,
   3.1 summarizes the process used to identify feasible earthquake loss-reduction provi-
            sions.
            reviews the results of efforts to identify hazard reduction activities for candidacy as
      3.2
            feasible loss-reduction measures (LRMs).
            reports the findings of socioeconomic analyses conducted to determine whether or
      3.3
            not these candidates could be considered cost-effective.
       Section 4 summarizes the process used to evaluate the '"acceptability" of these
measures, presents the resulting set of feasible loss-reduction measures (LRMs) and neces-
sary supporting activities, and reviews issues of acceptability as discussed during the course of
this study.
       Throughout this process the STAPLE (Social, Technical, Administrative, Political,
Legal, Economic) approach was utilized to ensure that (a) a wide range of available earth-
quake hazard reduction activities was considered and (b) the LRMs. developed were
analyzed and evaluated from all necessary perspectives.
       Section 5 will sort out the various ways in which cost-effective LRMs or earthquake or-
dinances may fit into various types of federal involvements.
       The Process of LRM Identification and Evaluation
3.1
      In order to achieve the primary objective of this study, a significant effort was directed
toward identifying, defining, and assessing possible loss-reduction provisions appropriate for
inclusion in a national program for earthquake insurance or reinsurance. The steps used in
this process are illustrated in Figure 3-1.
                                                 3 -1
                     1.
                                  Identify earthquake hazard
                                 reduction activities through
                                a thorough information search.
                    2.
                                        Select and restate
                                      a smaller number to
                                      be subjected to more
                                       thorough analysis
                                            a
                                            :
                    3.
                                          Analyze these
                                           activities on
                                     socioeconomic grounds
                                      n~~
                    4.             Present initial results at
                                 a Project Workshop for final
                                  development of LRMs and
                               further analysis by knowledgable
                                    and interested parties.
                                    .~~
                    S.        Present results for future analysis
                              at the final Advisory Panel meeting
                                   and to other reviewers of
                                       draft final reports.
                          I
                Figure 3-1. Steps Used to Develop and Assess Recommended
                                 Loss-Reduction Measures
       1. Conduct a thorough information search to identify hazard reduction activities
which could be used as components of a loss-reduction program. The very thorough infor-
mation search was designed to assure that a wide variety of sources was considered from the
growing literature on earthquake loss-reduction. Additionally, the very thoroughness of the
information search was designed to provide a resource for future efforts to re-examine pos-
sible efforts. This search produced a collection of ninety-six earthquake hazard reduction ac-
tivities for consideration.
                                                3 -2
     2. Reduce the number of possible earthquake hazard reduction measures and restate
them as needed so as to facilitate analysis and further development. In the second stage of
this process, the project team used expert judgment to select, synthesize, and restate hazard
reduction activities as a smaller number of more technically feasible loss-reduction provi-
sions..
      3. Perform socioeconomic risk-and-decision analyses of the technically feasible loss-
reduction activities. Questions of practicality were of utmost importance in the third step of
the process. In this step the technically feasible loss-reduction activities developed in Step 2
were subjected to socioeconomic analyses in order to determine their level of cost-
effectiveness (economic efficiency and their economic impact on various stakeholders
(economic allocation).
       4. Present the preliminary results of technically and economically feasible loss-
reduction activities at a Project Workshop for further revision, refinement, and definition as
loss-reduction provisions within the context of a national earthquake insurance program.
Once the list of possible loss-reduction activities had been limited to those identified as cost-
effective, they were synthesized and restated. A report of this work was generated and sent
to Project- Workshop participants (knowledgeable individuals representing a variety of
stakeholder interests). At the Workshop, participants were asked to review and critique the
socioeconomic analyses -and then re-examine, refine, and augment the candidate loss-
reduction measures in the light of their various interests. The collection of promising loss-
reduction activities was condensed and synthesized into fifteen Loss Reduction Measures
(LRMs) with corresponding Supporting Elements. Discussions evaluating the acceptability
of these measures from the perspectives of various stakeholders addressed risk analysis, in-
surance, and public policy issues.
      S. Present initially recommended loss-reduction measures at a final advisory panel
meeting and in two fmal draft reports for further review and revision. Workshop findings
resulting in fifteen initially recommended LRMs were developed in a preliminary final draft
report and presented at the third advisory panel meeting for review. A final draft report was
also submitted for review by advisory panel members. This process resulted in restatement
and elaboration of many of the LRMs to make them more acceptable in the light of objec-
tions raised.
      The remainder of this section discusses. in further detail each of the processes used to
identify technically feasible loss-reduction measures and to evaluate these technically
feasible LRMs on the basis of cost-effectiveness.
                                              3- 3
3.2      The Identification and Selection of Technically Feasible LRMs
Information Search
       As a starting point for accomplishing the tasks required by this project, a comprehen-
sive search of earthquake-related information was conducted to identify earthquake hazard
reduction activities which could satisfy the definition of loss-reduction measure as an activity
involving a physical intervention or restraint thereon that reduces expected building losses
associated with earthquakes. In order to assure thoroughness we developed a data collection
and evaluation (DACE) instrument through which each activity was characterized by five
descriptors. These could later be used to sort and review results to assure that all aspects of
the descriptor had been considered in the course of the search. Thus, each hazard reduction
activity was characterized by:
      o a general description of the earthquake hazard reduction activity in terms of (a) a physical description of
        the fix", which qualifies the activity to be considered as a possible LRM as defined in section 1.3, (b)
        specification of the activities necessary to support the LRM (e.g., maps, building inventories), and (c)
        identification of the methods needed to verify implementation (e.g., engineer sign-off, random sampling
        techniques, risk analyses, public policy analyses),
      o the source document(s) used to identify and develop the earthquake hazard reduction activities, includ-
        ing
        - library searches [in-house Dames & Moore; Natural Hazards Research and Applications Informa-
            tion Center (NHRAIC) in Boulder, Colorado; the National Center for Earthquake Engineering Re-
            search (NCEER) Information Service in Buffalo, N.Y.; and the Earthquake Engineering Research
            Center (EERC) Library at Richmond, California],
        - legislative, bibliographic, and other materials developed from a number of other federal, state and
            local sources suggested by the advisory panel and those listed in the acknowledgments, and
        - reports from projects previously developed by project team members and advisory panel members.
      o general type of application (e.g., landuse and building practices; residential, commercial, and critical
         public building usages) to assure that all applications required by the project (see section 1.3) were
         addressed,
   o type of structure affected to assure that all main building types were covered, and
   o region of application as defined by seismic zone, to assure that all regions of the country were covered,
Ninety-six earthquake hazard reduction activities were identified and stated in great detail.
A full report of these findings would be useful for those interested in re-examining a broader
range of possible loss-reduction activities. Their importance to this project was primarily to
ensure a thorough preliminary basis from which promising loss-reduction measures and their
supporting elements could be identified, systhesized, and developed. As a result, they are not
included in this report. The remainder of this section reports the results of this process.
                                                         3-4
Application of Engineering, Scientific, and Risk Criteria to Identify
Possible Loss-Reduction Activities
       In the next step, the project team used expert judgment in order to produce a shorter
list of possible loss-reduction measures that could be subjected to a risk-and-decision
analysis. In many cases, the information search identified overlapping activities that could be
synthesized into a fewer number of possible loss-reduction measures. In other cases, ac-
tivities were eliminated for one of many possible reasons, including
                                                                              the judgment of geotechnical and
      o lack of technical feasibility (as detersined4 for instance, through
         structural engineers on the project),
      o obvious lack of political feasibility,
      o narrowness of application relative to a national risk-reduction or insurance program (eg., the ac-
        tivity applied to a limited number of buildings or in such rare circumstances that state and local ad-
        ministrators would tend to ignore them),
      o imprecision of pertinent technical description (e.g., administrators would not know how to imple-
        ment the earthquake hazard reduction activity),
      o absence of technical evidence that losses would significantly be reduced through the implementation
        of the putative hazard reduction activity (eg., for exsting steel-frame buildings, technically possible
        seismic retrofits may not improve seismic performance significantly), and
      o obvious lack of cost-effectiveness (e.g., practitioners currently do not use this measure because more
        cost-effective techniques are available).
       Once a shorter list of activities was produced, these activities were restated in order to
facilitate socioeconomic analysis. Candidate activities naturally fell into two groupings --
Landuse Measures and Building Practices. Under landuse measures we included various
practices, such as site preparation, to minimize or avoid geological hazards. Under building
practices we included various measures, to modify the building structure through design or
redesign. This distinction between landuse measures and building practices is well-
recognized in different bureaucratic and professional functions, with site preparation ac-
tivities forming one link between the two types of activities. In section 5 we use the expres-
sion "earthquake ordinances" in order to facilitate greater administrative linkage between
landuse measures and building practices.
      The following two subsections present, respectively, the landuse measures and building
practices, that were subjected to socioecononiic analysis.
                                                     3-5
Landuse Measures
      Table 3-1 lists the candidate loss-reduction measures related to landuse practices that
were submitted to socioeconomic analyses. Seismic zones specified in these tables are il-
lustrated in Figure 2-5. Landuse measures generally involve policies, ordinances, and legisla-
tion regulating three classifications of landuse planning:
   o regulation of new development of sites,
   o removal/conversion of existing structures and sites, and
   o use of appropriate engineering and construction measures to mitigate damage for both new and existing
     developments.
Policies, ordinances, and legislation to be applied to new development include
   o development of public information and notification programs to place developers, realtors, and pur-
     chasers on notice of existing hazards;
   o discouragement of development in potentially hazardous (e.g., poor soil and/or ground-failure prone)
     areas by means of disclosure and/or such financial mechanisms as disallowance of tax deductibles after
     losses or special local taxes;
   o regulation of new development through subdivision regulations, grading ordinances, hillside-develop-
     ment regulations, and other zoning specifications;
   o state legislation related to liquefaction and landslide hazards similar to the 1972 Alquist-Priolo Special
     Studies Zones Act1 , which covered surface faulting.
Policies, ordinances, and legislation regulating removal/conversion of existing development
should ensure
   o acquisition, exchange, and relocation of properties in high hazard locations (e.g., high liquefaction sus-
     ceptible sites),
   o discontinuance of non-conforming land uses,
   o removal of unsafe structures through public nuisance abatement powers,
   o use of a non-conforming building ordinance requiring eventual removal of structures in the greatest
     danger, and
        ,,..A. rlceta. raul~vnalnnm..nt
   *
        kYV,3L-%bLQ SI    UGVGs"
   %J
1. California Senate Bill 520 (1972), the Alquist-Priolo Geologic Hazard Zones Act, requires the State Min-
ing and Geology Board to prepare policies and criteria for the development of areas encompassing major ac-
tive fault traces, which are to be mapped by the state geologist. It was amended in 1975 to require disclosure to
prospective buyers (see Palm, 1981).
                                                       3 -6
                                        Table 3-1
                                Landuse Measures Analyzed
Number Brief Description
1000    Purchase (if needed) existing construction or properties in very active fault zones of
        deformation (hence in seismic zone 4) and convert to low-density purposes or open space
        only. (The expression "very active is defined operationally in Appendix B.)
1100    Purchase (if needed) existing construction or properties in moderately active fault zones
        of deformation and convert to low-density usage or open space only. (The expression
        "moderately activew is defined operationally in Appendix B.)
120     Restrict new development in very active fault zones of deformation (in seismic zone 4) to
        low-rise residential construction. (Assume that residences and other construction would
        be designed to seismic code.)
1300    Restrict new development in moderately active fault zones of deformation in seismic zone
        4 to low-rise residential construction. (Assume that residences and other construction
        would be designed to code.)
1400   Restrict new development in moderately active fault zones of deformation in seismic.zone
        3 to low-rise residential construction. (Assume that residences and other construction
        would be designed to code.)
1500   In seismic zone 4 as deemed appropriate by geotechnical engineers prior to development,
        drive piles, use vibro-compaction, or use dynamic deep compaction in order to minimize
        potential ground failures owing to liquefaction. (Assume that seismic codes are adopted
        and enforced.)
1600   In seismic zone 3 as deemed appropriate by geotechnical engineers prior to development,
        drive piles, use vibro-compaction, or use dynamic deep compaction in order to minimize
        ground failures owing to liquefaction. (Assume that seismic codes are adopted and en-
        forced.)
1700   In seismic zone 4 restrict new development in very susceptible liquefaction zones to low-
        rise residential structures.
1800   In seismic zone 3 restrict new development in very susceptible liquefaction zones to low-
        rise residential structures.
1900   In seismic zone 4 allow major modifications of existing structures in very susceptible
        liquefaction zones only for which suitable geotechnical techniques can be used to mini-
        mize hazards resulting from ground failures.
2000   In seismic zone 3 allow major modifications of existing structures in very susceptible
        liquefaction zones only for which suitable geotechnical techniques, are used to minimize
        hazards resulting from ground failures.
2100   In seismic zone 4, in very susceptible landslide locales, restrict new development to open-
        space uses.
2200   In seismic zone 3, in landslide locales, restrict new development to open-space uses.
2300   In seismic zone 4 purchase (if necessary) land and/or severely damaged construction and
        convert existing development in very susceptible landslide locales to open-space uses.
2400   In seismic zone 3 purchase (if necessary) land and/or severely damaged construction and
       convert existing development in very susceptible landslide locales to open-space uses
                                                3-7
Policies, ordinances, and legislation regulating engineering and construction measures used
to mitigate damage should include
   o measures to protect existing development from damage in landslide areas, including measures for slide
     and slump control, mud- and debris-flow control, and rockfall control; and
   o measures to protect existing development in high liquefaction susceptible areas including nonstructural
     solutions, improving the soil in-place, and changing the project structure.
       Few very active fault zones of deformation exist in the United States. For operational
purposes, we have defined these as having surface expression at any site along the fault every
five hundred years or less. Chief examples of these very active fault systems include the San
Andreas, Hayward, and San Jacinto fault systems, but not the Wasatch or Newport-
Inglewood fault systems. "Blind" thrust fault systems, such as generated the 1987 Whittier
Narrows earthquake, and offshore fault systems are excluded from consideration inasmuch
as they do not generate surface faulting hazards. For very susceptible liquefaction, landslide,
or settlement zones, we refer to such zones as Turnagain Heights in Anchorage, the Marina
District in San Francisco, sites adjacent to the Duwamish River in the Puget Sound, sites ad-
jacent to the Jordan River or Great Salt Lake in the Wasatch Front region, and similarly
severe landslide zones. The emphasis of this report is toward site preparation and/or
avoidance of "severe" ground failure susceptibilities since current evidence does not suggest
large risks in zones with moderately susceptible ground failure hazards. At the same time,
risks of building losses from strong ground motion are emphasized in this report. This em-
phasis is not merely presupposed, but also is tested in terms of the cost-effectiveness analysis
in this section (with greater detail in Appendix B).
Building Practices Resulting in Loss Reduction
      Table 3-2 lists the candidate activities related to building practices that were submitted
to socioeconomic analyses. Again, seismic zones specified in these tables are illustrated in
Figure 2-5.
      In describing building practices that augment current efforts toward loss-reduction, we
have assumed that for the most part adequate seismic building codes are in effect in seismic
zones 3 and 4 west of the Rocky Mountains. In selected municipalities and possibly following
a disaster, this assumption may prove to be untrue. (See Selkregg et al., 1984, p. 185, for
seismic code disputes even in seismic zone 4.) Nevertheless, we further propose for analysis
purposes that the two eastern Model Codes -- the BOCA National Building Code (formerly
the Basic Building Code) published by BOCA and the Standard Building Code (SBC) pub-
lished by SBCCI -- incorporate by transcription the National Earthquake Hazard Reduction
                                                    3 -8
                                                    Table 3-2
                                        Building Practices Analyzed
Number Brief Description
100    In seismic zone 2, design new comm ercial buildings in accordance with adequate seismic code provi-
       sions
110      In seismic zone 3, design new commercial buildings in accordance with adequate seismic code provi-
         Sions
12       In regions of seismic zone 2 where high catastrophic loss potential exists (zone 2*), require seismic
         zone 3 detailing requirements for new commercial and governmental buildings
13       In seismic zone 2, design new residential buildings in accordance with adequate seismic code provi-
         sions
140      In seismic zone 3, design new residential buildings in accordance with adequate seismic code provi-
         sions
150      In seismic zone 2, design new governmental buildings in accordance with adequate seismic provi-
         sions
160      In seismic zone 3, design new governmental buildings in accordance with adequate seismic provi-
         sions
170      In seismic zone 2,seismically retrofit all potentially hazardous- buildings
180      In seismic zone 3,. seismically retrofit all "potentially hazardous' buildings
190      In seismic zone 4, seismically retrofit all "potentially hazrdous" buildings
200      In seismic zone 2, seismically retrofit all poorly anchored or poorly reinforced wood frame dwellings
210      In seismic zone 3, seismically retrofit all poorly anchored or poorly reinforced wood frame dwellings
220      In seismic zone 4, seismically retrofit all poorly anchored or poorly reinforced wood frame dwellings
230      In seismic zone 4, reinforce/anchor/or brace parapets and ornaments to withstand 50 percent of
         seismic design forces specified in a current model code
240      In seismic zone 4 require that gas water heaters be strapped to structural framing in all multi-family
         dwellings and apartments (two-family dwellings and above)
250      In seismic zone 3, seismically anchor or restrain all life-safety related equipment (see Table 3-4) in
         essential buildings, public schools (including colleges), buildings whose primary function is assembly
         for more than 300 people, other public buildings, and for buildings with more than 500 occupants
260      In seismic zone 4, seismically anchor or restrain all life-safety related equipment in buildings
         referenced in number 250.
                                                       3-9
Program (NEHRP) seismic design provisions. Program administrators may in the future
consider whether or not 1992 ASCE/ANSI provisions satisfy national seismic design code
requirements, and so can be regarded as the equivalent to incorporation of NEHRP seismic
provisions.
      Uniformity of seismic design provisions is very important for (1) removing competition
among jurisdictions (often neighboring) with respect to seismic codes in place and (2)
providing greater uniformity of standards for reducing underwriting costs for writing
earthquake insurance. Since many municipalities regularly adopt one of these two model
codes, incorporation of adequate seismic provisions in these model codes would be an im-
portant step toward their implementation in local municipalities throughout the country.
Since losses are reduced only if these provisions are adopted and enforced, the project team
suggested for evaluation a loss-reduction measure that uniform seismic design provisions be
adopted and enforced, especially in the eastern United States. At the same time, this
recommendation recognizes the important role of the three major model codes in construc-
tion practices throughout the United States.
      For purposes of analysis, we also propose that the concept of "seismic zone 2`"be in-
corporated into model codes. This concept recommends that seismic zone 3 detailing prac-
tice be required in those seismic zone 2 regions exhibiting high catastrophic loss potential
(hence 2*)2. The expression "high catastrophic loss potential" is important from an
earthquake insurance standpoint since, as explained in section 3.0, what makes earthquake
insurance different from many other forms of insurance (such as life and casualty) is that eg
gregate earthquake losses are characterized by extreme fluctuations on a year-to-year basis.
Regions with high catastrophic losses are more likely to trigger state, regional, and national
concerns as associated effects ripple throughout the economy.
2. One early step in the development of a federal earthquake insurance program would be to work with code-
making organizations to determine how to define seismic zone 2*. Possible operational definitions of seismic
zone 2* include
   o those regions where PGA2500/PGA 500 exceeds a specified number such as 1.5,
   o those regions where PHV2500/PHVSW exceeds a specific number such as 1.5, or
   o those regions where direct losses due to earthquake could exceed a given amount (such as $5 billion).
In these definitions, PGA represents peak horizontal bedrock acceleration, PHV represents peak horizontal
bedrock velocity, and subscripts refer to the mean return interval at a given site for these estimates. Use of
such site-specific probabilistic shaking hazard estimates could serve to define zones with thigh catastrophic loss
potential,' but it would need to be understood that these estimates render the interpretation of "high
catastrophic loss potential" as being building-specific rather than as area-wide or regional.
                                                       3-10
       For programs covering existing buildings, we define potentially hazardous buildings as
those buildings which have high damageability and whose direct damage poses significant
life-safety risks. In order to simplify the administrative application of the expression
"potentially hazardous building," we define for public policy purposes this expression in
terms of a list of nine construction classes in Table 3-3. These generally exclude single-family
dwellings and duplexes, although the potential hazards of these buildings (except for
                                            Table 3-3
                     Potentially Hazardous Building Construction Classes
                             Identified for Public Policy Purposes
   (1)   Buildings with unreinforced masonry bearing walls, which do not have complete or adequate
         load paths for seismic forces.
   (2)   Concrete tilt-up or reinforced masonry structures with flexible roofs. Flexible roofs include
         those of wood or steel deck without concrete fill. Structures having one or more of the fol-
         lowing inadequate features:
         !(a) wood ledgers used in cross-grained bending or tension,
         (b)    no bolts or anchor straps for anchorage of walls to roof diaphragm,
         ;(c)   excessive spacing or inadequate capacity of roof to wall anchors,
         *(d) chord elements that are discontinuous (not supplied with continuity plates, etc.),
                and/or
         (e)    inadequate connection of tilt-up wall panels to foundation.
   (3)   Non-ductile concrete frames -- concrete moment-resisting frames not conforming to the
         detailing provisions of the 1976 or later editions of the Uniform Building Code (UBC), in-
         cluding "pre-cast' frames.
   (4)   Buildings with 'soft" or 'weak" first stories -- particularly those having story strengths less
         than 65 percent of the strength of the story above, as per 1988 UBC.
   (5)   Buildings having unreinforced or inadequately braced parapet walls or inadequately attached
         exterior ornamentation.
   (6)   Buildings with inadequately attached or rigidly attached (inadequate allowance for story drift)
         exterior glazing or pre-cast concrete, masonry, or stone curtain wall panels.
   (7)   Unreinforced masonry "infill" exterior walls.
   (8)   Unreinforced masonry interior partitions or "infill" walls in stairwells and elevator shafts.
   (9)   Buildings where no lateral force resisting system is present or can be identified either for the
         whole building or for one story of the building. Buildings in which the seismic lateral force
         resisting system is incomplete, or has significant gaps that could allow portions of the struc-
         ture to collapse.
                                                      3 -11
predominantly wood-framed residential construction) remains to be analyzed. Certain
classes of one- and two-story wood frame residential construction are not so "potentially
hazardous" as they are highly damageable (i.e., having high likelihood of direct property
damage without there being a correspondingly high life-safety hazard). (See, for instance,
building practices 210 and 220 in Table 3-2.) Unfortunately, however, in the October 17,
1989, Loma Prieta earthquake, five deaths were reported in three- and four-story wood-
frame residences (with weak or soft stories) in the Marina District of San Francisco.
Likewise, significant numbers of deaths were associated with wood-frame dwelling damage
in the 1906 San Francisco earthquake (Hansen and Condon, 1989). The existing stock of
buildings that are either "potentially hazardous" or have high property damage potential is
very large. (See Petak and Atkisson, 1982; Algermissen et al., 1988; Hopper et al., 1975;
CSSC, 1985a; May et al., 1989; Taylor et al., 1988.)
      Table 3-4 lists examples of life-safety related equipment (i.e., equipment whose failure
can lead to or exacerbate life-safety hazards) associated with LRMs 250 and 260 in Table 3-2.
Later in this section and in sections 5 and 6 we discuss possible roles of life-safety protection
programs in loss-control programs involving federal insurance involvement. As with landuse
elements, we characterize at the end of this section additional supporting measures for build-
ing practice LRMs.
                                          Table 3-4
                         Examples of Life-Safety Related Equipment
            o Emergency generators including batteries and fuel tanks
            o Fire/water storage tanks and pumps
            o Boilers and other equipment using natural gas
            o Vessels and their support structures which contain sufficient quantities of sub-
              stances which, if released, could endanger the general public. These should
              primarily include liquified gases which can form heavier-than-air vapor clouds,
              and which are either explosive or toxic
            o Elevators and elevator equipment
            o Emergency communication equipment
                                                   3-12
General Remarks on Loss-Reduction Activities Selected for Analysis
      When analyzing the candidate activities listed in Tables 3-1 and 3-2, we have included
the following structural subcases as appropriate:
      o masonry (unreinforced versus partially reinforced)
       o cast-in-place concrete frames (non-ductile versus semi-ductile or with concrete
         shear walls)
       o tilt-up shear walls (unimproved or seismically improved)
       o pre-cast concrete frames (non-ductile versus semi-ductile or with concrete shear
         walls)
       o parapets/ornaments (unbraced versus braced or removed)
       o wood-frame dwellings (not anchored to foundation or with unreinforced cripple
         walls versus anchored or with wall reinforced at foundation)
       o chimneys (unreinforced versus reinforced or removed)
       o dwellings with story over garage (unreinforced versus reinforced)
       o mobile homes (unbraced versus braced)
This list does not include steel frame structures for which seismiuc design requirements are
generally less expensive and retrofit possibilities are more dubious.
       TBe types of activities and sub cases selected for analysis, with a few exceptions, fit into
what we shall call community-based programs. Currently, life-safety, economic, political, or
legal reasons may lead to individual instances of exemplary seismic safety practices. Espe-
cially within higher seismic regions, individuals or firms may on their own decide to build to
high seismic standards, to restrain, anchor, or isolate equipment and contents, and to retrofit
buildings to higher seismic standards. Owners or property managers mayvoluntarily decide,
or decide based on existing market incentives, to include seismic safety practices that exceed
existing regulations and code requirements.. Selected insurance companies, as part of their
business strategy, may systematically encourage various loss-reduction activities and may
provide premium reductions (rate credits) as means to provide incentives for these
measures. 3 These types of risk-redu ction activities are based on umique motivations or cir-
3. As later indicated, virtually all prudent insurers will provide some degree of partially risk-based rates to
minimize adverse selection, or poor risks at average or flat rates. The degree to which underwriting efforts are
made to rate accurately, to avoid poor risks, and to assist clients in reducing losses will depend in the private
market on business considerations.
                                                      3 -13
cumstances. Because such motivations or circumstances occur only randomly or rarely, loss-
reduction also occurs only randomly. That is, the programs are not community-based.
       In contrast, community-based programs generally require some degree of regulation
including enforcement at local, state, or federal levels and generally require uniform applica-
tion. Additionally, most activities listed in Tables 3-1 and 3-2 will require some degree of of
consolidation of state and local government resources. In some instances it may be advisable
to provide better information to owners, insurers and others in an effort to involve competi-
tive forces in encouraging implementation of loss-control measures.
      The application of regulation to loss-control programs that emphasize damage-control
also implicitly recognizes concerns for life-safety, and vice-versa. Since direct damage to
structures and contents is the primary cause of deaths and injuries in earthquakes, reduction
in property damage is the primary means to effect reductions in casualties. As a con-
sequence, a comprehensive program designed to reduce propertM losses will in turn have the
benefit of reducing expected casualties. (This of course does not imply that each increment
of property-loss reduction has a corresponding increment in life-safety protection. For in-
stance, adequate seismic design of new concrete and masonry frame structures may have
high casualty reduction benefits per dollar spent. In contrast, reduction in property damage
to low-occupancy and one- and two-story buildings and wood-frame structures, as well as to
existing buildings, may have lesser life-safety benefits per dollar spent.) Additionally, the use
of civil and police powers to enforce regulation may be significantly questioned if damage-
control alone is regulated, but the use of such authority is generally justified by the clear
presence of safety concerns. Hence, with a few exceptions, the community orientation of
many of the candidate activities, recognizing associated life-safety goals, is consistent with a
comprehensive program to reduce expected property losses associated with earthquakes.
3.3   Socioeconomic Analysis of Technically Feasible Loss-Reduction Activities
      This section reviews the process of socioeconomic analysis, details the methods used to
estimate costs and loss reductions, and summarizes the results of the socioeconomic analyses
of technically feasible loss-reduction activities listed in Tables 3-1 and 3-2 as they relate to
cost-effectiveness. This analysis of cost-effectiveness is an essential ingredient in a full-
fledged consensus process for identifying recommended LRMs, since without this analysis
LRMs might be proposed that have appeal to a wide variety of interested parties but that
have low benefits relative to their costs.
                                              3-14
Process of Socioeconomic Analysis
      Figure 3-2 identifies the steps taken to accomplish the socioeconomic analysis. By and
large, this analysis evaluated candidate activities on two grounds
       o economic efficiency or cost-effectiveness and
      o economic allocation - identification of those stakeholders who benefit from and
        those stakeholders who pay for implementation of loss-reduction activities.
      For this project, an interactive model was developed as a means to provide this evalua-
tion. For each analyzed activity, this model yields aggregate benefit/cost ratios and also
produces dollar estimates of costs and benefits to diverse stakeholders. Sensitivity analyses
were performed relative to some of the many parameters that could -affect outcomes.
       Relative to the classification of risk analysis methods discussed in Section 2, the
method used in this project for socioeconomic analysis has been probabilistic site-specific,
which is effective for defining long-range costs and benefits. Costs for loss-reduction
measures include chiefly construction costs with small percentages for local administrative
costs. Benefits include the entire stream of expected future benefits in constant dollar values
discounted to reflect the value of current investment capital. At the most restrictive level,
only reduction in direct property losses were considered amon g benefits. At less restrictive
levels, reductions in casualties, in the need for temporary housing, and in business interrupt-
ion were also considered among benefits.
      Tlis expected annual loss methodology ignores large-scale fluctuations in loss levels
that may occur over multiple-year periods, of time. Large-scale fluctuations often discourage
capital outlays, since returns may not be immediate or may not occur within a stakeholder's
tine-frame of interest. During the Project Workshop participants re-affirned the use of the
interactive model, but encouraged the use of probabilistic multisite methods and further ex-
amination of secondary and higher order economic losses. Should a fuller examination be
made of these issues, probabilistic multisite methods would be desirable. These have the ad-
vantage of defining various threshold level losses (such as losses resulting from mortgage
defaults as they affect lenders, and ultimately the federal government and/or catastrophe
insurers) that can create secondary financial losses through bankruptcies, insolvencies,
defaults, the need for federal assistance, and the like.
     The interactive model was used in order to
     o assure that activities identified for inclusion as LRMs in a federal insurance
       program are economically sound (i.e., have benefits which exceed costs), and
                                             3- 15
        Define LRM alternatives:
     the status quo (no mitigation)
         and candidate activities
      Define marginal costs of the
           candidate activity
      Define expected direct property
losses reduced through implementation
            of candidate activity
     Define expected indirect losses
           reduced through the
            candidate activity_
        Define aggregate costs and
           benefits of mitigation
               A='~~~~~~~~~~~~p
       Define costs and benefits to
           various stakeholders
Figure 3-2. Steps in Socioeconomic Analysis
                   3- 16
          provi de a preliminary determination of who pays for and who benefits from specific
      0
          L~tms.
Thus, the cost-effectiveness analysis served to assure that selected activities would not in-
voIve poor economic decisions and to provide data with which to evaluate candidates rela-
five to cost/benefit criteria. The stakeholder analysis, to the degree possible in this project,
provided farther important information regarding the acceptability of candidate activities to
various stakeholders. In application, this information can be used to determine, to the extent
possible within the limitations of this project, the degree to which various stakeholders who
benefit from mitigations should bear the cost of their implementation. For instance, if lend-
ing institutions benefit from cost-effective loss-reduction measures, then it is, at least con-
ceivable that they should bear the burden of some of the costs of these LRMs. Such con-
siderations are the subject of Sections 4 and 5.
      It should be noted that
      o The decision procedures used here permit a continuous LRM evaluation scale
          largely dependent on the discount rate selected. 4 (Although project workshop par-
          ticipants favored a three percent real discount rate, OMB Circular A-94 requires a
          ten percent discount rate, and no discount rate is easily warranted with respect to
          lives saved.)
       o Numerous individual decision situations are reflected in the real world (and in
         potential distributions used for such parameters as income level, site-specific seis-
         inicity factors, deductible levels, limits of liability, and premium levels under dif-
         ferent kinds of federal involvement, for both earthquake and non-earthquake
         insurance). Neither this range of cases nor helpful human behavioral models can be
         reflected in the limited mechanical cases produced for this project.
       o The model as developed applies to individual decision-makers, and hence accounts
         neither for widespread decisions nor for community impacts (such as those resulting
         from large-magmitude earthquakes) of those decisions.
4. Discount rates purport to quantify the time-value of money. Money today is more valuable than money
tomorrow - even discounting for inflation -- to the extent that money as capital has an investment earning
power. Thus, money may earn at xo above inflation.
    For public policy analyses, this earning power of money has many critical implications for the benefit-cost
ratios developed. Using the variable xo allows for a gradated or continuous evaluation of LRMs in terms of
the discount rate at which they would have a favorable benefit/cost ratio. (See Taylor, Atkisson, and Petal,
    The real discount rate is the constant dollar/earning value of current money, and is used as a continuous in-
teractive parameter. Hence, an LRM may be evaluated in terms of the lowest discount rate at which its
benefit-cost ratio exceeds unity. Discount rates to be used are subject to many controversies.
                                                      3-17
Estimations of Costs and Expected Annual Direct Loss Reductions Resulting from
Implementation of Candidate Loss-Reduction Activities
      In order to perform socioeconomic evaluations of mitigations, one must have available
data that at the very least can be used to indicate the costs and benefits of mitigations. Ap-
pendix B presents the results of analyses performed to estimate
      (1) risk levels (degree of loss) associated with various levels of seismic (earthquake)
            frequency and intensity,
      (2)   dollar values for both implementation costs and loss-reduction benefits of can-
            didate building practice LRMs, and
      (3)   dollar values for both implementation costs and loss-reduction benefits of can-
            didate landuse planning LRMs.
Again, it should be noted that estimates relate to expected annual direct loss reductions and
were designed for average conditions. Annual direct loss reductions incorporate all possible
earthquakes affecting buildings analyzed, not merely rare serious ones. As indicated in
Eguchi et al. (1989), ignoring effects of smaller but damaging earthquakes is a serious error
not only in earthquake insurance rating but also in analysis of the benefits of LRMs.
       In order to account for variations in frequency of earthquakes of varying seismic inten-
sities, short-cut methods were used that considered both (a) variations in seismic intensity
levels (owing to distance from sites to various earthquake sources) and (b) effects of strong
ground motions on various local soils. (See Appendix B.) Assumptions made are conserva-
tive since one goal of this analysis was to eliminate candidate LRMs which are, as a general
rule, poor investments. Even more conservative assumptions typically were made with
respect to landuse measures mitigating surface fault rupture, liquefaction, and landslide
hazards. Sensitivity of outcomes to variations in estimates of frequencies of shaking inten-
sities were analyzed within the interactive model. For both shaking intensity and analysis of
potential permanent ground displacements, it is possible at greater cost to provide much
finer estimates. Current methods for probabilistically analyzing liquefaction and landslide
hazards require additional systematic applied research in order to become credible for
microzonation analyses (Eguchi et al., 1989).
       Seismic vulnerability estimates were derived largely from ATC-13 (1985), Wiggins and
Taylor (1986), and engineering judgment. (See Appendix B.) As indicated in Wiggins and
Taylor (1986), for selected classes of construction, procedures previously used may sig-
nificantly underestimate the losses reduced through seismic improvements. Consequently,
sensitivity analyses were performed in order to determine the effects of using diverse seismic
vulnerability estimates to evaluate specific loss-reduction activities.
                                             3 - 18
      Estimates of the direct initial costs of loss-reduction activities were derived from a
number of sources along with engineering experience. These represent average initial cost
estimates for instances when the activity is technically feasible. This study as well as previous
studies strongly indicates that initial cost estimates are an extremely critical parameter in the
assessment of IRMs (see Taylor, Atkisson, and Petak-, 1981). By the same token, techniques
developed in order to reduce expected capital outlays needed to achieve seismic design and
redesign objectives       even by small margins       when applied broadly can have potentially
                      -                           -
large-scale aggregate effects in reducing the costs of losses associated with earthquakes. In
other words, research programs that yield small percentage reductions in seismic design and
redesign costs (e.g., 0.1% of replacement value) can have large-scale aggregate effects (e.g.,
millions of dollars in reduced costs).
      In addition to initial outlay costs and estimates of direct property benefits for specific
LRMs, an adequate risk-and-decision analysis requires consideration of secondary costs and
losses associated directly wiith the property and its stakeholders. Appendix C discusses addi-
tional estimates of economi c and stakeholder costs and losses.
      In addition to estimates of direct property losses, analysts considered losses associated
with
      o temporary housing,
      o business interruption,
      o deaths and injuries,
      o the cost of money, and
      o insurance premiums.
Not considered were losses associated with
      o contents,
      o infrastructure facilities and fire following,
      o release of toxic or hazardous chemicals,
      o transaction, foreclosure and business closure (except for crude assumptions on load-
         ings for premiums),
      o post-disaster clean-up,
      o price deflation,
      o unemployment resulting from general economic decline.
                                             3 - 19
Results of the Economic Efficiency Analysis
       In order to rate candidate LRMs in terms of cost-effectiveness, a three-tier criteria ap-
proach was used. This permits a continuum of economic evaluations with those LRMs that
pass at tier 1 obviously passing at tiers 2 and 3, those passing at tier 2 obviously passing at tier
3, and those failing at tier 3 obviously failing at all tiers. This continuum of economic evalua-
tions recognizes that diverse economic criteria, such as are implicit in discount rates selected,
may be used to determine economic acceptibility.
       At tier 1, the most rigorous, only direct property losses were considered, and an eight
(8) percent discount rate was used. Only the most cost-effective LRMs satisfy tier 1 criteria.
At tier 2, clear monetary considerations were included as secondary losses associated with
temporary housing, business interruption, and deaths and injuries were considered, and a
three (3) percent discount rate was used. Deaths were calculated to have an average value of
$300,000 (as a monetary measure only), which represents a conservative appraisal of a
lifetime discounted income. Tier 2 represents the level for sound economic policy supported
by project workshop participants. At tier 3, losses above primary and secondary levels were
considered, deaths were valued at $1,000,000 (a value exceeding average present discounted
value of potential future earnings), and a zero (0) percent discount rate applied. Tier 3 may
be appropriate for community health, safety, and welfare programs. LRMs not satisfying
tiers 1, 2, or 3 criteria are as a rule not economically sound policies.
      The main results of the efficiency (cost-effectiveness) analysis are outlined below.
Loss-reduction activity numbers refer to Tables 3-1 and 3-2.
      At tier 1, most of the activities covering new seismic design (#s 100, 110, 120, 130, 140,
150, 160) passed, with all cases passing at tier 2. Generally speaking, implementation of
seismic building codes has a favorable benefit/cost ratio--even from the standpoint of
property loss reductions alone.
      Seismic retrofit of unbolted and/or poorly anchored wood-frame residences in seismic
zone 4 (# 220) passed at tier 1. The low per-unit cost of this measure combined with sig-
nificant property loss-reduction make this an economically attractive candidate mitigation
measure.
      Use of geotechnical means to minimize landsliding, severe liquefaction, and/or sub-
sidence hazards in seismic zone 4 (# 1500) passed at tier 1 for commercial and public
developments and for large-scale residential tracts. Economies of scale are significant with
respect to residential structures; this measure appears to be economically unattractive for
unit-by-unit single-family and duplex residential developments.
                                               3-20
      At tier 2, seismic retrofit oftiit-up construction in seismic zone 4 (one subcase of # 190)
appears to be economically attractive owing to the comparatively low costs of this retrofit.
Other economic measures are seismic retrofit of unreinforced masonry structures in seismic
zone 4 (another subcase of # 190), and seismic retrofit of tilt-up construction in seismic
zones 2 and 3 (subcases of #s 170 and 180).
      Also at tier 2, a number of landuse/geotechnical en gineerig measures passed for
residential construction other than single family dwellings or duplexes. These include, for
seismic zone 4, restrictions on new development in very active fault zones of deformation (#
1200), in highly susceptible liquefaction zones (# 1700), and in highly susceptible landslide
locales (# 2100). For landslide locales, possible purchase of land with conversion to open-
space uses can in some cases be economically warranted (# 2300). Considerations ofpublic
health and welfare can enter into these landuse decisions. Seismically poor land can also
correspond to regions of intensive infrastructure earthquake damage with associated health
and welfare concerns (see Selkregg et aL., 1984).
      Minimization of severe liquefaction and/or subsidence hazards in seismic zone 3 (#
1600) also passed at tier 2 for new commercial and public development. Also, for modifica-
tions of commercial structures in severe liquefaction zones in seismic zone 4, use of geotech-
nical techniques to minimize these hazards passed at tier 2 (# 1900).
      Mitigations passing tier 1 and tier 2 represent, as a rule, economically sound policies.
These include life-safety factors only in defensible economic terms. Activities that pass at
tier 3 represent policies that have lower ratings on economic grounds, but that may be
pursued as sound public policies if life-safety hazards, potential community disruption, and
other factors are emphasized.
     At tier 3, seismic retrofit of unreinforced masonry buildings appears to be warranted in
seismic zones 2 and 3 (subcases of #s 170 and 180 in Table 3-2).            Seismic retrofit of
"potentially hazardous" buildings in seismic zone 4 passes at tier 3 for all pertinent building
types (retrofit of tilt-up and unreinforced masonry buildings passed at tier 2) (# 190). Seis-
mic reinforcement/anchorage/bracing of parapets and ornaments (# 230) passed at tier 2.
       With respect to landuse measures in seismic zone 4, restriction of new development in
moderately active fault zones of deformation passed at tier 3 (# 1300). In, seismic zone 3,
restrictions of new developments in highly susceptible liquefaction or landslide locales (#s
1800 and 2200) appear to pass at tier 3, as does use of geotechnical techniques to nmninimize
                                              3 -21
ground failure potential damage whenever major modifications of structures are made in
highly susceptible liquefaction zones (# 2000). Seismic retrofit of wood-frame dwellings in
seismic zones 2 and 3 (#s 200 and 210) is of marginal cost-effectiveness and needs further ex-
amination.
     Not passing on any of the three tiers (and as a rule with exceptions that can be assessed
through individual benefit-cost analyses) are
     o seismic retrofit in seismic zones 2 and 3 of non-ductile and pre-cast concrete frames
        (subcases of #s 170 and 180)
      o purchase of existing (undamaged) construction or properties in fault zones of
        deformation, or zones with severe liquefaction, landslide or rockfall potential (#s
        1000, 1100, as illustrations)
      o restriction of new development in moderately active fault zones of deformation in
        seismic zones 2 or 3 (# 1400)
      o purchase and conversion of land in highly susceptible landslide susceptible locales in
        seismic zone 3 (# 2400)
Activities numbered 200 and 210 only marginally passed for subcases considered at tier 3.
No formal analysis was provided for activities numbered 240,250, and 260.
3.4   Summary
     In this section we outlined the procedures used to identify and define feasible Loss
Reduction Measures (LRMs) for possible incorporation in a federal earthquake insurance
program. The procedures used involved
      1. a thorough information search, which identified 96 earthquake hazard reduction ac-
         tivities for consideration,
     2. reduction of this list to 32 loss-reduction activities for further analysis,
     3. socioeconomic risk-and-decision analyses to evaluate these 32 loss-reduction ac-
         tivities for cost-effectiveness and stakeholder impact, and
     4. a project workshop during which cost-effective loss-reduction activities were further
         analyzed, synthesized and developed into initially recommended Loss-Reduction
         Measures.
     5. a final advisory panel meeting and review by advisory panel members and other
         knowledgeable parties of these initially recommended LRMs.
                                             3-22
      The socioeconomic analysis permitted the evaluation of candidate loss-reduction ac-
tivties in terms of their cost-efficiency and stakeholder impact. Those that are especially
cost-effective include
   o adoption of, compliance with, and enforcement of adequate seismic design provisions
      in new construction in all seismic zones (with minimal or no costs in seismic zones 0
      and 1),
   o seismic retrofit of unbolted and/or poorly anchored wood-frame residences in seismic
      zone 4, and
   o minimization through geotechnical techniques of severe landslides liquefaction and/or
      subsidence hazards in seismic zone 4.
As discussed in the next section, these results were considered further in the course of an ac-
ceptability analysis.
                                             3 -23
4.0   THE IDENTIFICATION, DEVELOPMENT AN]) EVALUATION OF
      ACCEPTABLE LOSS-REDUCTION MEASURES
       As explained in Section 1, the characterization of earthquake loss-reduction provisions
as "feasible"r requires that they must prove to be both cost-effective and otherwise acceptable
to a wide variety of individuals who will be affected by the measure.
       As a result, three processes were utilized to help ensure that recommended loss-
reduction provisions would be acceptable.
    (1) The socioeconomic analysis conducted as. part of this study included an economic al-
          locative or stakeholder analysis of technically feasible loss-reduction activities.
    (2) Cost-effective loss-reduction activities were presented to a Project Workshop for
          further consideration and modification by diverse interest groups.
    (3) Initially recommmended loss-reduction measures were submitted to advisory panel
          members and other knowledgable parties at a final advisory panel meeting and
          through draft final reports.
This section reviews the procedures used to conduct these processes and reports the results
of these efforts.
4.1   Economic Allocative (Stakeholder) Analysis
      A stakeholder analysis has been developed in this project in order to estimate gains and
losses to stakeholders with respect to the status quo and to alternatives so that various loss-
reduction policy measures may be recommended. The following stakeholders were con-
sidered in the allocative analysis:
         o the general taxpayer (the federal government)
         o the state taxpayer (for specific state governments)
         o the local taxpayer (for specific municipalities)
         o lending institutions
         o realtors
         o developers
         o building contractors and subcontractors
         o owners
         o small businesses
         o workers/employees
         o tenants
         o nonprofit organizations
         o low-income residents
                                             4-1
          o companies writing earthquake insurance
          o companies writing non-earthquake insurance
These and a wide variety of other stakeholders may be directly involved in a proposed loss-
reduction program. In this list, taxpayers are included in three categories in order to
evaluate how losses are distributed among individual states and municipalities. Hence, a
taxpayer in a highly seismically prone municipality or state may expect to pay higher state or
local taxes to offset earthquake damage than a taxpayer in a less seismically prone
municipality or state. Accordingly, individuals may have interests that are associated with
potentially competing stakeholder-claims: one may desire lower earthquake insurance rates
for one's residence or business; one may desire lower local, state, and federal tax burdens;
one may desire to occupy more seismically resistant buildings; and one may have additional
interests in the above stakeholder positions.
       Stakeholders do not always accurately evaluate their economic interests. People may
support or oppose programs based on only partial or incorrect information. We have con-
ducted a limited stakeholder analysis in an effort to clarify where economic interests in
proposed measures lie -- who gains and who pays. In this regard, the stakeholder analysis
may estimate gains and losses to stakeholders with respect to
    (a) the status quo,
    (b) diverse proposed loss-reduction measures, and
    (c) alternative types of federal involvements in earthquake insurance.
Thus, stakeholder analyses clarify potential gains and losses to existing or prospective con-
stituencies. These analyses are also useful in determining which public policy vehicles may
be useful in view of the stakeholder benefits and costs of a proposed loss-reduction measure.
4.2    Results of Economic Allocative (Stakeholder) Analysis
       In discussing the results of the stakeholder analysis, we distinguish among diverse
stakeholder populations. In some instances, as with taxpayers, individuals may fall into a
number of stakeholder positions (e.g., federal taxpayer, taxpayer for a specific state, taxpayer
for a specific municipality).
       Key results obtained from the stakeholder analysis include the following:
       o Federal taxpayers currently bear the largest burden of earthquake property losses
          associated with public and selected private nonprofit buildings. Since current dis-
          aster relief policy places the financial burden of recovery on the federal government,
          the benefit/cost ratio of implementing loss-reduction activities to state and local
          governments is significantly reduced. In effect, current disaster relief policy serves
          as a major disincentive to mitigation for state and local and selected private non-
         profit buildings.
                                              4-2
     o All stakeholders modeled benefit fromtcost-effective IRMs except for state and lo-
       cal taxpayers for activities pertaining to state and local buildings. This general con-
       clusion may not necessarily hold for short-term owners, tenants, realtors, and con-
       tractors, who were not included in the model (in these cases, short-term time
       horizons, possibly reflected in high discount rates, may need to be considered in the
       stakeholder analysis).
     o Given current contingent federal liabilities with respect to ublicly owned buildings,
       the costs of federal subsidies, for cost-effective LRMs for these buildings can be off-
       set by reduced federal liabilities.
     o Mortgage-lending institutions benefit from cost-effective IRMs. A finer analysis of
       the risks borne by these institutions is therefore needed in order to estimate more
       precisely the degree to which these lenders benefit from implementation of LRMs.
      o Workers generally benefit from implementation of cost-effective LRMs owing to
        reduced expected casualties and unemployment.
      o Since losses in other lines of insurance (auto, theft, etc.) are expected to be reduced
        by the implementation of LRMs, insurers who write policies in these other lines and
        who may expect losses after earthquakes benefit from these LRMs.
      o Taxpayers in general gain from cost-effective loss-reduction activities, since their
         implementation
         - reduces post-disaster loans (subsidies) and grants, and
         - reduces the need for te mporary housing (relative to residential LRMs).
      o Tax credits for homeowners who undertake cost-effective loss-reduction activities
        are not effective vehicles to offset contingent federal liabilities, since benefits of tax
        credits would largely accrue to higher income segments of the population who are
        least expected to require post-disaster assistance. A fuller study of the benefits of
        tax credits would be needed before they should be recommen ded as means to induce
        LRMs.
      o Subsidies including tax deductions and low interest loans should be considered for
        cost-effective commercial seismic retrofit programs to the extent that these
        programs reduce post-disaster costs of
         - unemployment insurance,
         - workers' compensation claims, and
         - loss of tax revenues resulting from business interruptions and closures.
      In review, virtually all stakeholders benefit fromr implementation of cost-effective loss-
reduction measures. The notable exception is the state and local taxpayer and private non-
profit institutions eligible for federal disaster assistance, because federal disaster relief assis-
tance policies for public and private nonprofit building provide a disincentive for additional
investment in loss-reduction activities. (See Appendix D.)
                                                4-3
4.3   The Project Workshop and Final Advisory Panel Meeting
      The efforts outlined thus far were ultimately aimed at identifying earthquake loss-
reduction provisions which could potentially be worked into a national insurance or rein-
surance program. After the socioeconomic analyses were completed, the remaining loss-
reduction activities were presented at a Project Workshop for further revision, refinement,
and definition as Loss Reduction Measures (LRMs) for potential incorporation into a na-
tional insurance or reinsurance program. Afterwards, a final advisory panel meeting was
held, and draft final reports were reviewed by advisory panel members and other knowledge-
able parties.
The Project Workshop
      The Project Workshop was composed of recognized experts and interested and af-
fected parties representing a very broad spectrum of interests, professions, and geographical
regions. The workshop was to provide for further consideration of the views of diverse inter-
est groups and to assure that the proposed measures are professionally supportable, and ac-
ceptable to communities, the insurance industry and policyholders. The workshop was to en-
courage jhe introduction of new information and innovative ideas.
        Workshop participants were divided into five working groups:
           o building issues,
           o landuse planning/geotechnical issues,
           o risk analysis issues,
           o socioeconomic/insurance issues, and
           o public policy/legal issues.
The workshop was designed to encourage participants in each of these five topic areas to
freely discuss, augment, and revise preliminary findings and finally to develop and evaluate
specific conclusions.
       In both the landuse and building issues sessions, participants were first asked to review
a list of cost-effective loss-reduction measures (LRMs) and to add to this list. Next, positive
and negative impacts of these LRMs were to be listed. Then, the resulting LRMs were to be
evaluated on the basis of their probability of successful inclusion in a national insurance
program. A similar set of steps was used to develop lists of supporting elements -- activities
required to initiate, support, or sustain promising LRMs.
                                              4-4
       The risk analysis session was organized around
       - risk analysis methods,
       - other model elements of risk analysis, and
       - possible uses of risk methods in a federal earthquake insurance program.
First, prepared lists of these methods, elements, and uses, respectively, were added to. Next
pros and cons of these lists were discussed. Finally, the resulting lists were evaluated.
       The design of the working session on socioeconomic issues was, first to augment the list
of stakeholders previously modeled, next to evaluate the merits of including various
stakeholders, and then to rate the inclusion of these stakeholders in the model
socioeconomic analysis. Then, preliminary socioeconomic analysis results, were listed, to be
added to, discussed, and evaluated.
       The working session on public policy/legal issues was designed to evaluate the impor-
tance of various political issues relating to LRMs that had been developed prior to the
workshop. Advantages and disadvantages of including these and other issues in the public
policy analysis were to be listed and evaluated.
       The design of the workshop did not include a concerted effort to make every matter
discussed and every recommendation developed consistent in each of the five working ses-
sions. For instance, LRMs that may have been added or altered in the building issues and
landuse issues sessions were not necessarily specifically evaluated in the session on public
policy analysis. For another instance, recommendations developed in one session may have
been qualified or discussed in another session. However, the intent of the workshop was to
convene recognized experts and interested parties in each of a number of disciplines and in-
terest areas and to have those parties critique, modify, and augment conclusions developed
so far in this, project. Workshop participants were not asked to provide an overall integration
of results.
     Also discussed by Workshop participants were status quo obstacles to implementation
of IRMs and strategies for overcoming these obstacles. Additional public policy/legal
analysis are included in Section 5, with respect to the inclusion of LRMs in various types of
federal insurance involvements.
The Final Advisory Meeting and Reviews of Draft Final Reports
      The overall integration of results was developed in an initial draft final report which
was discussed at a final advisory panel meeting. Owing to the complexity of the report and to
serious objections to initial incorporation proposals, especially with respect to federal rein-
                                              4-5
surance involvement, an additional draft final report was also submitted. These draft final
reports were reviewed by advisory panel members, by the project officer, and, through the
project liaison, by federal officials on the interagency task force on earthquake insurance.
       Although much of the attention of these reviews of draft final reports concentrated on
incorporation issues, reviewers also added valuable insights that led to further refinements
and revisions of the initially recommended LRMs. One central issue raised in the final Ad-
visory Panel meeting and afterwards was the status of the recommended LRMs: Were they
to be explicitly stated in any bills before Congress, were they to be included in administrative
guidelines, or were they to be sufficiently detailed to be readily implemented as expressed?
Given the consensus process used in this project, it is clear that more specific LRMs than are
recommended here would require further administrative and technical discussion. In con-
trast, inclusion of the LRMs as stated may lead to an undesirable degree of administrative in-
flexibility. Hence, the LRMs recommended in this project are designed to be used in ad-
ministrative rules and regulations within existing and/or major modifications of federal
programs. Moreover, this report is advisory only to FEMA and so does not reflect their final
considerations.
4.4   Cost-Effective LRMs Recommended
LRMs and Supporting Activities/Elements Developed
      The landuse and building groups of the project workshop were asked to refine, revise,
and augment those loss-reduction activities defined as being cost-effective. The resulting
LRMs were then evaluated, and supporting or framework elements were identified and
defined. Results of the evaluation process were intended to refer to a likelihood of success-
ful inclusion in a federal earthquake insurance program having a loss-prevention element.
This subsection presents the results of those two working sessions as revised by the project
team in response to comments by the project advisory panel and other considerations.
Landuse LRMs
       Table 4-1 lists promising landuse LRMs, all of which were evaluated by the working
landuse group at the Project Workshop as having a high probability of successful inclusion in
a federal earthquake insurance program. All four LRMs apply chiefly to seismic zones 3 and
4, although LRM 3, pertaining to post-damage situations, may be extended to seismic zone 2.
LRM 1 does not apply as cost-effectively to scattered construction of single-family dwellings,
and administrative and legal versions of this LRM may consider scattered or unit-by-unit
                                             4-6
construction of single-family dwellings as a possible exclusion. The other three LRMs apply
to all structures. All-four LRMs require governmental regulation as a prm instrument for
implementation, and all four emphasize potential permanent ground failures. Local extreme
strong motion amplification effects owing to high relative site response factors were added to
LRM 2, because an increasing body of evidence demonstrates that these factors are sig-
nificant contributors to earthquake loss potential. Some concern was expressed over the use
of 50 percent of replacement cost as a criterion in LRM 4. In administrative versions of this
LRM, consideration may be given to use of "actual cash value" or "market value" in lieu of
"'replacement cost."
                                               Table 4-1
                                  Recommended Landuse LRMs
                                (Applicable only in seismic zones 3 and 4)
   New Developments
            Require in high liquefaction susceptible zones that geotechnical techniques be used to
   LRM 1
            minimize potential ground failures for:
            o new commercial, public, and residential subdivision development, and
            o major modifications of commercial, public and residential subdivision development.
               (Exceptions of scattered construction of single-family dwellings may be considered in
               legal and administrative versions of this loss-reduction measure.)
            Use zoning ordinances, subdivision ordinances and other techniques to control new
   LRM 2
            development in active fault zones, high" site amplification, landslide and liquefaction sus-
            ceptible zones.
   Existing Developments
            Permit reconstruction or replacement of existing development in areas identified as active
   LRM 3
            fault zones, high landslide, or liquefaction susceptible zones experiencing damage of more
            than 50% of its replacement value only if the identified risk is reduced to an acceptable
            level. Consider purchase of existing damaged properties in high landslide susceptible
            zones unless suitable measures are used to protect existing development from damage.
            Permit no additions to buildings in areas identified as active fault zones, high landslide or
   LRM 4
            liquefaction susceptible zones unless the risks are reduced to an acceptable level, except
            additions to single-family dwellings up to 50% of the replacement cost, which can be made
            without such risk reduction.
                                                     4-7
      In evaluating these four LRMs, the working group emphasized two general advantages:
      o reduction in expected property losses (reduction in exposure/risk, limitation of
         number of potentially hazardous buildings, limitation of potential losses to the
         housing stock, and reduction of post-disaster clean-up costs), and
      o improvement in public safety and health in regions where damage potential is high
         to such infrastructure facilities as sewage lift-stations, natural gas mains, and water
         mains.
      The working groups highlighted the following general disadvantages:
      o apparent loss of market property value in high hazard zones (Further legal and
         socioeconomic analysis is needed to determine whether or not externalization of
         earthquake risks can be assumed in assessment of market values.), and
      o possible litigation and political dissension resulting from this loss of property value.
 Supporting Elements for Landuse LRMs
      Table 4-2 provides a list of candidate activities that support or sustain LRMs described
in Table 4-1 as determined by the workshop attendees. In the main, these are restricted to
seismic zones 3 and 4 for which available data have already been developed. Hence, these
supporting activities do not require huge sums of money as some reviewers of earlier final
drafts have contended.
      Li consists of small-scale maps needed principally to define seismic zones. These maps
are being updated continually. The remainder of the supporting elements apply primarily in
seismic zones 3 and 4.
      Intermediate scale maps (12) requiring examination of local geologic effects on strong
ground motion are helpful in defining "poor sites" relative to strong ground motion. Their
identification is useful in further delineating liquefaction/subsidence/landslide hazards. Fur-
thermore, as landuse planning evolves, inclusion of LRMs pertaining to poor sites will gain
more support. The project director strongly endorses continuing improvements of building
codes in order to determine the feasibility of including microzones for poor soils within the
seismic provisions of those codes. Moreover, consideration of poor sites relative to strong
ground motion are incorporated into building practice LRMs.
      1S requires maps of active fault zones of deformation in seismic zones 3 and 4. The
State of California already has such maps, and these are also available from Utah Geological
and Mineral Survey for portions of the Wasatch Front, Utah. As the socioeconomic analysis
indicated, in many cases, these maps have more symbolic than economic value, although they
are useful in general earthquake source studies and in some cases indicate fault creep
                                             4-8
(gradual movement of identified faults) and additional hazards (new faults). Cases in which
development in moderately active fault zones of deformation can be avoided -- without sig-
nificant economic loss - should be encouraged. These maps can also be extremely useful in
controlling the development of critical and very high occupancy structures.
                                          Table 4e2
                    Activities Supporting Recommended Landuse LRMs
  Supporting
  Element      Description
               For the entire United States, development of small scale maps (1:5,000,000) of ground
  Li
               motion, evaluated by an expert panel.
               For urban areas with a minimum population (e.g., 50,000) development of inter-
  L2
               mediate scale maps (1:100,000) of ground motion that include examination of local
               geological effects on strong ground motion (e.g., maps of relative site velocities for dif-
               ferent spectra).
               Compilation and as necessary development of large scale maps (1:24,000) of Quater-
  I3
               nary surface faulting within a 50-mile band outside the perimeter of urban areas having
               a minimum population. Compilation and development of intermediate scale maps
               (1:100,000) elsewhere in seismic zones 3 and 4.
               Compilation and development of large scale liquefaction and landslide high seismic
  IA
               susceptibility maps (1:24,000) for urban areas having a certain minimum population.
               Greater attention should be placed on quantitative interpretation of such expressions
               as "high susceptibility." Areas mapped should be large enough to accommodate short-
               term growth in undeveloped areas around the city.
               Construction of information databases and transfer mechanisms so that the foregoing
  15
               maps may be readily available and understandable to local officials, realtors,
               developers, insurance companies, and the general public.
               Requirement that general plans include a seismic safety element that sets development
   L6
               policy for local geological hazards including high relative site response factors, fault
               zones, and regions of high liquefaction and/or landslide susceptibility.
               Development of requirements that in areas identified as active fault zones, and high
   17
               landslide or liquefaction susceptible zones that a geologic/geotechnical report be
               prepared for critical facilities, high-occupancy buildings, new subdivisions, and major
               modifications of high-occupancy (and/or critical) buildings, and that these be reviewed
               by a suitable licensed professional
               Development of guidelines for preparation and review of geologic/geotechnical
   1.8
               reports.
               Provision of resources for state and local programs, procedures, and staffing to effect
   L9
               LRMs.
                                                      4-9
       LA requires landslide and liquefaction maps. Data for these, for instance, are available
for portions of California, Alaska, Utah, Nevada, and Washington. Of special interest is
more detailed delineation of very high susceptibility zones, and, for many purposes, the
desirability of improved techniques to quantify these hazards (see Eguchi et al., 1989). The
broad zones as defined for the Wasatch Front, for instance, could be more narrowly defined
based on future detailed site investigations and research that better determines probabilities
of liquefaction-induced ground failure and that provides more consistent quantitative defini-
tions of "high" and "very high." (See Anderson et al., 1982; Idriss et al., 1986; Taylor et al.,
1988.) Economic means to develop seismically-induced landslide maps should be en-
couraged with emphasis possibly on areas where previous landslides have occurred. Once
again, quantitative interpretation of landslide susceptibilities needs to be improved.
       L5 encourages the development of systematic means for the transfer of these maps to
interested parties.
       L6 requires a seismic safety element within general plans of municipalities with a cer-
tain minimum population. This activity is regarded as a supporting element rather than as an
LRM because there has been considerable controversy over the effectiveness of seismic
safety planning elements.
       L7 requires geologic/geotechnical reports for critical facilities, high-occupancy
facilities, new subdivisions, and major modifications of high-occupancy (and/or critical)
buildings.
       L8 requires guidelines for preparation and review of these geologic/geotechnical
reports.
       L9 was added by the project director based on Selkregg et al., 1984, pp. 160ff. Support
for capable state and local government LRM programs, procedures, and professional staff-
ing is an essential means to carry out loss-reduction policy. Continuity of organizations and
professional staffing is needed to take advantage of loss-reduction opportunities. Ap-
propriate capabilities include technical knowledge. The federal govermnent may justifiably
provide partial financial support for these programs, procedures, and staffing to the extent
that landuse measures are expected to offset existing contingent federal liabilities. This sup-
port (made later also with respect to building LRMs) is consistent with the recommendations
by S. Scott (1988a and b) that implementation needs both (a) local agents of experimentation
and innovation and also (b) continuing education and training programs.
       For the bulk of these supporting elements, many previous investigations and activities
can be used to provide a basis for LRMs proposed, especially in Alaska, California, Utah,
and Washington.
                                             4 - 10
LRMs Related to Building Practices
       Ten LRMhs affecting building practices were carefully formulated by workshop par-
ticipants and were evaluated as, having a high probability of successful inclusion in a federal
earthquake insurance program. An eleventh (LRM 6) was added by the project director on
consideration of a primary program that includes residential structures. These LRMs are
listed in Table 4-3.
       Of the LRMs affecting building practices, those evaluated most highly in terms of the
likelihood of successful inclusion in a federal earthquake insurance program having a loss-
reduction element were:
LRM 7       - in seismic zones, 2, 3, and 4, design of new essential buildings and public
               schools (including colleges and universities) in conformance with current
               model code seismic provisions.
LRM 10     - seismic retrofit of unreinforced masonry buildings in seismic zone 4.
LRM 11     - seismic securing/strengthening of building parapets and external ornamenta-
             tion in seismic zone 4.
LRM 12     - seismic retrofit of potentially hazardous essential buildings and public schools
             (including colleges and universities) in seismic zone 4.
LRM 13     - in seismic zones 3 and 4, inspection and disclosure of anchorage and presence
             of unbraced cripple walls at time of property transfer for buildings including
             one- and two-family dwellings. and of anchorage of mobile homes.
LRM 14     - In seismic zone 4, state law should require that gas water heaters in new and
             existing multi-family dwellings be braced or strapped to structural framing.
Evaluated almost as highly are
LRM 5      - incorporation of NEHRP seismic provisions in eastern model codes (seismic
             zones 0,.1, 2,3) and
LRM 15     - require seismic retrofit of pre-1976 concrete tilt-up construction in seismic
             zone 4 within 10 years.
Evaluated as passing (as less convincing to workshop participants) are
LRM 8      - addin superior detailing requirements in seismic zones currently designated 2
              with high catastrophic loss potential.
LRM 9      - in seismic zones 3 and 4, disclose a "hazard rating" to potential buyers well
             before the time of escrow.
                                            4 - 11
                                           Table 4-3
                               Recommended Building Practice LRMs
New Construction
         Eastern model codes shall be encouraged to incorporate (adopt by transcription) the latest version
LRM 5
         of the NEHRP seismic provisions. All model codes should incorporate a geotechnical component
         that considers local site amplification effects on strong ground motion and minimization of potential
         ground failure effects.
         Building regulatory authorities should adopt and enforce model codes that have adequate seismic
LRM 6
         provisions for one- and two-family dwellings and anchorage of mobile homes. The building code
         should apply also to repairs of earthquake-damaged buildings to assure that losses are not repeated
         in subsequent earthquakes.
         In seismic zones 2, 3, and 4, new essential buildings and public schools, including colleges and
LRM 7
         universities, should be designed in conformance with current model code seismic provisions.
         In seismic zones currently designated 2 but with high seismic catastrophic loss potential (designated
LRM 8
         2*) model codes should require the detailing requirements applied to zones of high seismicity.
          For new construction in seismic zones 3 and 4, a building "hazard rating" must be disclosed to
LRM 9
          potential buyers well before the close of escrow.
Existing Construction
LRM 10 In seismic zone 4, local jurisdictions should institute ordinances with requirements for seismic
       retrofit of unreinforced masonry (URM) bearing wall buildings. These buildings should be required
       to be upgraded to a minimum-level or else demolished within a 20-year period.
LRM 11 In seismic zone 4, local jurisdictions should institute ordinances for the securing/ strengthening of
       building parapets and external ornamentation within a 20-year period.
LRM 12 In seismic zone 4, potentially hazardous (other than URM) essential buildings and public schools in-
        cluding colleges and universities must be retrofitted or phased out within a 20-year period.
LRM 13 In seismic zones 3 and 4, inspections of buildings including one- and two-family dwellings and an-
       chorage of mobile homes should be performed prior to significant financial commitment or property
       transfer and hence well before the close of escrow. A report to the potential buyer should indicate
          whether or not:
          a. the dwelling is anchored to the foundation,
          b. unbraced cripple walls are present, and
          c. gas water heaters (if present) are adequately braced or strapped to the framing.
LRM 14 In seismic zone 4, state law should require that gas water heaters in multi-family dwellings (new and
        existing) be braced or strapped to structural framing.
LRM 15 In seismic zone 4, concrete tilt-up construction which does not have adequate roof-to-wall anchors
       and continuity ties shall be required to be retrofitted within 10 years.
                                                     4 - 12
       LRM 9 has been the subject of several criticisms by project participants. First, studies
 have shown that disclosure requirements in California have sometimes had little if any
                                                                                           dis-
 cernible effect on purchases in active fault zones in California. (See Palm, 198 1.) However,
 LRM 9 emphasizes disclosure well before the close of escrow. Second, if LRM 5 is accepted,
 the LRM 9 might initially appear to be redundant. Yet, even if L1RM 5 is adopted, LRM
                                                                                              9
 provides a basis for distinguishing between lbuildings conforming to current model seismic
 code requirements and older buildings that may not so conform. More elaborately, a hazard
 rating system can include the following categories:
    o Conforming to current model seismic code requirements
   o Potentially seismically hazardous (as defined in Table 4-3)
   o Nonconforming to current model seismic code requirements and not potentially haz-
     ardious
   o Seismically retrofitted to 65% of current model seismic code design force requirements
Although LRM 9 is not so essential as most of the other LRMs recommended, efficient
                                                                                    use
*of
  such a hazard rating system can help in
  o insurance rating,
   o mortgage lending, pension fund, mortgage securty, and other financia decisions which
     are concerned with potential catastrophic losses from mortgage defaults, and
   o building purchase decisions.
In short, LRM 9 has the potential to discourage through a wide variety of financial incentives
the prolonged use of potentially hazardous buildings.
      LRM 5 recognizes the autonomy and importance of the three major model codes in the
United States, and so does not propose a national building code. Moreover, LRM 5 acknow-
ledges the leadership of the Structural Engineers Association of California in developing
seismic provisions for the Unifrm BuildingCode. In two years, LRM 5 might be revised
after adequate review to consider incorporation of ASCE/ANSI (American Society of
                                                                                          Civil
Engineers/American National Standards Institute) seismicprovisions.
      One LRM noticeably absent from workshop discussions, but recommended in LRM 6,
is the development and incorporation in model codes of adequate seismic provisions
                                                                                     for
residential construction. Progress has already been made in developing agreement among
model code organizations on codes for residential construction. (See CABO, 2989.) These
codes represent suitable minimum standards for an LRM in a federal program. Basedl
                                                                                      on
                                            4-13
codes represent suitable minimum standards for an LRM in a federal program. Based on
other Workshop recommendations on seismic building codes, the project director believes
that LRM 6 would also be rated highly.
   The LRMs thus presented for inclusion in a federal earthquake insurance program having
a loss-reduction element cover a wide range of structures, from public to residential to
commercial/industrial, and all seismic zones. The LRMs proposed also differ significantly
with respect to socioeconomic criteria. In particular, life-safety factors and ease of ad-
ministration were emphasized in
   o LRMs proposed for essential facilities, and
  o LRMs proposed for seismic retrofit of "potentially hazardous" buildings (only some of
    which are clearly cost-effective).
An optional LRM, not discussed in the workshop but clearly technically feasible is the an-
chorage or restraint of life-safety related equipment (see Table 4-4) in essential buildings in
seismic zones 3 and 4. This and many other candidate LRMs may on further examination, or
with additional research, be found to be cost-effective and acceptable. Review of research
and applications advances, including those in using base-isolation strategies for design and
retrofit, should be used to reassess periodically cost-effective and acceptable LRMs.
Supporting Elements for Building Practice LRMs
      Table 4-4 summarizes supporting elements needed for successful implementation of
the building LRMs listed in Table 4-3. All supporting elements except B6, B7, and B8 were
evaluated highly by participants in the building working sessions. B6, B7, B8, B9, and B10
were added by the project director in response to later considerations provided by project
reviewers.
       Except for B2, which applies to new construction in seismic zone 2, and B8 and B9,
which apply generally, the supporting elements are designed chiefly for existing construction
in seismic zones 3 and especially 4. The marginal costs of these supporting elements are low.
       B1 defines "potentially hazardous" buildings as a means to support LRM 6, LRM 15,
and partially risk-based rating systems (See Table 4-3).
       B2, which provides for the definition of seismic zone 2*, facilitates application of LRM
8. Our previous discussion in subsection 3.2 describes alternative definitions of seismic zone
2 that could be considered in determining the application of LRM 8.
                                             4 - 14
                                         Table 4:4
               Supporting Elements for Recommended Building Practice LRMs
       Supporting
       Element       Description
       BI            Definition of 'potentially hazardous' buildings as in Table 4-3.
       B2            Definition of seismic zone 2* -as those seismic zone 2 areas with high seismic
                     potential at extended recurrence intervals and/or with high seismic loss poten-
                     tial.
       B3           Definition of criteria and a program for seismic evaluation and retrofit of exist-
                    ing buildings.
       B4           Provision for limitations on liability of local jurisdictions and their building
                    official(s) when they provide and permit criteria (as in B3) for evaluation and
                    retrofit design which is less stringent than building code requirements for new
                    construction.
       B5           Permission for voluntary seismic upgrades without mandated upgrades for non-
                    safety related functions.
      B6            Support for development of programs and procedures and of professional state
                    and local building staffing to effect LRMs.
      B7            Support for dislocated tenants during seismic retrofit programs.
      BS            Continued research directed at reducing costs for seismic construction, both
                    new and existing.
      B9            Continued work to incorporate a geotechnical component into model seismic
                    codes.
      B10           Continued research into development of codes that emphasize property damage
                    control and maintenance of function over and above critical life-safety protec-
                    tion.
       Supporting elements B3 through BS support LRMs applicable to existing construction.
B3 involves definition of seismic retrofit criteria and state legislation in order
                                                                                          to make
retrofitting cost-effective -andfeasible at standards more realistically below those required
                                                                                                 by
current model seismic provisions and supports LRMs 10, 11, 12, 13, 14, and 15). B4 provides
(through state legislation or local ordinance) for limitations on liability of local jurisdictions
and their building officials overseeing a seismic retrofit program. This action supports
                                                                                            LRMs
10, 11, 12, 13, 14, and 15. B5 provides for the development of legislation, etc., to
                                                                                         facilitate
seismic upgrading without triggering costly mandatory upgrades for non-safety-related
                                                                                             func-
tions (in support of LRMs 10, 11, 12, 13, 14, and 15).
                                                    4-15
       B6 supports all building practice LRMs by providing federal funding for state and local
governments in support of programs, procedures, and professional staffing (e.g., structural
engineers, architects, inspectors) to effect LRMs. B6, like L10, may require federal assis-
tance. This partial federal assistance may be warranted by reductions in contingent federal
liabilities as a result of state and local activities and so may not be considered an additional
burden on a federal earthquake insurance program. Consistent with this recommendation is
that by Selkregg et al. (1984) for support for state-level commissions to oversee and en-
courage loss-reduction activities. Suitable representatives of private industry, including in-
surers, engineers, architects, and others engaged in loss-prevention activities, should be in-
cluded on these commissions.
       B7 addresses concerns identified in the stakeholder analysis by providing for inclusion
of a social program to assist dislocated tenants during major seismic retrofit construction. Its
inclusion as a supporting element derives from discussions by B. Zeidman at the project
workshop and by Comerio (1989). In some instances seismic retrofit programs in seismic
zone 4 may involve serious social dislocations. Examination of and minimization of these
 dislocations should be an integral element in these retrofit programs.
       B8 recommends continued research efforts in order to reduce future costs of seismic
 design and retrofit. As our socioeconomic analysis confirmed, these costs are very significant
 factors in assessing the cost-efficiency of LRMs; even small reductions in costs for the LRMs
 proposed can have large-scale aggregate benefits.
       B9 derives from cautions voiced at the third Advisory Panel meeting that one must not
 assume that the geotechnical component of LRMs for new construction is adequately
 covered in existing model building codes or in NEHRP provisions. Strengthening code con-
 cerns for geotechnical remediation of landslide, liquefaction, and subsidence sites and sub-
 divisions, and continued progress in incorporating local high shaking relative site response
 factors into codes is important in assuring that sound landuse practices are buttressed by and
 often enforced in terms of sound building practices.
Status Ouo Obstacles to Implementation of LRMs
      Unfortunately, because of the many proposals that face them, key decision makers of-
ten make decisions simply in order to reduce the number of proposals remaining in their
purview. (See Cohen et al., 1972, and March and Olsen, 1976.) Instead of evaluating each
problem logically and searching for optimal solutions, decision makers are overwhelmed so
that, fundamentally,
                                              4-16
      o problems, solutions, and participants are seen as separate streams which flow
        through the system, and
      o system outcomes depend heavily on coupling the three streams in a timely fashion to
         take advantage of an opportunity for a decision.
In applying this approach to describe policy formulation in complex governmental organiza-
tions, Kingdon (1984) defined the three major process streams as
       o problem recognition,
      o formation and refining of poicyproposals, and
      o politics.
Figure 4-1 presents a general illustration of the major elements contained in a model for as-
sessing policy formulation, adoption, and implementation.
      With respect to problem recognition, risk analysis has been the chief means discussed
in this project to explain the extent to which earthquakes pose a problem. Risk evaluation
has been used to answer critical questions related to social, technical, political, legal, and
economic components of the problem streams. Inside advocates (i.e., policy entrepreneurs)
who understand risk results and windows of opportunity will be able more fully to bring
about an effective coupling of the problem, policy, and political streams. In other words, the
process of risk and decision analysis, as discussed in Section 2.1, is essential to policy for-
mulation, adoption, and implemenation.
      In the project workshop, participants indicated that LRMs facing the greatest obstacles
to implementation are:
      o those pertaining to existing commercial/industrial/institutional structures and
      o those in smaller local jurisdictions (e.g., those with less financial, technical, and ad-
         ministrative capacity to effectuate LRMs),
Additional barriers already discussed include
      o disincentives to mitigate hazardous publicly owned buildings when 75 percent of all
         disaster costs are borne by the federal government in a Presidentially declared dis-
         aster and
      o disincentives to mitigate when insurance rates are insensitive to cost-effective
         mitigations.
                                              4-17
                                                                                                                                                                                       Policy
                                                                                        Policy Formulation and Adoption
              Risk Analysis
                                                                                                                                                                                    mplementatio
                                                                                                                                                                                    I
                                                                       Risk
                                                                     Problem
                     Risk
                  Estimation                               Expected Loss
                                                         and Consequences
                      __liiiiiiii
                                                            Pollcy/Solution                                                                                                         Implementation
                                                                Stream                                                                                                                   and
                                                                                                                                                            L
                                                                                                                                           Pol                        Policy          Evaluation
                                                                                                                                                                     Agenda
                                                                                                                                         Windw
                                                            Social, Technical
                                                             Administrative,                                                                                                             Objectives
                                                                                                                                                                   Acceptable
                                                                                                                                      .Opportunit
                                                             Political, Legal,                                                                                                              and
                                                                                                       --4
                                                                                                                                                                      Risk
                                                                                                                                       for Choice
I-a.
                                                                                                                                                                                         Programs
                                                               Economic
80
                                                                                                                                                                                          __~
                                                              Components
                         Risk
                      Evaluation
                                                            Political Stream
                                                                                                I
                                                              Participants/
                                                                                                                                                                                    Adminlstratoi rs
                                                                                                             Inside Advocates / Policy Entrepreneurs
                                                             Stakeholders
                                                                                                                                                                                    Engineers
                      Researchers                           Budget/Economy
                                                                                                                                                                                    Contractors
                       Analysts                               Environment
                                                                                                                                                                                P   __                l
                                                                                                                                                          .1 111411WWRJN
                                                                                                                II I I I WOMEN OWN 11.11 11INS WINNOWER
                                                                                       -1-115 laid I
                                                                        Nim-111,11111111
                                                  1111,11INNIIIIII
                      111,111's I
       IN III-pill"
                             Figure 4-1. A Risk Management Model for Assessing the Process of Policy Formulation, Adoption, and Implementation
     Means to overcome barriers faced in the process of implementation LRMs for natural
hazards include:
     o identifying, mapping, and classifying natural hazard zones and estimating
         earthquake losses so as to clarify the extent of the risk and facilitate ILRM im-
        plementation,
        o creating procedures and data bases to facilitate benefit-cost analyses,
        o reducing significant differences among model building codes in order to provide
          consistency among municipalities,
        o increasing technical capacity among local planning and buildingregulation depart-
          ments,
        o developing political constituencies to support LRM i mplementation, and
        o understanding the short-term focus in decision-maaking so as to maximize efforts-
          within the political system.
     Workshop participants also proposed strategies to increase implementation success.
These include:
  o making LRMs acceptable to the largest number of people and interest groups in the
     community,
      o creating advocacy groups within professional code organizations to support code
        changes,
      o having federal staff work with ad hoc committees of code organizations to facilitate the
        adoption of LRMs,
      o promoting simple code provisions for one-to-four family residences, and
      o promoting education/training programs to improve seismic design and construction
        practice.
      Workshop participants emphasized linkage of earthquake insurance rate-structuring
programs to those insurance programs for other perils. They also emphasized the integra-
tion of programs for public buildings, disaster relief, and insurance.
4.5   Summary
      The stakeholder analysis highlighted the fact that current disaster relief and other
federal policies constitute disincentives to state and local governments in implementing loss-
reduction measures. Lenders benefit both from implementation of cost-effective mitigations
and increased volumes of earthquake insurance purchase. Under current circumstances,
federal taxpayers. may benefit from implementation of mitigations for public construction
                                               4 -19
even to the extent that federal cost-sharing programs may be considered cost-effective.
Providing these cost-sharing programs will make benefit-cost ratios for state and local
mitigations of public buildings more attractive. (See Appendix D.)
      Using the results of the socioeconomic analysis, the Project Workshop participants, in-
cluding the Advisory Panel and other project reviewers, and the project team were able to
synthesize and further develop the fifteen LRMs that were recommended for inclusion in a
federal insurance program. These fifteen LRMs affect all regions of the country. They em-
phasize new construction in seismic zones 2, 3, and 4 and existing construction in seismic
zones 3 and 4. They emphasize landuse practices in seismic zones 3 and 4. All LRMs may be
considered community-based in that key loci of enforcement lie in state and local govern-
ments. In effect, the fifteen LRMs can be incorporated into potential earthquake or-
dinances. For a particular community, details of earthquake ordinances would be defined by
the seismic zone (i.e., 0, 1, 2, 3, and 4) of the community in question in conjunction with those
LRMs in Tables 4-1 and 4-3 applicable to the zone. In a federal program there is a need for
model earthquake ordinances. The fifteen LRMs developed in this report provide adequate
guidance for ordinances which would be cost-effective and acceptable.
      Project Advisory Panel members, workshop participants, reviewers, and the project
team also developed supporting elements for these promising LRMs, and strategies for
overcoming status quo obstacles to implementation of these LRMs. In the majority of cases,
these supporting elements would have low costs relative to a national program. Higher costs
might be involved in federal assistance and cost-sharing programs for training and staffing
and for phasing or retrofitting potentially hazardous public buildings. In Section 5, we main-
tain that some of the higher costs of supporting promising LRMs may be justified with
reference to programs specifically targeted to reduce existing contingent federal liabilities
owing to disaster relief policy and other federal statutes.
                                              4-20
5.0   LOSS-REDUCTlON MEASURES IN VARIOUS
      FEDERAL INSURANCE CONTEXTS
      In Section 3 we evaluated candidate loss-reduction activities in terms of their cost-
effectiveness. In Section 4 we discussed fifteen promising LRMs which could serve to define
earthquake ordinances.
      Our goal in this section is to determine how LRMs may be incorporated into a federal
earthquake insurance program. In achieving this goal, we define only general types of
federal earthquake insurance constructs. Fuller definition and evaluation of possible con-
structs is beyond the project scope. Similarly, in order to show that it is feasible to incor-
porate LRMs into federal earthquake insurance involvements, it is necessary only to indicate
some of the ways in which these LRMs may be so incorporated. Although we indicate that
some federal earthquake insurance constructs would be incompatible with the LRhMs
proposed here, an administrator of a federal earthquake insurance involvement may devise
ways other than are illustrated here in order to incorporate LRMs.
      In Section 5.1 we present an overview of the possible roles that the federal government
could play in the provision of disaster insurance and the application of loss-reduction
measures.
      In Section 5.2 we first discuss the status quo which involves no federal earthquake in-
surance program, and suggest how recent modifications and developments of disaster relief
policy -affect the implementation of loss-reduction measures.
      In Section 5.3 we examine how the rate structure of an earthquake insurance program
will affect the implementation of such LRMs as those recommended in this report.
       In Section 5.4 we examine LRMs in a primary federal earthquake insurance context.
We consider two general types of primary programs: (1) purchase of federal earthquake in-
surance made possible by federal agreements with local (or state) governments and (2) pur-
chase of earthquake insurance without requiring such agreements. We assume that this
earthquake insurance may be available only to some segment of the population (e.g., the
residential section) and that private insurance markets will cover remaining segments.
      In Section 5.5 we examine LRMs in a secondary federal earthquake insurance context.
   Sections 4, 5.2, and 5.3, provide coherent programmatic directions for implementing
LRMs into a federal insurance program. In general,
                                             5-1
      (1)   existing contingent federal liabilities, themselves created to meet genuine state and
            local needs, justify increased federal influence over seismic construction and land-
            use planning processes, and
      (2)   in primary and secondary federal earthquake insurance programs, some of this in-
            fluence can be effected through rate-making and/or pricing which ensures that build-
            ings in higher risk categories are rated in accordance with their risks or that in-
            surance availability is conditional only on LRM implementation and/or enforce-
            ment of earthquake ordinances. As previously explained, these ordinances do not
            place significant burdens on state or local governments in lower seismic zones, espe-
            cially zones 0 and 1. Furthermore, public and selected private nonprofit buildings
            may be required to purchase earthquake insurance.
      The loss-reduction programs outlined here emphasize reductions in expected long-
term earthquake losses; they do not (and could not) include mechanisms to reduce sig-
nificantly large-scale earthquake losses in the very near term. We address the issue of near-
term losses only briefly in Section 5.1, where we indicate schematically how a federal
earthquake insurance involvement with a mitigation element can assist in controlling losses
from potential near-term large-scale earthquake disasters. We do not examine whether or
not such an involvement yields the best or optimal system; however, a federal earthquake in-
surance and/or reinsurance system with a loss-reduction component can address both short-
term and long-term losses associated with earthquakes.
5.1    Possible Federal Involvement in Earthquake Disaster Insurance
      One principal reason for federal involvement in an earthquake insurance program is to
protect the integrity of the United States economy. In this regard, we are referring to an ex-
pected catastrophic earthquake resulting in losses that could exceed fifty billion dollars.
Another major objective is to reduce expected property and injury/life losses through the ap-
plication of LRMs which can be implemented through an insurance mechanism.
Federal Insurance as Buffer
      The functional role of federal insurance mechanisms and LRMs are illustrated in
Figure 5-1. Federal involvement would serve as one component in a buffer zone of private
and public entities which can take steps to reduce negative social, political, and economic
impacts of a catastrophic earthquake. Within the buffer zone, state and local governments
may require LRMs such as building codes to reduce structural damage, may provide self-
insurance against future disasters, or may provide disaster relief. Private insurance com-
panies may issue disaster policies to protect structures. The federal government may seek to
                                                5 -2
           CAATRHIC
          1hI-,- 'TIAIK
L.)wunE
                          Figure 5-1. Illustrative Network of Earthquake Disasters and Government Insurance Programs
achieve LRMs through improved landuse and building practices and may provide insurance
or disaster relief. Depending on the aggregate insurance coverage provided and disaster
relief allowed, there will be inversely corresponding effects on the socio-political-economic
system.
       If there is insufficient insurance coverage and/or limited disaster relief, then the
economy will be adversely impacted. State and local governments, private entities, financial
institutions, or individuals may suffer severe primary losses, which in turn lead to business
failures and long-term losses of goods and services throughout the system. Through a
domino or ripple effect, secondary or higher order losses may equal or exceed primary
losses.
       It is common to think of insurance as a transfer mechanism which shifts risk from one
party to another and of LRMs as a mechanism to reduce the risk to both the insured and the
insurer. In the case of catastrophic disasters, insurance has the additional role of reducing
the risk of financial crisis or collapse throughout the United States, because it reduces ad-
verse primary impacts and thus buffers the system against secondary disruptions.
Possible Roles
      There are at least three roles which the federal government could play in an
earthquake insurance program. The first role is that of a primary insurer providing first-loss
coverage through a government insurance policy. In Figure 5-2, this function is represented
by box 4. This role could be accomplished in a manner similar to the National Flood In-
surance Program or may take an alternative form. When the federal government works in
cooperation with the private insurance industry (Figure 5-2, box 5) to issue policies and col-
lect premiums, the linkage between the two entities is strong.
      The second role which could be taken by the federal government is as a reinsurer,
providing insurance coverage to the industry who compose the primary insurers (Figure 5-2,
box 7). Again, the alliance of federal and private insurance shown in boxes 8 and 9 represents
the combined effect of providing insurance coverage.
      The third role would be for the federal government to provide a combination of
primary insurance and reinsurance. How extensive federal involvement might be would be
determined after evaluating the capabilities of private insurers and the necessary amount of
insurance needed to protect against severe socio-political-economic impacts.
      In the case of public and private nonprofit properties currently covered by the Stafford
Act, the federal government currently can be perceived as being a co-insurer with the state
government and private nonprofit organizations when a Presidential disaster declaration is
                                             5-4
                                                   ;     ,I
                                                                                                           I                                            VA
                              FEDERAL GWVERINENT                                          STATE GOVERNNINTS
                                                                                      o                                    LOSS REDtCTIORN POLICIES
                                                                                                                    .                                                LOCAL GOVERNETS
                                                                                                                                                             --
                                                                                                                                GENERAL LAW /   COOES
                                                                                                                         .
                                                                                          ---- ----..
                                                                                            f                                                    s_
                                                                                                                                                 t           -2- -
                                   ---- 1E
                                      Z
                          ,
                                                                                                                                                 3
                                       FEDERAL                                                               STATE                                                LOSS REDUCTION POLICY
                                     INSURANE                               I                 I           INSIMRANCE                                                 (BUILDING CODES S
                                      PROGRAN                                                            COMMISSION                                                LAID USE ORDINANCES)
                                                                       ~
                                                              .---I
                                                                  -             lM        I
              r                                                                                                If       .13 .
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      PRIMARY                                           REINStIAJuCE                                     REGULATORY                                                    LOSS REDUCTION
      PROGRAM                                             PROGRAM                                       POLICIES AMD                                                    IFPLENENTATION
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                                                                                                         PRACTICES                                                     (COGPLIANCE MD
                                                                                                                                                                         ENFORCEMENT)
                                                         INSUMANCE
     INSURANCE
 POLICIES AMD                                          POLICIES AND              17
 RATE SETTING                                          RATE SETTING              1
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                                                                        9
                                                       PRIVATE SECTOR
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                                                          INSURANCE
                               I
FEDERALLY BACKED
                                                       PRACTICES AMD
MORTGAGE LENDERS
                                                       RATE SETTINGS
                                             'I,  in
                                  INSURED PARTY           -      --
                                                                      Figure 5-2. Intergovernmental-Insurance System
made. In Figure 5-1, this relationship is identified by the line connecting the federal and state
boxes in the buffer zone.
       In addition to providing insurance, federal involvement in requiring the implementa-
tion of LRMs would provide a means of risk reduction and thereby buffer adverse impacts in
the society. While it has been demonstrated earlier in this report (Sections 3 and 4) that
LRMs may be cost-effective and reduce risk, the enforcement of LRMs by local communities
is not simple to achieve.
Complexity of the Relationship between
Federal. State and Local Governments and the Insurance System
       In order to view the role of federal insurance and LRM implementation from the
proper perspective, it is important to understand the complex relationship between an inter-
governmental regulatory system and an insurance market system. (See Figure 5-2.) The in-
tergovernmental regulatory system is grounded in politics, and its purpose is ultimately to
produce rules, regulations, and ordinances which benefit society -- in this case those
mechanisms that reduce the risk of loss of property to earthquakes.
       The intergovernmental aspects of this system are based on a constitutional form of
government in which the federal government adopts laws that transcend state rule where
most rights, including generally landuse and the development and construction of property,
are guaranteed. Therefore, in its hierarchical relationship with states, the federal govern-
ment may mandate rules or laws which are consistent with the constitutional system or may
provide incentives to the states and/or local governments through the use of such instruments
as grants-in-aid, loans, and sanctions, such as withholding or other forms of federal financial
assistance.
       Local governments, however, function at the pleasure of the states; therefore, the
states may directly mandate that local governments engage in certain regulatory activities, or
the states may pass through a federal requirement. The states may also provide incentives
(such as cost-sharing) to accomplish the adoption and implementation of certain loss-reduc-
tion measures. It is important to note that the states can act directly without federal prompt-
ing. (E.g., in the case of California, the state legislature enacted the Field Act which gave the
state authority over the design and construction of schools.) In spite of this ability of the
state to require mitigation, as illustrated in Figure 5-2, local governments retain, for the vast
majority of buildings, primary responsibility for the adoption and implementation of loss-
reduction measures for earthquakes by insuring compliance and enforcement.
                                              5 -6
       With respect to the insurance market, should the federal government decide to engage
in the business of providing insurance, it may take on the role of a primary insurer or the role
of a reinsurer. In either role, the federal government would be participating in the insurance
marketsysterm and thus would be working in cooperation with the insurance industry. In the
case where the federal government provides primary insurance, it would have full control
over the requiring of LRMs and the setting of rates.
       In the case of reinsurance, the federal government would set rates for the sale of rein-
surance to private sector companies, and those rates would be passed through to the insured
parties. The federal government's relationship with reinsured parties would be largely con-
tractual. The primary contractual relationships would be between the federal government
and insurance companies, on the one hand, and the insurance companies and the insured
parties, on the other hand. Effecting the implementation of LRMs through a reinsurance
program would be more difficult, since federal relationships with state and local govern-
ments and with the insured are less direct than in a primary program.
       In order to achieve the implementation of loss-reduction measures through the rein-
surance program, the federal government would have to either mandate action or provide
incentives to the states such that appropriate LRMs are adopted and implemented at the lo-
 cal level and then require that insured parties comply with the LRMs as implemented by lo-
 cal government. This compliance can be either mandated by the fed eral goverrunent through
 its ability to withhold insurance coverage or encouraged through an insurance rate-setting
 structure.
        In effect, implementation of loss-reduction measures through an insurance program
 would be accomplished at the state level through a regulatory process on the part of the state
 through its insurance commission. The insurance commissioner of each state operates un-
 der the rules of the state, but establishes the specific set of regulations which govern the
 operation of the private sector insurance companies within the state. Therefore,, the federal
 government could provide incentives to the state to require the private sector insurance in-
 dustry to comply with incorporating loss-reduction requirements into the insurance market
 system.
      In summary, it is important to understand that the incorporation of loss-reduction
measures in a national insurance program requires integration of a complex intergovern-
mental political system with an equally complex governmental insurance and market system.
The federal government has the -abilityto withhold insurance and to use the rate structure to
enforce the adoption of certain LRMs; however, should local governments and/or states
                                              5-7
refuse to comply, the whole notion of having a federal insurance program to reduce the -risk.
 to the economic system of the United States fails. As a result, the federal government must
work in both directions; it needs to work through the intergovernmental system as well as
through the insurance market system to achieve the ends of incorporating loss-reduction,
measures which reduce the risk of loss and also providing insurance which reduces the risk of
severe economic downturn in the event of a catastrophic earthquake. Thus, the federal
government can and must use direct and indirect measures to achieve the adoption and en-
forcement of LRMs by local governments in high risk earthquake zones. This is a complex
task, reflecting the characteristics of the political structure that we live-and operate under.
 Additional Challenges to Insurance and LRM Implementation
         To achieve local compliance and establish a workable system, it is important initially
 that the adoption of loss-reduction measures be broadly accepted as necessary and desirable
 and as relatively noncontroversial. Even LRMs such as the requirement- that minimum
 building codes be implemented within the various risk zones in the United States have-met
 with strong challenges. Unfortunately, the challenges to incorporating LRMs involve addi-
 tional issues and requirements which extend beyond these initial levels.
        For adoption, compliance, and enforcement to take place there must exist sufficient
 constituency support, inside advocates, sufficient community resources, necessary technical
 skills, and jurisdictional acceptance (Alesch and Petak, 1986; Mittler, 1989; and Petak, 1984).
 In general, the smaller the jurisdiction, the greater the probability that one or more of these
 requirements will not be met (Mittler, 1989). In smaller communities, technical abilities are
 scarce, fiscal capacity is low, tax effort is minimal, data to make accurate decisions is limited
 and the resources to generate sufficient amounts of data is low, organized constituencies
 (political interest groups) are unlikely, and the political dynamics of the community would;
largely be conservative in approaching implementation of LRMs. When a community is
uninformed it is unable to attack a problem knowledgably and find worthwhile solutions, so
it uses this lack of information as an excuse for inaction.
        With respect to landuse practices, it has historically been difficult for the 'federal
government to engage in regulating activities. There have been numerous attempts under
laws established by the Environmental Protection Agency and the NFIP to engage in ac-
tivities seen by many as national landuse planning. Project participants expressed extremely
diverse opinions on the success of these programs. For both building and landuse planning
acts, some project participants have questioned whether or not the federal government has a
legitimate role to play. (See our response in Section 5.2.) Thus, the application of broad
                                               5-8
landuse control measures is controversial although we have some reasonably successful ex-
amples in the form of coastal zone management and floodplain and wetlands protection acts.
      In the area of building codes, the United States operates with three generally accepted
model codes which are applied in different regions of the county They are not equal in
their consideration of seismic design and construction. The seismic provisions for new build-
ings, prepared by the Building Seismic Safety Council under contract to FENA, are gaining
acceptance in BOCA and SBC as well as in ASCE standards.
      Whatever the benefit to be gained by implementing earthquake-related damage-
resistant measures in building construction and the rehabilitation of existing buildings and by
the application of landuse measures, it must be large enough to be of significance in terms of
the definition of catastrophe that we are concerned with when we talk about a national
governmentally-sponsored insurance program. By our earlier discussions we noted that the
immediate aim of such a program is to protect the viability of the U.S. economiic system in
the event of a catastrophic earthquake. Therefore, at a federal level, catastrophe occurs
when the state and local governments are unable to meet the demands brought about by the
disaster event, in which case the U. S. economic system might be seriously harmed. The
benefit, then, of LRMs is in reducing the consequences of that event and other events in
terms of dollar loss.
       In the very near term, the LRMs proposed here may not reduce the catastrophic loss
potential enough to turn it into a noncatastrophe. LRMs are important because, in the long
term, they may result in significantly reducing the probability of building collapse, mortality
and morbidity and loss of personal property which could contribute significantly in terms of
the ability to recover from a catastrophe, and they may assure that the level of potential
losses associated with earthquakes does, not increase significantly as the built environment
changes and grows.
2    Status Quo Policy and its Implications for
      the Implementation of LRMs and the Purchase of Earthquake Insurance
      In Section 1 we explained that current earthquake loss-prevention programs are frag-
mentary owing to the locus of control, various sources of building codes, lack of economies
of scale (capital and sldlled labor), the sporadic timing of earthquake policy development, in-
surance system considerations, the public "spillover" benefits of privately undertaken LRMs,
and disaster relief system considerations. Specifically, we concluded that current federal and
                                             5-9
state disaster relief policies, viewed here only from the narrow perspective of their implica-
tions for loss-prevention programs
   o create contingent federal liabilities in the event of a presidential declaration of disaster
      (see Appendix C),
  o create inequities in federal funding through these liabilities (see Petak and Atkisson,
    1982), and
  o create strong financial disincentives for state and local governments to engage in pre-
    disaster earthquake loss-reduction projects for publicly owned buildings (see Appendix
    D).
In this subsection, we discuss the possible implementation of LRMs within the limitations of
status quo programs. For purposes of this discussion, the status quo is viewed as a collection
of policy instruments currently available to implement LRMs. We provide a brief discussion
of the current role of lending institutions in requiring earthquake insurance purchase. We
then emphasize current disaster relief assistance and hazard mitigation policy as defined in
the 1988 Stafford Act. Appendix D supplements this section with an illustration of stake-
holder considerations for seismic retrofit of public buildings.
The Role of Lenders in the Status Ouo with Respect to LRMs
and Insurance Purchase Requirements
      Studies by Brown and Weston (1980) and by Brown and Gerhart (1989) concluded:
      o that the property/casualty insurance industry would not aggressively market
        earthquake insurance voluntarily;
      o that the industry could be induced to provide widespread protection against
        earthquake damage by mortgage-finance industry demands that security property be
        protected by earthquake insurance;
     o that legislatively imposed requirements for such coverage can be an effective
       stimulus as AB. 2865 demonstrated in California [though as Brown and Schiller
       pointed out (1979), legislatively mandated coverage may be vulnerable to constitu-
       tional challenge];
     o and that inherent in the implementation of any scheme for inducing widespread
       earthquake insurance coverage were risks of antitrust violation, especially with
       respect to insurers, although under the guidance of qualified counsel such risks
       could be identified and circumvented.
     In California, judicial intervention (the Garvev case, overturned on appeal) extending
the doctrine of "concurrent causation" stimulated counteractive legislation (A.B. 2865)
which required all property/casualty underwriters doing business in the state to make a one-
                                              5 - 10
time offer to policyholders to sell them an earthquake endorsement. These offers resulted in
a doubling, to about 20%o, of California homeowners who were insured against earthquake.
Arguably, the typical 10% deductible clause and the premium cost discouraged wider ac-
ceptance.
      During the 1980s, there was general acceptance of the strong probability that a major
earthquake would strike California within 20 to 30 years. The mortgage-finance industry's
general response to any earthquake-related threat to the value of its security interest in
mortgaged property was to ignore the prospect. Not even proximity to Alquist-Priolo
"special studies zones" generated selectivity in evaluating loan applications.
      The secondary mortgage-finance market, in those instances where it evidenced any
concern, generally preferred direct purchase of portfolio protection to the alternative of
requiring earthquake insurance as a condition of residential mortgage loans, even though
such a requirement could have been imposed selectively, state by state, through a minor
modification to standard-form Federal National Mortgage Administration (FNMA)/Federal
Home Loan Mortgage Corporation loan documents. Loan originators, with a very few ex-
ceptions, ignored the opportunity to require earthquake coverage and registered strong op-
position to tentative suggestions by FNMA that it might consider requiring primary lenders
to include earthquake coverage for any loans assigned to the secondary market. Central to
that resistance was the recognition that the cost of such additional insurance coverage could
be a significant factor in the competition for borrower-customers in the absence of a demand
universally imposed on all loan agreements. Since not all loans are sold into the secondary
market, such universality could not be achieved. Geographical dispersion of security
properties was also presumed to diminish portfolio risks of some but not all lenders, as was
the incidence of wood frame shake-resistant residential structures.
      In effect, within the status quo, lending institutions are not currently in a position to en-
force LRMs. As suggested in Section 4, lenders would benefit from major program modifica-
tions that require IRMs and/or effect increased earthquake insurance purchase. Such
program modifications would be needed for lending institutions to play a major role in im-
plementing earthquake loss-reduction measures.
Implications of the Stafford Act for Loss Prevention
      The Stafford Act offers a number of means to encourage and support loss-reduction ef-
forts. Specifically, the Stafford Act
                                               5-11
   o requires that currently "applicable codes, specifications, and standards" be used in
     federally assisted repairs or replacements (sections 406 and 409),
   o provides monies to support additional loss-prevention programs (section 404),
   o strongly suggests that a loss-prevention element-become a significant feature of pre-
     disaster earthquake planning (sections 404 and 409),
   o may be interpreted to suggest that subsidies to state and local governments may be war-
     ranted to induce cost-effective LRMs for public buildings (see Appendix D), and
   o conditionally requires earthquake insurance purchase for public and private nonprofit
     buildings repaired, restored, reconstructed, or replaced with the assistance of federal
     disaster relief funds (section 311).
      Hence, for damaged public and private nonprofit buildings, seismic replacement and
retrofit can be required given adequate current codes, specifications. and standards. In ef-
fecting LRMs in this context, it is important that adequate codes. specifications. and stand-
ards be defined. In addition, with state insurance regulator certification, insurance purchase
can be required for repaired or replaced buildings so that a large share of the contingent
Federal liabilities for these buildings can be transferred to state and local governments
(FEMA, March 1989, p. 11639). Issues pertaining to the certification by the state insurance
regulator have not been addressed in this project.
LRM Implementation within Status Ouo Policy as Defined by the Stafford Act
     The types of loss-reduction efforts referenced in the Stafford Act accord with the types
of LRMs that we have been examining in this project. These types include
     o structural hazard control or protection projects,
      o construction activities that will result in protection from hazards,
      o retrofitting of facilities,
      o acquisition of hazardous properties or relocation of facilities to less hazardous sites,
      o development of state or local mitigation standards (See for instance, supporting
        elements B3, B4, B5, in Table 44; supporting elements L7, L8, L9 in Table 4-2; loss-
        reduction measures in Tables 4-1 and 4-3.), and
      o development of comprehensive hazard mitigation programs with implementation as
        an essential component. (FEMA, May, 1989)
      The process of identifying, evaluating, prioritizing, and monitoring these risk-reduction
measures, as suggested by the Stafford Act, may be encapsulated as follows (see FEMA,
Sept. 1989, p. 37957; FEMA, March, 1989, pp. 11649-53; FEMA, May, 1989):
                                              5 - 12
     o Prior to the disaster, the state can develop a hazard mitigation plan, while the
       Federal government assists with model standards, codes, and specifications.
     o After the disaster, the state evaluates the hazards and prepares a new hazard mitiga-
       tion plan, updates the existing mitigation plan so that it identifies and prioritizes
       LRMs for the state, as primary grantee under section 404, and for potential sub-
       grantees (restricted in the FEMA, May, 1989 memorandum to state agencies,
       municipalities, certain private nonprofit organizations, and Indian tribes).
     o The federal government approves or declines project(s) and/or findings and/or
       makes suggestions as to the state hazard mitigation plan.
     o Once the plan is approved, the state monitors implementation of LRMs after the
       plan.
Criteria for inclusion of LRMs in the state hazard mitigation plan include
      o a cost-effectiveness test, which involves a 10 percent discount rate (FEMA, May,
         1989, p. 14; OMB, 1972), and
     o determination of 'best fit" in overall state or governmental risk reduction plan,
       and/or
     o determination that the consequences of not undertaking the LRM are severely
       detrimental, and/or
     o determination that the LRMs have the greatest potential impact on reducing future
       disaster losses. (FEMA, May, 1989).
      The overall linkage between section 404 of the Stafford Act and LRMs proposed in this
project suggests clarification of two elements of section 404:
      o the 10 percent standard for a discount rate to be used in determining "cost-
         effectiveness" and
      o the legally allowable and politically feasible scope of the types of building usages to
        which section 404 can be applied.
If the 10 percent standard is used, and dominates all other criteria for identification and
selection, of LRMs, then many of the LIRMs identified in Tables 4-3 and especially those in
Table 4-1 will probably fail to be deemed 'cost-effective." In this case, as a rule, only those
LRMs passing Tier 1 criteriawill likely be properly deemed "cost-effective". They include:
    o use of geotechnical techniques to minimize severe liquefaction and/or subsidence
      hazards in seismic zone 4 for commercial and public developments, and large-scale
      residential tracts,
  o retrofit of unbolted and/or poorly anchored wood-frame residences, in seismic zone 4,
    and
   o adoption of, compliance with, and enforcement of adequate seismic codes.
                                             5-13
On a project-by-project basis, a number of other LRMs, such as anchoring/securing critical
equipment in specific buildings, may be found to be cost-effective. If, however, the 10 per-
cent rule is one of the criteria to be weighed, and life-safety and long-term disaster reduction
considerations are given significant weight, then Tables 4-1 through 4-4 are helpful in con-
sidering LRMs to be used along with their supporting elements.
      If the scope of facilities covered under section 404 is deemed to be the same as the
scope of facilities covered under section 406, then only those LRMs apply that pertain to
publicly owned (and in special cases, private nonprofit) buildings. These include applicable
portions of all landuse LRMs in Table 4-1 and applicable portions of B1, B2, B4, B5, B6 and
B7 in Table 4-3, along with requisite supporting elements.
Obstacles to Implementation within the Framework of the Status Ouo
     We have interpreted the Stafford Act as implying that:
     o Hazard mitigation planning processes, both before and after earthquake disasters,
        can be augmented to include cost-effective LRMs and/or earthquake ordinances
        (and also supporting elements as defined in Section 4).
      o Federal funding assistance for repair or replacement of damaged public and
        selected private nonprofit buildings can include monies that recipients can use to
        meet current seismic standards.
      o There is an urgency to define standards and measures for seismic repair of existing
        buildings as a basis for clarifying "applicable codes, specifications, and standards" to
        be used in federally assisted repairs.
      o Monies may be provided for developing risk-reduction programs after an earth-
        quake. The earthquake ordinances proposed in Section 4 suggest general LRMs for
        the implementation of such programs.
      o Projects federally financed for repairs should be required to purchase earthquake
        insurance.
In effect, the 1988 Stafford Act modified previous disaster relief programs to encourage loss-
reduction activities in post-earthquake circumstances. Pre-earthquake hazard mitigation
planning should now benefit from the expertise of those in earthquake building and landuse
disciplines. Hazard mitigation policies and programs developed after earthquakes should
reflect loss-reduction elements such as those defined in Section 4.
      In spite of these positive implications of the Stafford Act, because the federal govern-
ment pays at least 75 percent of the cost of post-earthquake recovery, federal disaster relief
inherently discourages property loss-reduction programs for state and local and selected
                                             5-14
private nonprofit buildings. As previous sections and many project participants have af-
firmed, the minimum 75 percent recipient cost share remains a formidable obstacle to the
implementation of LRMs for public buildings not yet affected by an earthquake disaster (see
Appendix D). With the post-disaster orientation of current policies, risk managers of public
and selected private nonprofit buildings have in effect free "oisurances powicies with the
Federal Treasury serving as a retrocessional reserve fund -one paid by future taxpayers
after the damage has occurred). Yet cost-effective LRMs for public and private nonprofit
buildings benefit the public in a great many ways. Lives can be saved, injuries can be reduced,
and governmental and educational downtime can be minimized. Public buildings could serve
as models, for seismic design rather than as examples of poor construction and ill-considered
retrofit. This general approach is consistent with Executive Order 12699 of January 5, 1990,
which applies similar reasoning to all new construction of buildings to be leased for federal
uses or purchased or constructed with federal funding assistance.
      From a general liability standpoint the federal government has a clear interest in state
and local programs that affect potential earthquake losses, including those pertaining to
development, adoption, and implementation of seismic loss-reduction measures. including
llanduse and building practices. These controls were constructed in the federall system owing
to genuine needs at state and local levels for federal disaster assistance. We must conclude
that current federal controls over earthquake losses are inadequate relative to contingent
federal liabilities incurred. This suggests that stronger (i.e., commensurate) controls are
needed over these federal liabilities, whether they be through subsidies, altered tax deduc-
tion policies, or federal earthquake insurance involvement.
Summ ary
       Section 406 of the Stafford Act may serve as a useful hazard reduction tool for publicly
owned and private nonprofit buildings damaged by an earthquake in a Presidentially
declared disaster. Continuing development of standards, specifications, and codes, espe-
cially for buildings and sites in seismic zones 3 and 4 for retrofits, and seismic zones 2 and 3
for new construction, are essential to sound public policy. The requirement in section 311 of
state insurance regulator certification for earthquake insurance availability, adequacy, and
necessity greatly qualifies possible assistance in relieving federal liabilities for these damaged
buildings, once they are retrofitted, relocated, or replaced in accordance with adequate
standards. Earthquake insurance purchase can limit future disaster assistance to portions of
the population who are not or should not have been insured.
                                               5 - 15
         Section 404 promises to encourage earthquake risk reduction efforts. especially if life-
  safety and other community criteria are weighed heavily and public programs to assist
  residential/commercial/industrial loss-reduction measures are encouraged or allowed.
 However, in the face of funding restrictions after a major disaster, and in face of pressures to
 confine loss-reduction projects to public buildings and selected private nonprofit buildings,
 section 404 may in practice be more restrictive and require considerable judgment. LRMs
 proposed in Tables 4-1 and 4-3 serve as useful guides to community-based programs and
 LRMs that passed at Tier 1 suggest the sorts of projects that will likely be cost-effective.
         The Stafford Act also modifies the way in which pre-disaster planning can and should
 occur. Pre-disaster planning should now contain a very strong loss-prevention element so
 that post-disaster recovery activities can benefit from this element. Otherwise, post-disaster
 implementation of section 404 will have the extreme disadvantage of requiring hasty reports
 which are not supported by prior activities. (See Spangle, 1987.) Tables 4-1 through 4-4
 provide guidelines for activities that should be undertaken prior to disasters. Monies cur-
 rently earmarked under the Stafford Act for pre-disaster planning appear to be inadequate
 for the professional labor required to engage in loss-prevention planning and execution.
 Moreover, since this planning and execution requires consideration of many stakeholders,
 relative autonomy of functions from existing agencies may be needed so that monies used for
 loss-prevention are not spent on other activities, or overwhelmed by the powers of other
 state and local agencies.
       - The presence of a large federal cost share for public and nonprofit buildings damaged
by disasters has many implications. For example, even with the Stafford Act, federal controls
over loss-prevention activities are not commensurate with potential federal liabilities in-
curred. These potential liabilities apply not only to public and selected private nonprofit
buildings but to homeowners, small businesses (through the SBA loan program), and to
mortgages generally (through federally backed mortgage programs). Liabilities with respect
to health, life, safety, and environmental matters also exist. As a consequence of these exist-
ing potential liabilities, the federal government has a clear interest in such activities as
        o the state and local governmental adoption of, enforcement of, and compliance with
           building codes,
        o life, safety, and welfare issues,
        o mortgage-default issues, and
        o low-income housing issues.
                                             5-16
       Unfortunately, current federal disaster assistance policy tools provide inadequate
means to achieve broad scale implementation of LRMs because thev are mandated only in
localities declared federal disaster areas by the President. Instead of being proactive and
supporting the implementation of LRMs prior to earthquake events, the current disaster
policy is reactive and triggered by unusual events. The Stafford Act, therefore, is not by itself
a policy that is capable of preparing the entire United States for a catastrophic earthquake.
        The principal goal of current disaster policy is to ensure that economic stability be re-
stored in the affected disaster region. While necessary to support recovery efforts, tbe cur-
rent policy has no provisions to address primary and secondary effects in areas other than
Presidentially declared disaster areas. Thus, by itself, current policy is insufficient to deal
with the fall impacts of single disasters.
        As currently written, the Stafford Act mandates that communities affected by disasters
employ loss-reduction measures to reduce the risk from future disasters. These measures are
not standardized; they are location-specific. In addition, they are politically negotiated by
 state and federal officials rather than designed by mitigation specialists, and then they are
 amassed in a Hazard Mitigation Plan early in the recovery process rather than well-
formulated prior to the disaster.
        In order to protect the United States from a catastrophic earthquake, the current dis-
 aster policy is clearly insufficient. What is needed is a mechanism which prepares the
 country for disasters and guarantees that excessive loss of life and injury and severe
 economic downturn are avoided.
        Because federal controls over these existing concerns are not commensurate with
 liabilities potentially incurred, significant program alterations could be made in order to
 strengthen these controIs. In Sections 5.3 and 5.4 we shall examine how major program in-
 terventions involving federal earthquake insurance may augment these controls. However,
 at present and barring significant federal legislation to augment these controls (such as
 through altered taxation deduction policy), we suggest that a program of federal subsidies to
 public and selected private nonprofit entities, including universities, be initiated to under-
 take cost-effective LRMs as a means to reduce these potential federal statutory liabilities.
      Insurance Rates and Loss-Reduction Measures
5.3
      Before considering how LRMs might be incorporated into the two major types of
federal earthquake insurance program constructs (primary or secondary insurance), we must
look at one major incorporation issue -- how the rate structure of any earthquake insurance
program will affect the implementation of such LRMs as those proposed in this report. The
                                              5 - 17
compatibility of the LRMs proposed here with federal earthquake insurance involvement
may largely depend on how rates are differentiated on the basis of such key factors as seismic
hazards and building vulnerabilities. Consistent with the use of partially risk-based rates as a
public policy instrument would be the decision to permit federal earthquake insurance for all
properties on the condition that cost-effective LRMs be undertaken. Hence, a major issue
facing the administration of a federal earthquake insurance program will be the degree to
which the rate structure supports and sustains cost-effective LRMs. Considerations of how
this major issue fits into primary and secondary federal earthquake insurance involvements
are discussed in Sections 5.4 and 5.5.
      In a review of the fifteen LRMs proposed, one finds the following factors emphasized:
      o seismic zone designations (0, 1, 2, 3, and 4), with special emphasis on higher risk
         zones,
      o current model seismic codes as indicators of building performance in earthquakes,
      o potentially hazardous buildings in seismic zone 4,
      o one- and two-family wood frame dwellings in seismic zones 3 and especially 4, and
      o severe liquefaction, -landslide, subsidence, surface fault zones, and high shaking
        amplification sites in seismic zones 3 and 4.
Because this report emphasizes community-based LRMs, these factors are not rare. (See
Section 3.2.) These factors do not as a result reflect the full range of scientific and engineer-
ing considerations that could be examined in an extremely thorough seismic analysis of an
individual building. As indicated in Eguchi et al. (1989), costs of very detailed investigations
have rapidly diminishing returns with respect to rate development for all but very expensive
properties, properties with large numbers of occupants, very high potential business inter-
ruption costs, or critical community functions. As a consequence, a fully risk-based rating
system -- one that satisfies the highest level of scientific and engineering precision and
thoroughness available for all buildings -- would be prohibitive in cost. The partially risk-
based rating system implied in this report lies between the two extremes -- a fully risk-based
system with cost-prohibitive underwriting expenses and a flat or relatively flat rating system
with extremely low underwriting costs. Only the above factors are of concern in the partially
risk-based system recommended.
      For this reason, we shall speak of various partially risk-based rating systems -- as op-
posed to flat rates. Rates may be flat relative to some factors but not to others, and the fac-
tors of interest in this report are those reflected in the LRMs proposed.
                                              5-18
      There are several important reasons for considering some risk factors in the rating
structure. Summarily, these reasons are that:
   1. For the most cost-effective LRMs, all other things being equal, actuarially risk-based
      rates are adequate economic Inducements for undertaking the LRMs.
  2. Even if all things are not equal, flat rates with respect to parameters reflected in ILRhMs
     can be counterproductive to efforts to implement these LRhMs.
  3. In at least some cases costs of incorporating partially risk based rates are characteristic
     of current prud ent underwriting.
  4. In a federal earthquake insurance involvement severe administrative problems can be
     avoided if mapping for LRMs converges as much as is feasible with mapping for in-
     surance rates.
The following discussion illustrates the first three reasons with respect to the very simple
building parameters ("highly damageable" versus other) and seismic zones parameters
(especially seismic zone 4) reflected in the building practice LRMs. The fourth reason has
been discussed already in Section 2.
Economic Inducements.
      The economic inducement for implementing LRMs can be seen first in the wide varia-
tions of risk levels and rates reflected in some current rating systems and secondly as
reflected in our socioeconomic analysis of the IRMs themselves. The fact that rates cur-
rently are not perceived as providing incentives to LRMs reflects primarily the extreme busi-
ness cycles that earthquake insurance undergoes (as, discussed in Section 1.2 and in Cheney
and Whiteman, 1987). During soft markets, actual rates may be extremely competitive. As
the market hardens, rate increases may occur even for parties who undertake LRMs. The
hardened market -- resulting from limited reinsurance availability and higher reinsurance
prices -- makes rates even less sensitive to LRMs undertaken.
      For commercial structures no dispute exists over the wide variations, in earthquake in-
surance rates currently applied to diverse building vulnerability classes. According to
Steinbrugge (1982, p. 372), rates across building classes vary more than tenfold. (Rates for
class 1C and 2A buildings are approximately 10 percent of rates for class SC buildings.)
Rates across residential building classes vary to a slightly lesser extent. To indicate the sig-
nificant spread of risk among various building categories (all other factors being equal), we
                                              5-19
have developed an analysis described in the footnote below.1 Appendix B contains adequate
materials for a preliminary actuarial analysis of potential rate differentials, as illustrated in
Appendix C and also with finer detail in terms of general procedures outlined in the footnote
below.
      For residential construction, our socioeconomic analysis suggests that there is suffi-
cient spread of risk for differentiation of rates by class of construction -- especially in higher
seismic zones. Use of the best class of construction as a means of determining rates would
imply a subsidy situation for those types of structures expected to contribute significantly to
expected future losses. In some cases, cost-effective retrofits for these structures are avail-
able.
Risk-Based Rates as Incentives
       Given the extreme differences in risks for various building classes, differences sufficient
to make LRMs cost-effective, then all other things being equal, actuarially sound rates are
sufficient economic inducements for undertaking LRMs. With actuarially sound rates, the
difference in risks between the status quo and the implementation of the LRM is magnified
in rates through the use of a loading factor. This loading factor, a multiplier, represents min-
imal administrative costs including overhead marketing, claims adjustment, underwriting
costs and fees, if any, plus costs to cover catastrophic factors (see Section 2). Since costs for
1. For residential construction and for illustrative purposes, we have modified SEISRISK-III (Bender and
Perkins, 1987) in order to provide comparative annualized average loss for various types of residential con-
struction. A composite attenuation function developed by N. Donovan was used along with soil factors
derived from Evernden (1985) and with intensity conversion factors derived from Trifunac (1976). Residential
loss algorithms used in this project are summarized in Appendix B of this report. Of chief interest are those
average annual losses derived for
   o unanchored and unreinforced wood frame dwellings,
   o anchored and reinforced wood frame dwellings,
   o low-rise unreinforced masonry dwellings, and
   o residential construction without specific seismic design (seismic zone 0 or 1)
We find that throughout California, average annual losses for unanchored and unreinforced dwellings exceed
those for anchored and reinforced dwellings by a factor of almost three. Average annual losses for unrein-
forced masonry units exceed those for anchored and reinforced wood frame dwellings by a factor of ap-
proximately seven. Using Wiggins' (1986) algorithms, we find that average annual losses for residential con-
struction with no special seismic design exceed those for residential construction designed to UBC seismic
code 3 standards by a factor of almost five. These findings do not reflect differences in strong ground motions
throughout California.
                                                     5 -20
LRMs are unaffected by rates, then the benefits of undertaking the LRM are multiplied by
this factor if these benefits are reflected in rate differentials. In other words, if the present
value of the future stream of expected benefits is B, then the present value of the future
stream of expected premium, reductions is L x B, in which L is the loading factor exceeding
unity. So, if the benefits (B) exceed the costs (C), then the premium reductions (i.e., L x B) in
a risk-based system exceed the costs by an even greater margin. Hence, LRIMs considered
cost-effective without respect to rate differentials prove to be even more cost-effective if
rates are suitably risk-based.
       The above reasons apply only if "all other things are equal." As already indicated,
earthquake insurance markets currently do not have sufficiently stable prices for owners to
discern clearly that undertaking LRMs results in rate reductions. Also, as indicated in our
socioeconomic analyses of state and local buildings, where much of the risk is assumed by the
federal taxpayer, risks may be "externalized" and thus do not serve as an incentive to im-
pIementing LRMs. (See Appendix D.) Furthermore,, not all benefits of LRhMs accrue to
building owners. Some benefits, for instance, may accrue to building tenants through result-
ing increased life-safety protection and less chance of prolonged business interruption losses.
Other benefits, for instance, may accrue to lending institutions, through reduced likelihood
of losses resulting from default These 'spillover" effects, or benefits to others, will not
necessarily be reflected in actuarially sound partially risk-based rates. Another reason why
partially risk-based rates do not always induce LRMs is that people do not always behave in
economically rational ways, even if they have pertinent information and can interpret it cor-
rectly.
Flat Rates as Disincentives
      Our second reason for strong consideration of partially nisk-based rates is that even if
these rates do not in all cases induce LRMs, flat rates will serve as disincentives to the im-
plementation of LRMs, even for new developments. Flat rates provide potentially sub-
sidized economic protection against earthquake damage. For instance, if rates are flat in
California, then owners in a lower seismic zone will be subsidizing owners in high liquefac-
tion and landslide susceptible sites along the coast and in higher seismic zones. Likewise,
owners of buildings designed to current adequate code standards will be subsidizing owners
of buildings that are highly damageable. In effect flat rates would provide financial protec-
tion against earthquake-related damage whether or not seismically-responsible landuse and
building practices were employed.
                                              5-21
       In a voluntary earthquake insurance program using flat rates, numerous cases of moral
hazard may result. Owners of highly damageable properties, knowing that rates are sub-
sidized, will insure; owners knowing that their rates subsidize risks assumed by others will
refuse to insure. Moreover, given the protection of earthquake rates subsidized by others,
those with higher risks will not be economically induced to reduce those risks. Whatever
motivations exist for individuals, firms, municipalities, and states to undertake LRMs, they
will not include rate reductions, and the presence of subsidized earthquake insurance will
serve as a disincentive to reducing expected property damage. Benefit-cost ratios for LRMs
that are otherwise favorable may become unfavorable given insurance protection provided
by flat rates. (See Appendix D.)
Current Underwriting-Practice
      The third reason supporting the contention that partially risk-based insurance
premiums are to be strongly considered is that risk-based rates are characteristic of prudent
underwriting practice. Continuing the current practice of many earthquake insurers, these
rates would reflect
      o seismic zone designations (or, in other terms, macroseismicity estimates of
        earthquake sources, their rates of seismicity and attenuation functions), and
      o building vulnerability categories (here, with a minimum distinction between highly
        damageable commercial and residential construction on the one hand and other
        construction on the other hand).
To a lesser extent some insurers currently consider
      o high site amplification, liquefaction, landslide, subsidence, and fault zones.
The feasibility of including such site hazards into earthquake insurance considerations is cur-
rently being examined in conjunction with studies under California legislation SB1885.
      Additionally, the cost of differentiating structures into broad-based categories is not
necessarily so great as may be presumed. Inspectors at time of sale may be able to determine
whether or not dwellings are bolted to their foundations. Age of structure and type of ex-
terior construction may also serve as proxies for rating categories. Sampling techniques can
be used to assess the quality of data derived from telephone calls and other data sources.
Prudent insurers writing both residential and commercial structures currently include such
considerations in their underwriting practices. These considerations are important to them
in order to control losses from their insured exposures. Moreover, rate credits can be con-
                                             5 -22
sidered for owners who prove, contrary to prima facie ratings, that their structures are not
higher risks.
       Current underwriting practice reflects both information costs and private insurance
market competition costs. From a business standpoint, insurers need rate differentials at
least in order to assure that lesser risks do not purchase insurance elsewhere. Insurers with
fairly flat rates might be faced with worse risks at rates which do not adequately cover these
risks. However, a governmental insurance program, especially if primary and mandated,
may avoid such problems of adverse selection because both low and high risks are included.
Also to be considered are goverrmental objectives including providing affordable insurance
both in the short- and long-term and decreasing risks to property, persons, and financial and
institutional entities. In such a monopolistic setting, where normal competitive business con-
siderations do not apply, underwriting costs of partially risk-based rates may be erroneously
conceived as additional administrative burdens             resulting in higher overall rates -- rather
                                                      --
than as means to achieve primary program objectives, including loss-reduction and resulting
long-term reductions, in rates. These considerations show that, in a fuller study of federal
earthquake insurance issues, the objectives of a governental! insurance involvement need
to be considered, especially if competitive market concerns are largely or fully removed.
Conclusions
      In summmary, administration of a federal earthquake insurance involvement will require
strong consideration of the types of rates involved, and how they affect such LRMs as those
proposed in this report. We maintain that a partially risk-based insurance rate-setting sys-
tem, sensitive to regional seismic strong motion hazards, and, in higher seismic zones
(especially 3 and 4) to differences in building vulnerabilities and site conditions is one of two
major vehicles (the other being earthquake ordinances) for incorporating LRMs into -a
federal earthquake insurance program. To the extent that rates do not reflect the diverse
typesof risks reflected in the fifteen, LRMs proposed here, rates will be counterproductive to
the implementation of those LRMs. Perfectly flat rates - as an extreme example -- would
undercut economic arguments for undertaking LRMs, since insurance could protect
economic investments in high-risk properties at rates that were subsidized by those with
lower risks.
      Even if partially risk-based rates do not induce LRMs, they provide at least some incen-
tive for mitigation. For instance, if it costs. $2,000 to bolt a dwelling to the foundation, then a
homeowner has some incentive to mitigate if the premium is thereby reduced by over one
hundred dollars a year. But, the homeowner has little or no economic incentive to do so if
                                               5-23
premiums are the same whether or not dwellings are bolted to their foundations. In fact, flat
rates could be used as a reason to oppose any public policy measures that encourage very
cost-effective property loss-reduction measures, including code compliance and retrofitting.
Thus, in the administration of a federal earthquake insurance involvement, one significant
consideration will be the degree to which the rating system supports and sustains the LRMs
proposed here.
      These reasons thus provide extremely powerful considerations for partially risk-based
rates in order to incorporate LRMs into a federal earthquake insurance program. The ad-
ministrative ease of having partially risk-based rating maps that coincide with LRM maps
greatly contrasts to the administrative difficulties of extreme differences between these
rating and LRM maps. This project supports only modest underwriting costs to incorporate
partially risk-based rates. The misconception that the costs for developing risk-based rates
will be a burden on a primary mandated (i.e., monopolistic) federal earthquake insurance
program needs to be further examined in a fuller study addressing the feasibility and program
objectives of federal earthquake insurance. In estimating the cost-effectiveness of a federal
earthquake insurance involvement, benefits of loss-reduction must also be included.
     Loss-Reduction Measures in a Primary Federal Earthquake Insurance Program
5.4
     This subsection includes a general discussion of those aspects of a primary insurance
program that are pertinent to LRMs. We deal principally with logical features of a primary
program and in no way define precise details of that program.
Potentially Increased Federal Liabilities and Rate Considerations
       If the federal government undertakes a primary earthquake insurance program with
respect to some or all classes of private owners and tenants, potential short-term federal
liabilities will be increased. To offset both short- and long-term potential liabilities,
premium payments could be used to develop a pre-disaster reserve fund. Also, programs
that induce loss reduction (as for public and selected nonprofit buildings) could potentially
reduce these liabilities. Deductibles may be increased or limits of liability may be decreased.
For instance, if there is strong desire for low deductible levels, then premiums must be in-
creased, or some other mechanism (e.g., subsidies) must be employed to cover potential in-
creased federal liabilities.
                                             5-24
      General mechanisms for decreasing earthquake insurance rates (i.e., making them
more affordable) without increasing deductible levels and without adversely affecting LRMs
can include
   o long-term and uniform implementation of adequate seismic building standards,
   o long-term and uniform implementation of adequate seismic landuse and geotechnical
     standards and criteria,
   o developing greater geographic distribution of insured properties, and
   o pooling perils.
These mechanisms suggest
  o the long-term desirability of inducing uniform and adequate seismic construction and
     landuse planning/geotechnical standards and criteria,
   o the desirability of strong inducements and/or requirements to assume greater
     geographic spread of seismic risks, and
   o the desirability (if feasible) of integrating perils and, to the extent politically accept-
     able, of cross-subsidizing among pells and among geographic regions for earthquake.
Providing very affordable rates (i.e., low premiums, low deductibles, high limits of liabilty) is
initially an attractive inducement for voluntarily assuring geographic distribution of earth-
quake insurance purchase. To do so, however, a program may have to be subsidized in the
event of earthquake losses except with respect to buildings for which contingent federal
liabilities are already significant !(e.g., public and selected private nonprofit buildings).
       In this report, we have not argued against subsidies in general, especially those that
serve as investments in reducing future earthquake losses; however, subsidies for poor con-
struction do not serve to reduce future losses and should be assumed with caution. (Early
subsidized rates in the NFJP were heavily criticized as noted in Neil Fulton, 1984, Monday
and Butler, 1984, and Kusler and Bloomgren, 1984.) As suggested in Section 5.3 (and with
caveats for the various types of subsidy situations that can arise), providing lower rates for
more damageable buildings and higher risk sites by subsidizing with rates from lower risks
can be counterproductive to implementation of loss-reduction programs. Greater affor-
dability in rates should be achieved through such risk diversification methods as pooling risks
and encouraging geographic spread of coverage, which promote rather than hinder loss-
reduction programs.
      The apparent tension between affordable rates and LRMs is less dramatic than may be
supposed. Nonetheless, the administrator of a primary federal earthquake insurance
program will need to make difficult decisions regarding the degree to which the rate struc-
                                             5-25
ture supports and sustains the LRMs proposed here. Even if rates are lowered in response to
implementation of LRMs, they may not be perceived by consumers to be affordable, and for
some low-income segments of the population, insurance purchase may be viewed as a finan-
cial hardship. As suggested in section 5.3, there will be a temptation in a non-competitive
situation for administrators to reduce underwriting costs incurred in the private market set-
ting, and so to discourage safe construction and landuse practices in order to reduce - tem-
porarily -- rates. The point here is that while many social, political, economic and legal con-
siderations on rates charged may enter into administrative decisions, those decisions must
not ignore the potentially deleterious effects of having lower risks subsidize higher risks, par-
ticularly those for which cost-effective LRMs are available. The administrative weaknesses
of maintaining and applying radically diverse maps for LRMs and insurance rates further
supports the contention that both maps should be risk-based.
General Linkages with the NFIP
       Discussion of a definitive linkage between the NFIP and a primary earthquake in-
surance program, lies beyond the scope of this project. However, the general logic and ex-
perience of the NFIP are useful in terms of implementing loss-control measures in a primary
federal earthquake insurance program.
       Major distinctions between flood insurance programs and potential earthquake
programs derive from mapping considerations. Large-scale mapping of local areas forms the
primary basis in the NFIP for flood plain management and rating programs. In contrast,
macrozonation (e.g., seismic zones as illustrated in Figure 2-5) currently forms the basis for
the most thoroughly developed earthquake loss-reduction programs, namely, those that deal
with seismic code development, adoption, compliance, and enforcement. This distinction is
reflected in the primary emphasis of this report on LRMs and rate development relative to
those parameters of importance in the LRMs proposed: macrozones, seismic building vul-
nerability categories, and, in higher seismic hazard zones (3 and 4), local seismic hazards.
Current evidence supporting the cost-effectiveness of landuse LRMs is significantly weaker
than evidence supporting the cost-effectiveness of building design and construction LRMs.
Hence, there is less emphasis in this project on the very large-scale maps (at scale larger than
 1:24,000) that are characteristic of such detailed landuse efforts as in the NFIP.
       Earthquake hazard microzonation may eventually evolve to take on a greater sig-
 nificance as applied and theoretical research improves our understanding of the geotechni-
 cal environment and ability to employ larger-scale mapping techniques cost-effectively.
 Structural engineering, geotechnical engineering, architecture, and other building construc-
                                               5-26
tion advancements would be priorities along with risk analysis that emphasizes risk assess-
ments and regional mapping rather than very large-scale mapping. These are the principal
methods to achieving loss reduction which would be applied under a primary earthquake in-
surance program.
       Nevertheless, the overall logic and experience of the NFIP provides a basis for under-
standing the sort of program that a primary federal earthquake insurance program could be-
come and the various ways in which it may evolve. The basis for the national flood insurance
program is an agreement between communities and the federal government that com-
munities will adopt, comply with, and adequately enforce flood plain management or-
 dinances. Noncompliance entails possible suspension from the program or rate surcharges.
Participating communities who comply enable individuals or corporations whose insurable
property is located within the community to purchase flood insurance. As support for this
program, FEMA/FIA has mapped special flood hazard area zones at large scales and has
gradually made rates less subsidized and more actuarially sound. Problems of non-
compliance, although rare, have been recognized and are being addressed. (See FEMA/FIA,
July 1989, p. 29668; FEMA, June 1989; and ISO, 1989.)
       In the early years of the NFIP (1968-1973) even highly subsidized rates did not make
flood insurance purchase attractive to property owners. Under the Flood Disaster Protec-
tion Act of 1973, purchase became required in special flood hazard zones for those property
owners assisted by Federal programs or Federally supervised, regulated, or insured agencies
or institutions. Hence, lending institutions were called on to require that flood insurance be
purchased by their borrowers whose security consisted of building properties located in spe-
cial flood hazard zones. Lenders may at their discretion require that flood insurance be pur-
chased by borrowers with securities in properties located outside special flood hazard zones
where to date approximately one-third of claims paid have occurred. Both residential and
commercial property is included, but land values are not insured. (FEMA/FIA, July 1989).
       The Coastal Barrier Resources Act Public Law 97-348, prohibits the NfIP from
providing flood insurance protection for structures built or substantially improved after Oc-
tober 1, 1968, in areas designated undeveloped coastal barriers. For these areas, as in other
areas where flood insurance is unavailable, federally backed lenders, may make conventional
loans at their own discretion. FEMA/FIA has recognized problems of compliance of
mortgage lending institutions with regulations, but continues to work on resolutions. Similar
experience and progress has occurred with respect to defining limits of liability coverage -- a
                                             5-27
problem that arose for residential condominiums initially treated as multi-unit residential
buildings and more recently treated as single-family units (FEMA/FIA, July 1989).
      Thus, the NFEP is working out the problems as they become apparent in the application
of rules and regulations in the program. The agreement with local governments constitutes a
voluntary means by which community-based standards can be implemented through local
governments. Agreements with insurers in the Write-Your-Own (WYO) program suggest
precedents whereby government-insurer relationships can be clarified, especially with
respect to how insurers can act as agents for the federal government.
      We did not assess whether or not voluntary community participation in a primary
federal earthquake insurance program would provide adequate geographic spread of
coverage to reduce rates significantly. However, if a primary earthquake insurance program
were developed along these lines, then the LRMs proposed in Tables 4-1 and 4-3 would fit in
well. Informally, these serve to define generally earthquake ordinances (earthquake resis-
tant standards) analogous to flood plain management ordinances. So developed, earthquake
LRMs have the advantage of being able to be incorporated directly into overall community
programs. The ordinances as envisaged here primarily emphasize building loss-reduction
practices. As microzonation practices evolve and possibly become incorporated into seismic
building codes in the next decade or two, the linkage between landuse planning and building
loss-reduction practices may become closer. As with the NFIP, a major federal role would
involve developing earthquake insurance rates. This may eventually include very large-scale
mapping, but initially would currently involve smaller scale regional mapping along with
assessments of building vulnerabilities and regional seismicity. The community orientation
of LRMs in Tables 4-1 and 4-3 fits well into a primary federal insurance program involving
agreements between the federal government and local governments. The possibility of
earthquake-induced flooding and mudslides, a topic excluded from consideration in this
project, itself suggests linkages between the current NFIP and potential primary earthquake
insurance involvements.
      A contrasting primary program structure may be one in which the sole primary
relationship is between the federal government and the insured. Such a program permits in-
surance companies to act as agents for federal insurance. In this type of primary earthquake
insurance program, we shall assume as before that the federal government has a primary
responsibility for rate-making. Since this type of program may require only an indirect
relationship between the federal government and communities, no direct federal controls
over LRM requirements are available. Thus, it is unlikely that LRMs will be initiated, unless
they are induced by differential insurance rates or by insurance availability requirements.
                                            5 -28
       A potentially expensive program, from an underwriting standpoint, would involve con-
siderable federal guidance in determining rates for various communities so that rates would
reflect risk. This would not entail federal-community agreements but could involve con-
siderable efforts to rate buildings. One means to effect this rating system would be to
presume that higher rates apply and to place the burden of proof on the buyer to substantiate
any request for rate reductions/credits. A potentially less expensive alternative would be the
generation of federal-community agreements acknowledging that earthquake risk-reduction
ordinances (such LRMs defined in Tables 4-1 and 4-3) were in effect These are potentially
less. expensive because uniformity of loss-reduction and underwriting standards could be as-
sured.
 Possible Extension of Provision (d) of Section 406. of the Stafford Act
         One possible remedy for the inadequate tools currently available to control contingent
 federal liabilities lies in extending provision (d) of section 406 of the Stafford Act to include
 primary earthquake insurance. In effect, justified by the need to reduce current federal
 liabilities, one could require that public and selected private nonprofit buildings purchase
 earthquake insurance (at partially risk-based rates) as a condition of receipt of federal dis-
 aster assistance. Section 311 currently requires this earthquake insurance purchase only with
 state insurance regulator certification of availability, adequacy, and necessity. If this
 earthquake insurance purchase requirement were made conditional only on receipt of
 federal disaster assistance, provision (d) of section 406 then would indicate that non-
 compliance with insurance purchase entails that federal disaster relief is reduced by the
 amount of insurance proceeds that would otherwise have been covered by earthquake in-
 surance.
        This large step in a primary federal earthquake insurance program would need to be
justified, as is done here, by reference to existing contingent federal liabilities and the in-
 adequacy of current controls over these liabilities. State insurance regulators would need to
be involved in discussions of such program changes. To buttress, this program, we suggest as
before possible federal subsidies for cost-effective seismic retrofits and other seismic
program developments, including staffing assistance. Existing federal liabilities can be
reduced through a program that specifically addresses potential cost-effective LRMs and
supporting elements.
       As Appendix D clarifies, sanctions are not the only effective means to encourage
LRMs. Implementation of this program element may require additional staffing and train-
ing to assure that public and private nonprofit buildings are rated appropriately and that rate
                                              5-29
credits are provided for suitable seismic mitigation activities. Extremely affordable rates
may also be warranted but only for construction that satisfies programmatic guidance
developed in Tables 4-1 and 4-3.
      It is undecided here as to whether or not this extension should be part of the primary or
the secondary federal earthquake insurance program. It is possible that the private in-
surance industry, regulated by state insurance commissions, could adequately rate these
buildings and supply earthquake insurance given secondary federal insurance involvement.
Conclusions
This discussion has suggested the following general conclusions:
  o Partially risk-based rates are desirable for the building usages covered in the primary
      program (and a strong prima facie case exists against rates for riskier buildings that are
      subsidized by other lesser risks -- unless undertaking LRMs is a condition for
      earthquake insurance purchase).
   o Partially risk-based rates form a primary basis for a federal program in which insurance
     is provided directly to owners and tenants.
   o In order to lower rates on an actuarial basis (whether through decreased premiums,
     decreased deductibles, or increased limits of liability), risk diversification is desirable,
     whether through geographic spread or through linkage with other perils (see Section
     2.2).
   o In order to minimize potential conflicts between LRMs proposed here and those
     federally supported elsewhere, and in order to use the experience of current primary
     federal insurance programs, there should be a linkage with the National Flood In-
     surance Program (NFIP). (This does not entail a single administration over the two
     programs, nor does it imply that the federal earthquake insurance structure should be
     modeled after the NFIP. However, this does entail using benefits of program ex-
     perience, including legal experience, and examination of advantages and disadvantages
     of linking flood and earthquake perils, along with other perils, if any, for which there is
     market failure.)
   o In the early stages of the NFIP, the subsidized rates for risky facilities were heavily
     criticized; and a strong case can be made that more damageable buildings and more
     hazardous sites for which cost-effective LRMs are possible should not be subsidized
     through lower rates in a federal earthquake insurance program having a loss-reduction
     element.
   o If the primary program involves a direct optional agreement between communities and
      the federal government, then the LRMs proposed in Tables 4-1 and 4-3 can serve
      generally to define for local and state governments an "earthquake ordinance" (a set of
      earthquake-resistance standards) for participation in the primary program; Tables 4-2
      and 4-4 define supporting elements (see caveats and additions in following discussion).
      Earthquake ordinances pertaining to building usages covered in the primary program
                                              5 -30
        are compatible with a program involving federal agreements with state or local
        governments.
      o If the primary program involves direct relationships between the federal overnment
        and local residents, and no agreement with the local government, then indirect means
        can be used to induce LRMs for public buildings, including
           o rate credits for buildings identified as not being potentially hazardous on the
              condition that LRMs for public buildings are implemented,
           o federal assistance to state and local LRM programs and projects, and
           o earthquake insurance purchase requirements for public and private nonprofit
            - buildings.
      o Given current contingent federal liabilities for private and nonprofit buildings, con-
        sideration should be given to extending provision (d) of section 40 of the Stafford Act
        (covering mandatory flood insurance purchase and commensurate decrease in federal
        post-disaster obligations with noncompliance) to incorporate earthquake as well as
        flood insurance considerations. (An analogous recommnendation appears in French
        and Rudholm1 1990.)
 Thus, a primary federal earthquake insurance program can serve as a strong policy tool to
 encourage LRMs for buildings covered under the program. However, a primary program by
itself does not provide strong inducements for LRMs for buildings not covered. LRMs for
public buildings may be induced by federal cost-sharing programs or by providing selected
rate credits. Hence, inclusion of LRMs forpublic buildings can be justified with reference to
existing contingent federal liabilities without regard to those additional liabilities incurred by
federal earthquake insurance involvement.
       In a primary federal earthquake program, then, an administrator has two basic possible
tools for incorporating LRMs: partially risk-based rates. and earthquake ordinances. An
administrator may also justify LRMhs for public buildings with respect to non-insurance-
related existing contingent federal liabilities. Thus, it is clearly feasible to incorporate LLRMs
into a primary federal earthquake insurance program.
5.5   Loss-Reduction Measures in a Secondary Federal Earthquake Insurance Program
      The preceding sections provide a general overview of how major federal program
changes or additions can provide greater controls over iRMs. The need for greater controls
over implementation of LRMs is supported by (a) existing contingent federal liabilities and
(b) contingent federal liabilities that would be created under a primary program. More
generally, it is in the ordinary interests of the federal government to be concerned with the
national welfare, which includes the financial stability of institutions and the health and well-
being of citizens.
                                              5-31
      As a consequence of existing federal liabilities, we have maintained that federal assis-
tance for cost-effective LRMs may be suitable especially in those cases where these subsidies
can help to reduce contingent federal liabilities. We have further maintained that risk-based
premiums or premiums conditional on LRMs being undertaken may be desirable to support
LRMs proposed in Section 4.
      The challenge of incorporating IRMs into a secondary program, or a combined
primary and/or secondary program, is enormous. In this subsection, we examine some fea-
tures of such programs.
 Key Relationships
       Figure 5-3 provides a very schematic account of some key relationships within a secon-
 dary federal program. The figure is designed to address the critical question of how LRMs
 are to be enforced in a secondary earthquake insurance program. Key participants of inter-
 est are the federal government, insurers, the insured, state insurance regulators, lenders, and
 communities. We examine these various participants and their general relationships in order
to understand how to incorporate LRMs into a secondary program.
       Owing to the competitive nature of private financial institutions, we do not propose to
use the leverage of lending institutions as a direct means to incorporate LRMs into a secon-
dary program. As indicated in Section 5.2, federally-backed lending institutions may not be
eager to require purchase of earthquake insurance. Although some lending institutions may
be strongly supportive of implementation of LRMs, others may be less supportive. Hence,
whereas lending institutions may be helpful in ensuring broader insurance purchases and in
influencing the implementation of LRMs, we do not regard them as primary enforcers of
LRMs. For similar reasons, we have not treated insurance companies as primary enforcers
of LRMs even though they may lobby communities to achieve adequate or superior seismic
standards. As a result of competitive pressures to avoid cases of adverse selection, private
insurers may use partially risk-based rates based on available information on risks, and this
may assist indirectly in encouraging LRMs. Nevertheless, business considerations including
the desire for profitability will dictate the degree to which risk-based rates are used, and the
practice will vary considerably among private insurers.
       State insurance regulators are in a good position to begin requiring that insurance
companies provide the federal government (and private reinsurers) with adequate informa-
tion on which to base rates and to assess potential liabilities.
                                             5-32
                   Federal Government
                                    -                        ---
                           I
                         Pring
                                        11Riatg
                                          in
State Insurance                                            Backing
                     I
                                         31
  Regulators
                                                                             Disaster Relief,
                                                                        Rating, Model Standards
    Regulate
                                              I
                   Insurance
                                         UN.              Lendei rs
                  Companies
                                                                       NIMNw
                           I                  - NENMR
                                                                                     I-
                                                                                     1.
    Influence
                                                          Mortgages
                                                                                     I.
                 The Insured                 ~~~~~~~~~~~~~~~~~~~~Y..
                                                                        In/ ]uence
                                                                          H
                                                                                     I.
                                                                                     K
                     Earthquake
                Ordinances & Polices
                                                                                     I
                                                      Community                      N
                                                  (Local or State)
Figure 5-3. A Simplified Diagram of Probable and Possible Relationships
               in a Secondary Federal Insurance Program
                         (Shaded lines denote possible relationships.)
                                             5-33
Pricing Mechanisms and LRMs
      One way to effectuate partially risk-based rates in a secondary system is for the federal
government to form cooperative relationships with state insurance regulators. Secondary
earthquake insurance would be made available to various states conditional on state in-
surance regulator assurance that rates would be reflective of those seismic risk factors per-
tinent to the fifteen LRMs proposed here and discussed in Section 5.3. Hence, on this alter-
native, state insurance regulators would assume the responsibility for ensuring that rates are
partially risk-based in the sense used throughout this project. We do not here elaborate on
the pros and cons of this alternative, but merely mention it as one conceivable administrative
avenue for making a secondary federal earthquake program insurance involvement com-
patible with the LRMs proposed.
      The pricing mechanism for earthquake reinsurance is sufficiently complex and
entrenched that it may require many years for this mechanism to be adjusted to ensure that
LRMs are being incorporated through at least partially risk-based rates. Another ad-
ministrative alternative for ensuring this incorporation would be to develop secondary prices
to reflect primary risks. The justification for federal control over this secondary pricing lies
in the liabilities potentially incurred by taxpayers if the federal government becomes a
secondary earthquake insurer. In developing secondary prices, the administrator would
need to require
   o that insurance companies writing earthquake policies and desiring federal earthquake
      reinsurance provide exposure data as means to evaluate secondary prices, and
   o that risk estimation methods such as those indicated in Section 2 (and in greater detail
     in Eguchi et al., 1989, and Taylor, Hayne, and Tillman, 1990) be used to develop prices
     for this reinsurance.
The first step would be extremely large since
  (a) primary earthquake insurance portfolios may change on a day-to-day basis (so that
         standards for aggregating portfolio exposures would be needed);
   (b)   adequate exposure data, such as building structural vulnerability categories, cur-
         rently are not always collected by primary insurers, especially when policies are writ-
         ten that cover a great many sites. Collection of these data may be regarded as a
         nuisance by many underwriters; and
   (c)   suitable analysis of these data, given private reinsurance arrangements, deductibles,
         and limits of liability, can be time-consuming unless simplified guidelines are
         provided that are nonetheless compatible with secondary pricing to reflect primary
         rsks.
                                             5 -34
Hence, use of secondary pricing to reflect primary risks is an available tool, although difficult
to implement to assure that a secondary federal earthquake insurance involvement is com-
patible with the LRMs proposed here. In a fuller analysis of this second alternative, con-
sideration should be given to the extent to which in a secondary earthquake insurance
program there can be confidence that participating primary insurers, in a competitive
market, will necessarily and uniformly use partially risk-based rates. The degree to which in-
surers will use such rates to remain competitive may bear on the degree to which raw ex-
posure data are needed for secondary pricing.
      A third alternative, once considered the most prormising, would be to have the federal
government develop primary rate guidelines. We regard federally prepared guidelines as a
much more direct approach to inducing LRMs than attempts to .affect prices only -at the
secondary level. Many underwriters may balk at the tedium and time required to collect and
transmit this exposure data, and the timeliness of data for secondary pricing decisions may
require considerable systematization of raw data In contrast, with federally prepared
guidelines, direct rates can be guided so that the total volume of sales by underwriters can
provide an index of the relative risks within their portfolios and, hence, an index of the
residual risks borne by the federal government as a secondary insurer.
      Moreover, the federal government could provide for rates relative to community LRM
standards (earthquake ordinances) that have evolved and that are in effect. Through this
mechanism, greater uniformity in rate-making could be achieved, since community-level
earthquake risk assessments would in the main dictate how facilities are to be rated. In addi-
tion, rate advantages could be provided for owners and tenants in communities that incor-
porate LRMs. Finally, the federal government could ensure that subsidized rates are not
provided for potentially hazardous buildings or highly damageable structures.
      This third alternative -- direct federal control over primary rates -- may receive chal-
lenges owing to state jurisdiction over insurance regulation. Hence, although initially
promising, the desire not to create federal-state conflicts makes this -a less attractive alterna-
 ive.
      A fourth alternative, possibly combined with the others, is to use the leverage of a com-
bined primary-secondary federal earthquake insurance involvement (if this combined
program exists) in order to assure that IRMs are initiated in states and municipalities for
which earthquake insurance is made available. In effect, federal earthquake insurance
availability would be made conditional on earthquake ordinances being implemented by
                                              5-35
state and local governments. Analogous considerations were developed in Section 5.4 when
insurance purchase requirements for public buildings were discussed. By itself, the
availability of federal earthquake insurance involvement may not suffice to induce com-
munities to adopt earthquake ordinances. If combined with other programs, such as federal
assistance programs suggested in Section 5.2 then this fourth alternative may prove to be
useful. Moreover, serious consideration should be given as to whether or not the secondary
pricing mechanism supports and sustains the earthquake ordinances.
       We have examined at least four possible ways in which secondary federal earthquake
insurance involvement may be compatible with the LRMs proposed. These four ways sug-
gest that it is feasible - although challenging - to incorporate LRMs into a federal
earthquake insurance involvement. In all four ways, partially risk-based rates (or else rates
conditional on LRMs being undertaken) are a major vehicle for supporting and sustaining
the LRMs proposed here. The expression "incorporate' suggests that federal earthquake in-
surance involvement can be seriously inconsistent with implementation of LRMs, and that
the incorporation issue partially turns on how to make fiscal incentives consistent with im-
plementation of LRMs. The first and second alternatives, for instance, stress these financial
 incentives. The fourth alternative stresses direct enforcement of cost-effective LRMs at
the community level.
Conclusions
In this subsection we have developed the following conclusions:
    o It appears to be feasible, although extremely challenging, to incorporate LRMs into a
       secondary federal earthquake insurance program.
  o As part of a combined primary and secondary program, if one exists, various reasons
    may be provided for applying LRMs to all buildings rather than merely to those build-
    ings as covered in the primary program. Particularly, the administrator may use other
    contingent federal labil ies to justify extension of LRM requirements to buildings
    covered in a secondary program. (These may include existing liabilities or others
    created under a primary program.) These reasons, while not fully compelling, nonethe-
    less should be strongly considered by program administrators.
  o One very direct way to assure that rates are compatible with LRMs is for the federal
    government to control rate-making and conditions of insurance availability (e.g., by
    requiring that insurance is available on the condition that LRMs are undertaken). Al-
    though this way is clearly feasible in a primary federal earthquake insurance program, it
    encounters large-scale obstacles in a secondary federal earthquake program to the ex-
    tent that such federal controls over direct rate-making may challenge, or appear to
    challenge, state controls over insurance regulation.
                                            5-36
  o One less direct way to assure that rates are consistent with LRMs is to develop prices at
    a secondary level to reflect primary risks. This way, although feasible, would be ex-
    tremely challenging and would require changes of habits among many primary
    earthquake insurers.
  o Another way to assure that rates are consistent with LRMs is to make insurance
    availability conditional on state regulation that assumes partially risk-based rates
    (through a cooperative arrangement with state insurance regulators so that they may
    assure that primary rates reflect risks). This way is mentioned here to indicate that
    various administrative programs may be conceivable, although not without possible
    problems and challenges.
      Thus, as in a primary federal earthquake insurance progranm the administrator of a
secondary program has two vehicles for incorporation of LRMs: partially risk-based rates
and earthquake ordinances. However, in a secondary federal earthquake insurance in-
volvement, influence over requiring both LRMs and partially risk-based rates will be less
direct and to that extent more challenging. The presence of private insurer competition that
leads to the frequent use of partially risk-based rates in order to avoid adverse selection may
mitigate some of the challenges faced by an administrator over a secondary federal
earthquake insurance program.
      These conclusions were arrived at through an examination of a few of the key par-
ticipants and relationships within a federal program. There is no examination here of the
overall political feasibility of the above conclusions or of the details of any secondary federal
earthquake insurance construct. With respect to a combined primary and secondary federal
earthquake insurance involvement, it follows from the foregoing conclusions that significant
federal responsibility for or involvement in encouraging directly or indirectly partially risk-
based rates will be a common element of both programs. As indicated previously, if the
major thrust of this encouragement is to ensure that potentially hazardous or highly damage-
able buildings in regions of higher seismicity are not provided rates subsidizedby lower risks,
then the costs of underwriting these rates will not be extraordinarily high and will continue
current practices of many earthquake insurers. If rates are tied to community standards that
have evolved over the years (or that in many regions of the country have remained uniform),
thenunderwriting costs will be reasonable.
                                              5-37
5.6   Summary of Approaches to Incorporating LRMs into
      Various Federal Insurance Contexts
      In overview, the overriding goals of a federal earthquake insurance program are:
      o to indemnify persons for their losses in the event of future earthquake disasters,
      o to reduce the tragic losses of life and increasing losses of property from earthquakes,
      o to ensure financial stability throughout the United States should a large catastrophic
        earthquake occur in the near term and
      o to sustain this stability through efforts which control direct expected losses and
        hence secondary, tertiary, and higher order losses.
The latter is the goal of this report. The costs of physically modifying the built environment
in order to reduce very significant losses from a large catastrophic earthquake in the near
term would be exorbitant. Hence, the LRMs recommended here reduce expected losses in
the long term.
       In the status quo, disaster relief policy designed to serve many social and political needs
nonetheless serves as a disincentive to the implementation of loss-reduction measures for
public and selected private buildings. (See Burby et al., 1990.) The significance of existing
federal liabilities justifies increased federal controls along with possible cost-sharing, train-
ing, and education programs. Earthquake ordinances as defined earlier can assist in
prioritizing funding under section 404 of the Stafford Act and in defining where increased
controls are most useful.
      With increased federal liabilities in a primary and/or secondary earthquake insurance
program, we maintain that the federal-government would need to have direct influence over
rating at the primarn     level and/or pricing at the secondary level. These controls and in-
fluences are needed to assure that partially risk-based rates are employed. These partially
risk-based rates are here encouraged chiefly for economic and administrative reasons, but
they also offer potential life-safety and other benefits. Residents of communities that adopt
earthquake ordinances can also receive rate credits in a primary earthquake insurance
program.
                                              5-38
      We have addressed generally how the loss-reduction, measures proposed in this report
can be incorporated into a federal earthquake insurance program. Incorporation of LRMs
involves two major vehicles:
   (a) their use in defining earthquake ordinances for implementation at state and local
          levels, and
   (b) the use of or encouragement of partially risk-based rates (or else availability of in-
          surance only on the condition that LRMs are undertaken).
To facilitate incorporation, we propose federal legislation to implement loss- and hence
deficit-reducing seismic mitigation programs for public and selected private nonprofit build-
ings. These programs would provide training, staffing, and other supporting elements
needed to implement LRMs within a federal earthquake insurance program.
      In a primary federal earthquake insurance involvement, both vehicles -- ordinances
and partially risk-based rates -- could be used to promote LRMs. In a secondary federal
earthquake insurance involvement, less direct means (including secondary pricing to reflect
risks and the use of the leverage of other programs) would need to be used to incorporate
LRMs.
                                            5- 39
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Kentucky GEHSTAP. 1986. Governor's Earthquake Hazards and Safety Technical Advisory
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Kingdon, J. W. 1984. Agendas. Alternatives, and Public Policies. Boston, MA: Little,
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Kunreuther, H. 1989. 'The Role of Actuaries and Underwriters in Insuring Ambiguous
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                                             6-6
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                                             6-9
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                                            6 - 10
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                                          6-11
                                APPENDIX A
             BIOGRAPHICAL SKETCHES OF ADVISORY PANEL MEMBERS
Richard J. Roth. Jr.. Co-Chair
      Richard J. Roth, Jr., was appointed to the position of Assistant Insurance Commissioner and Chief
Property/Casualty Actuary, State of 'California, on July 1, 1984. Roth joined the Department of Insurance as, a
property/casualt actuary in March, 1981.
       He is responsible for issues relating to property and liability insurance, specifically reinsurance, workers'
compensation, medical malpractice, mortgage guaranty, public liability, commercial, and the availability and af-
fordability of automobile insurance. He is the author of the Department's annual report on earthquake in-
surance. As the Chief Property/Casualty Actuary, Roth is involved in issues of solvency, financial reporting,
and the actuarial portion of the financial examination of property/casualty companies.
       Roth is a Fellow of the Casualty Actuarial Society and received a Bachelor of Science in Mathematics in
1964 and Masters degrees in Economics and Statistics in 1970 from Stanford University. He also holds a law
degree and is a member of the Connecticut State Bar. Prior to entering the insurance profession, he was an
aeronautical engineer for six years.
D. Ward. Co-Chair
        A licensed architect, Del Ward currently is a consultant in building technology and also serves as an ad-
junct faculty member in the Graduate School of Architecture, University of Utah. In both capacities, his prin-
cipal work pertains to building technology and structural systems.
        Architectural education has been the predominant activity of his career. He began his teaching career
at Columbia University, New York City, in 1958. From 1960 to 1975 he was a Professor of Architecture at the
University of Utah. After that he joined the State University system of Florida for two years, where he assisted
in organizing the Florida Solar Energy Center, and energy research center. Since 1981 he has engaged in
private architectural practice and consulting.
         His involvement in architectural aspects of seismic design spans a period of more than twenty years and
a number of activities, beginning in an academic research setting. From 1977 to 1981, he was executive direc-
tor of the Utah Seismic Safety Advisory Council, a state agency established by legislative act to recommend
and guide Utah's earthquake programs. He has served on the Board of Directors of the Earthquake Engineer-
ing Research Institute and chaired the Public Policy and Publications Committees of that organization. Addi-
 tionally, he has served on research review committees for the National Academy of Sciences, the National
Science Foundation, and the Federal Emergency Management Agency, either directly or through contractors
 to those agencies.
         Since 1985, he has served on the examination-writing committee of the National Council of Architec-
tural Registration Boards, the professional organization through which architectural licensing examinations
 are prepared. His involvement with that group has been in the divisions of general structures and lateral
forces.
         Published reports, papers, lectures, and technical studies by Mr. Ward number in excess of L50. These
 writings appear in various books, journals, proceedings, and separate booklets. All of the published work deals
 with building technology.
         Most recently, Mr. Ward is co-author of a book on seismic design principles for architects titled Seismic
and Wind Loads in Architectural Desin: An Architect's Studv Guide. A second edition of the work will be
released by the American Institute of Architects in June of 1990. This book is a principal reference for ar-
 chitects preparing for licensing' examinations.
                                                        A- 1
James E. Beavers. Ph.D.. P.E.
        Dr. Beavers currently serves on the Board of Directors of-the Earthquake Engineering Research In-
stitute and is editor of the Institute's professional journal Earthquake SPECTRA. He served as chairman of
EERI's "Third U.S. National Conference on Earthquake Engineering" held in Charleston, SC (1986) and has
been a member of the Strong Motion, Public Policy and Nominating committees. He was also a principal or-
ganizer of the first major earthquake conference to focus on earthquake hazards and risks in the eastern U.S.
held in Knoxville, Tennessee (1981) and was editor of the two volume proceedings 'Earthquakes and
Earthquake Engineering: The Eastern United States." He is a member of the National Academy of Sciences
and Engineering's National Research Council Committee on Earthquake Engineering and was chairman of its
Advisory Panel for a National Earthquake Engineering Experimental Facility. He is a member of the Scientific
Advisory Committee for the National Center for Earthquake Engineering Research, has served as a member
of the National Science Foundation's Advisory Panel for Critical Engineering Systems and a chairman of the
Seismic Advisory Panel for the Governor of Tennessee.
        Dr. Beavers has been chairman or a member of numerous other national, state and local professional
committees; has authored or coauthored over fifty papers, articles and reports; has been guest lecturer/invited
speaker at over fifty university and civic functions; has lectured for the International Atomic Energy Agency's
Nuclear Power Program at Argonne National Laboratory, and has taught at the University of Tennessee. His
professional honors include National Outstanding Young Engineer by the National Society of Professional
Engineers (1977), Rotary Foundation exchange program participant with the peoples of India (1980), Honor
Member of the National Civil Engineering Rolla (1987), Outstanding Technical Achievement Award - Martin
Marietta Energy Systems, Inc. (1987), Engineer of the Year - State of Tennessee (1987), National Award of
Merit - American Society for Engineering Management (1989), and appointment as a Martin Marietta Fellow
(1990).
        He received his B.S. degree in Civil Engineering from the University of Missouri at Rolla and his M.S.
and Ph.D. degrees in Structural Engineering from Vanderbilt University. He is a registered Professional En-
gineer in Tennessee and Mississippi and is a member of several technical and professional societies, including
the American Society of Civil Engineers (Fellow), the Seismological Society of America and the National
Society of Professional Engineers. He has served as President of the Knoxville Branch, Tennessee Valley Sec-
tion and Tennessee Section of ASCE; President of the Oak Ridge Chapter, Tennessee Society of Professional
Engineers and Vice President of the Tennessee Society of Professional Engineers.
        He is on the Senior Staff of the Engineering Divisions at Martin Marietta Energy Systems, Inc. which
operates the Department of Energy's Oak Ridge National Laboratory, (Oak Ridge, TN), Uranium Enrich-
ment Plants (Oak Ridge, TN; Paducah, KY; and Portsmouth, OH) and Y-12 Plant (Oak Ridge, TN) with
over 18,000 employees.
George K. Bernstein
        An attorney in Washington, D.C., and New York City, Mr. Bernstein advises and represents insurers,
agents, brokers and State Insurance Departments on regulatory matters including the chartering and licensing
of insurance companies, examinations, compliance with state law, ratemaking, as well as the rehabilitation and
liquidation of financially troubled and insolvent insurers. He is also involved in the formation of offshore in-
surers and of risk retention groups.
        Mr. Bernstein also represents insurers and insurance organizations in litigation and before Congress
and state legislatures in such areas as financial deregulation, taxation, investment income, rating classifications,
workers' compensation, occupational disease including asbestosis and agent orange, medical malpractice,
automobile no-fault, and competitive rating. He is frequently called on to testify as an expert witness before
legislative committees and in insurance litigation. He is also involved in public housing and real estate matters.
        In 1974, Mr. Bernstein received the U.S. Department of Housing and Urban Development's
"Distinguished Service Award".
        Previously, from 1969 to 1974, Mr. Bernstein served as the first Federal Insurance Administrator. In
March of 1972, he was also appointed Administrator of the federal Office of Interstate Land Sales Registra-
tion (OILSR). He served in both positions in the U.S. Department of Housing and Urban Development until
November 1974, when he resigned to return to the private practice of law. As head of the Federal Insurance
                                                        A-2
 Administration, Mr. Bernstein administered the National Flood Insurance Program, the Federal FAIR (Fair
 Access to Insurance Requirements) Plan and Riot Reinsurance Programs, and the Federal Crime Insurance
 Program. He also acted as insurance advisor to the White House, and frequently testified before various Con-
 gressional committees on behalf of the White House and HUD and as an expert witness. As Interstate Land
 Sales Administrator, Mr. Bernstein implemented the 1968 federal law requiring full disclosure and registration
 of unimproved property sold in interstate commerce.
         Before coming to Washington in 1969, Mr. Bernstein served with the New York State Insurance
Department, first as Deputy Superintendent and General Counsel (beginning in 1%4), and from 1967 as First
Deputy Superintendent. Before his appointment to the Insurance Department in 1964, Mr. Bernstein prac-
 ticed law, primarily in the field of insurance, in New York City.
         Earlier, from 1957 to 1961, as Assistant Attorney General of the State of New York in the Litigation
and Appeals Bureau, he argued more than 50 appeals in the State and Federal Courts, many of which resulted
in landmark decisions in the area -offederal-state relations and criminal constitutional law. Among the state
agencies that he represented during this period was the New York Insurance Department,, and many of the
matters he handled had precedent-setting impact on the insurance business and its regulation.
         Mr. Bernstein received his BA. from Cornell University in 1955 and his LL3. from Cornell Law School
in 1957. At law school, he has the winner of the Moot Court Competition and was Chairman of the Moot
Court Board.
         He was admitted to the New York Bar in 1957, the United States Court of Appeals, Second Circuit, in
1958, the United States Supreme Court in 1972, and the District of Columbia Bar in 1973.
         Mr. Bernstein has also served as a United States Delegate to the NATO 'Conference on Flood In-
surance, 1970; United States, Government Consultant to the Japanese Government on Flood and National
Disaster Insurance, 1972; Special Counsel to the New York Select Committee on Insurance, 1974-1976; Con-
sultant to the Overseas Private Investment Corporation, 1975-1977 and 1983-1984; Consultant to the
President's Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Re-
search, 1979-1981.
         He was a member of the President's Interdepartmental Committee on Medical Malpractice, 1971-1973;
the National Academy of Sciences' Committee on Medical Malpractice, 1972-1973; the Advisory Committee
to the New York State Legislature on Recodification of the Insurance Law, 1972-1974; the President's Inter-
departmental Study on Workers' Compensation, 1973-1974; and the National Insurance Development
Program Advisory Board, 1976-1977.
         He recently served as Chairman of the Expert Review Committee for the National Earthquake Hazrds
Reduction Program. Since 1983, he has been court-appointed Agent for the Vermont Insurance Commis-
sioner as Receiver of the insolvent Ambassador Insurance Company.
        He is a member of the Association of the Bar of the City of New York, and is a member of its Com-
mnittee on Insurance, of which he was Chairman from 1975 to 1978, where he chairs the Subcommittee on In-
surer Solvency; the District of Columbia Bar Association; the Federal Bar Association, and the American Bar
Assocation, where he serves on the Tort and Insurance Practice Section and the Section on International Law.
George G. Mader. AICP
        George Mader received a B.A. with a major in geography in 1952 fromn UCIA and a Master of City
Planning degree from U.C. Berkeley in 1956. He spent 1958-59 as a Fulbright Scholar at the Technological
University of Delft in the Netherlands studying city planning in Western Europe. From 1955 to 1958 Mr.
Mader was an associate planner on the special staff that prepared the San Mateo County General Plan. From
1959 to 1962 he was senior planner in charge of the current planning division for the San Mateo County Plan-
ning Commission.
        In 1962 Mr. Mader joined Wiliam Spangle and Associates and today is President. As a representative
of the frm, he has served as Town Planner for the Town of Portola Valley since 1965 and for the Town of Los
Altos Hills from 1968 to 1975. He has prepared background studies for general plans, general plans, and
zoning, subdivision and site development regulations. He has performed special studies of slope-density
zoning, and has been instrumental in developing new plans and regulations responsive to geologic and seismic
hazards. He developed detailed plans for transfer of development credits in sensitive hillside areas of the cities
of Claremont and Milpitas.
                                                      A-3
        Mr. Mader has been actively involved in many of the firm's research projects. He was Principal Inves-
tigator for a two-year National Science Foundation study of post-earthquake land use planning and recently
headed a study of the response to seismic and volcanic warnings in the Long Valley area of California. He con-
sulted for a geotechnical firm establishing approaches for rebuilding the earthquake-damaged city of Ech
Cheliff in Algeria and is a member of the project team for the United States-Mexico Earthquake Preparedness
Project to improve earthquake safety in the San Diego-Tijuana border area. Under a National Science Foun-
dation grant, he is documenting the Portola Valley experience in use of geologic information in planning.
        Mr. Mader has participated in many state, national and international committees and workshops as a
spokesman for land use planning to reduce risk from natural hazards. He was a member of the California
Seismic Safety Commission from 1975 to 1984 and chairman from 1979 to 1981. He chaired committees for
the Commission evaluating State requirements for seismic safety elements and the Special Studies Zones Act.
He has served on committees of the President's Office of Science and Technology Policy, the National Re-
search Council, and the National Science Foundation, and also has participated in review groups convened by
the United States Geological Survey. He is currently a Policy Advisory Board member for the Bay Area
Regional Earthquake Preparedness Project.
    - Mr. Mader taught city and regional planning courses for U.C. Extension, Berkeley from 1960 to 1964
 and was a lecturer in the U.C. Department of City and Regional Planning from 1967 to 1970. He is a senior
 lecturer in the School of Earth Sciences at Stanford University where, since 1970, he has taught courses in the
 application of the earth sciences in city and regional planning.
        IMr. Mader is a member of the American Planning Association and the American Institute of Certified
 Planners. Before the consolidation of the American Institute of Planners and American Society of Planning
 Officials, he was a member of both organizations and held offices in the Northern California Section and the
 California Chapter of AIP.
Frank E. McClure
        Frank McClure is a California registered Structural Engineer, Civil Engineer, and Architect. He
graduated from Lowell High School in San Francisco in 1941. He received a B.S. in civil engineering with a
major in structural engineering in 1944 from the University of California, Berkeley.
     X He is an Honorary Member of the national earthquake engineering society, the Earthquake Engineer-
ing Research Institute. He served as its president from 1986 through 1988. He is also a member of the
American Society of Civil Engineers, Structural Engineers' Association of Northern California, Seismological
Society of America, and the International Conference of Building Officials.
        Mr. McClure' is a Senior Structural Engineer Consultant for earthquake engineering at the Lawrence
Berkeley Laboratory, University of California, Berkeley. After serving in the United States Navy, Civil En-
gineer Corps, as Lt. (j.g.) with the Seabees on Okinawa, he returned to San Francisco where he worked for
several consulting structural engineering offices, and public agencies. In 1955, he opened his own consulting
structural engineering office in Oakland, which later grew into the firm of Frank E. McClure and David L.
Messinger, Consulting Structural Engineers.- McClure and Messinger provided professional services in all
 aspects of structural engineering design of public, industrial and commercial buildings, and specializing in
 earthquake engineering. He took a position as University Engineer, University of California Systemwide Ad-
 minstration in 1976 until he joined the Lawrence Berkeley Laboratory in 1978.
        His professional expertise is in the field of earthquake engineering, with specialization in earthquake
 vulnerability assessment, seismic reconstruction, and earthquake loss estimation. He made field investigations
 and prepared reports on earthquake damage caused by the 1952 Kern County, 1954 Eureka, 1966 Parkfield,
 1969 Santa Rosa, 1971 San Fernando, 1975 Oroville, 1978 Santa Barbara, 1980 Livermore, 1987 Wlittier and
 1989 Loma Prieta California earthquakes, and the 1964 Alaska, 1967 Caracas, Venezuela, and 1985 Mexico
 City earthquakes.
         He has served as earthquake damage evaluation consultant to the insurance industry and federal
 agencies. He performed early earthquake loss simulation studies to test the application of earthquake in-
 surance with various deductibles to mitigate earthquake losses.
         He has served as a member of the Scientific Advisory Committee, National Center for Earthquake En-
 gineering Research, State University of New York at Buffalo; the National Research Council, Committee on
 Earthquake Engineering; Department of Energy, Natural Phenomena Hazards Panel; Seismology Code
                                                       A-4
Development Committee,, International Conference of Building Officials; and the State of California, Field
Act Advisory Board to the Office of the State Architect; and Advisory Panels for the Building Seismic Safety
Council.
Earl Schwartz
      Mr. Schwartz began his career with the City of Los Angeles as a Civil Engineering Assistant with the
Department of Building and Safety in 1956. During his 33 years of service, he progressed through the ranks by
competitive examination. He was appointed Chief of the Departmentrs Earthquake Safety Division in 1977,
Chief of the Conservation Bureau in 198 Chief of the Resource Management Bureau in 1994 and Chief of
the Mechanical Bureau in 1988. He was promoted in May of 1989 to his present position of Executive Officer.
       Mr. Schwartz attended the City College of New York where he received a B.S. Degree in Civil Engineer-
ing, graduating in 1956. He moved to California shortly after graduation. Earl is licensed by the State of
California as a civil engineer, structural engineer and a fire protection engineer.
       He is a member of numerous professional associations. Presently, he serves as a Director on the Struc-
tural Engineers Association State Board. He is a member of the Structural Engineer's Association of
Southern California where he is currently Vice-President. He is a member of the State of California Historical
Building Code Board and the Earthquake Engineering Research Institute.
       Earl has been involved with the Los Angeles City Earthquake Hazard Reduction Program for many
years and was responsible for development of the Department's Earthquake Safety Division, serving as its first
Chief. The Earthquake Safety Division is responsible for strengthening earthquake hazardous buildings.
Dr. Lidia Lippi Selkregg
        Professor Emeritus in the School of Public Affairs at the University of Alaska, Anchorage, Dr. Selkregg
received her Doctor of Natural Sciences degree at the University of Florence, Italy, in 1943. She is a Certified
Professional Geologist, AIPG 2060 and a State of Alaska licensed professional geologist.
        From 1971 to 196 she was a Professor of Resource Economics and Planning and Senior Scientist,
Arctic Environmental Information & Data Center at the University of Alaska. From 1968 to 1971 she served
as Planning Consultant/Planning Officer on the Federal Field Committee for Development Planning in
Alaska. From 1961 to 1968 she served as Technical Director of Planning/Staff Geologist for the Alaska State
Housing Authority. From 1958 to 1961 she was Geologist/Geologist/Engineer for U.S. Army Corps of En-
gineers in Alaska. From 1951 to 1958 she was Geologist for the Illinois State Geologic Survey. From 1942 to
1951 she was a Consultant Geologist, Professor of Natural Sciences and Assistant Professor at the University
of Florence, Italy.
        Dr. Selkregg has extensive experience related to the 1964 Alaska earthquake. She '(a) organized, coor-
dinated, and monitored the activities of the Engineering-Geology Evaluation Group that she established on
March 29, 1964, to prepare geologic reports on the effects of the earthquake, including mapping areas of
failure, subsidence, and inundation as they affected Anchorage, Cordova, Seldovia, Seward, and Kodiak; (b)
organized, coordinated, and monitored the preparation and implementation of geologic studies related to dis-
aster assessment and post-disaster planning for Anchorage, Valdez; Seldovia, Cordova, and Kodiak; c)
developed methods for coordination among local, state, and federal agencies and the Office of the Governor
for implementation of redevelopment plans; d) served as geologist, planner, and member of the Anchorage
Planning & Zoning Commission, assembly, and State Coastal Zone Management Council advising several
planning and engineering consultants who have conducted studies on geotechnical hazards including the Na-
tional Academy of Science, the Municipality of Anchorage, and the State of Alaska; and e) served as a member
of the Anchorage Municipal Assembly, instrumental in establishing a geotechnical commission for the city.
        She has published extensively in the fields of groundwater geology, planning, and applied sciences. She
was principal author of:
   The Day the Earth Shook -- Shock and Aftershock. Alaska Academy of Engineering and Science.
      Report No. 3, Anchorage, Ak. (1984).
                                                     A-5
   Seismic Hazard Mitigation: Planning and Policy Implementation -- The Alaska Case. National
       Science Foundation CEEB112632 (1984).
   Planning for Earthquake-Prone Regions, Proceedings of PRC-USA Disaster Mitigation Through
      Architecture, Urban Planning and Engineering, Beijing, China, November 2-6, 1981.
   Urban Planning in the Reconstruction in Human Ecology Volume, the Great Alaska Earthquake of
      1964. National Academy of Science. (1970)
   Effect of Good Friday Earthquake on Anchorage, Alaska, and Urban Reconstruction. American
      Association of the Advancement of Sciences, Alaska Section. (1964)
William Sommers
       William Sommers has spent thirty-five years in local government administration both in the United
States and abroad. He is currently the Commissioner of Public Works for Cambridge, Massachusetts.
       Prior to that assignment he was the Commissioner of Inspectional Services for the City of Boston from
19851to 1987. Mr. Sommers served as municipal manager in Bensalem, Pennsylvania; Franklin Township,
New Jersey; and from 1982 to 1985 as city manager of Englewood, New Jersey, in the New York Metropolitan
area. From 1962 to 1982 he was a foreign service development officer with the U.S. Department of State's
Agency for International Development (AID) in Thailand, Vietnam, the Phillipines and Egypt, emphasizing
local government and development.
       Mr. Sommers holds a B.A. in political science from Middlebury College in Vermont and a master's in
public administration from Harvard's Littauer Center for Public Administration. He also attended the Flet-
cher School of Law and Diplomacy at Tufts University.
       Mr. Sommers has authored some 25 articles on local government and recently served on the Technical
Advisory Committee for the 'Rapid Visual Screening of Buildings for Potential Seismic Hazards."
D. Whiteman
                                                    A-6
                                 APPENDIX B
                   ESTIMATION BASES FOR RISK ANALYSES OF
               TECHNICALLY FEASIBLE LOSS-REDUCTION ACTIVITK
         In order to make socioeconomic evaluations, of loss-reduction measures within an
   earthquake insurance context, one must provide data that at the very least can be used to
   suggest the costs and benefits of these mitigations. This Appendix presents the results of
   analyses performed to estimate
      (I) risk levels (degree of loss) -associated with various levels of seismic (earthquake)
            frequency and intensity,
      (2) dollar values for both implementation costs and conditional loss-reduction benefits
            of analyzed building practices, and
      (3) dollar values for both implementation, costs and conditional loss-reduction benefits
            of analyzed landuse measures.
         In other contexts, assurance from experts may be convincing for the evaluation of loss-
  reduction activities. However, for this project, a more thorough approach was needed, and
  risk analysis is a commonplace insurance practice. Even uncertain risks are provided special
  treatment in a framework that emphasizes quantitative estimates. Moreover, outside the in-
  surance context, failure to provide meaningful estimates for risk analyses of specific loss-
  reduction activities suggests that the proposed measures have not received thorough con-
  sideration -- that, for instance, dramatic instances have been highlighted without thorough
  investigation of the phenomenon.
         Eguchi et al. (1989) emphasized the varieties of risk analyses possible and the uneven
  quality of the models used. Current models of the probability of liquefaction-induced
 ground failure are divergent enough to lead to widely discrepant estimates. Data on building
 losses that are either caused by or associated with liquefaction have not been systematically
 gathered. For some risk analyses, divergences of models used may make little or no dif-
 ference to the results; for others, these divergences may have far-reaching practical implica-
 tions.
        The use of risk analysis to evaluate promising Ioss-reduction activities results in, for
 those mitigations for which current probabilistic models are weak, estimates of risk and risk-
 reduction that are somewhat suspect. These loss-reduction activities lie especially in the lan-
 duse area. For these, we suggest more focused research to develop more suitable models so
 that meaningful risk estimates can be made. For purposes of this project, we use expert
judgment to compensate for current modeling limitations. With respect toi building
                                             B-I
measures, controversies exist over adequacy of models, and divergencies in models
developed could lead to very different results. Since this project does not include the con-
siderable funding needed for evaluating the sensitivities of risk estimates to diverse models,
the estimation bases used here are policy-level only. As the risk analysis report suggests,
there are many possible ways to improve current models, and any risk analysis developed at
this stage must be provisional.
B.1 Expected Annual Loss Basis for Calculation
      The basic method used in Appendices B and C and illustrated in Appendix D is an ex-
pected annual loss method. Benefits of a specific loss-reduction activity are treated as
reduced expected losses. Reduced expected losses are evaluated in terms of the present
value of expected reduced losses over the lifetime of the structure.
      The method used for assessing expected annual losses, in its discrete form, is based on
the following equation
                              max
                         I
                                                                                        (B-1)
                                    1N
                                    -L
         EAL      =
                      I =It
Such that
            is the loss for a given type of structure at intensity I
       IA
            is the annual frequency of occurrence of intensity I
      NI
            is the threshold intensity for damage (here, It = 6.0)
      It
            is the maximum intensity possible (here, Imax = 10.0)
      Im,
            is earthquake intensity (measured in such terms as peak horizontal ground ac-
      I
             celeration, peak horizontal ground velocity or Modified Mercalli intensity)
       For calculation of direct property benefits, one calculates for a given LRM average an-
 nual reduced losses achieved through implementing the specified LRM. Next, one uses a
 real discount factor such as 3 percent and assumes a given time period such as 80 years for
 the loss-reduction. Using a standardized discount formula, one can thus estimate the present
 value of the benefits and compare these with the costs of the loss-reduction measure.
       Since we considered many cases in this project, these methods were developed at the
 University of Pennsylvania into a computer program that also included the analysis of
 benefits and stakeholder considerations indicated in Appendix C. One of many illustrations
 is provided in Appendix D. For reconstruction of specific calculations, the reader may select
                                              B-2
a specific LRM, select a given seismic zone intensity level (Table B-1) and use Table B-5, an
assumed facility life-span and an assumed real discount rate, in order to estimate direct
property benefits to be compared against costs in Table B-5.
B2     Sample Intensity Frequency Estimates for Policy-Level Risk Analysis
       In the absence of elaborate computer modeling for this project, we developed a simple
computerized scheme for modeling various sets of estimates of the frequency of Modified
Mercaili Intensity. As indicated in Eguchi et al. (1989), elaborate modeling would require
consideration of alternative source zone models, attenuation functions, relative site response
factors, and intensity conversion equations as well as the correlation of ground motion es-
timates for special sites with UBC designated seismic zones (which are determined without
respect to relative site response factors).
       The simple model used here assumes that the frequency, N 1, of a given Modified Mer-
calli shaking intensity can be determined in terms of the following equation:
           N, = exp (bI + a)                                                          (B-2)
in which     b = the slope coefficient, which directly represents the ratio of frequencies of
                   lower to higher intensities
             a = the volume coefficient, which relative to a specific b-value represents the
                 relative frequency of specific intensities
             I = Modified Mercalli Intensity (defined in terms of strong ground motion
                 critenra).
This model provides an adequate basis for poicy-level risk analysis.
       The seismic hazard zones of interest in this risk and decision analysis are 2 (or 2*), 3,
and 4. As a first crude approximation, one may assume that the (bedrock) intensities for
each of these zones with a 10% chance of non-exceedance in 50 years '(or roughly a 475 year
return interval) are VII, VIIl, and perhaps IX respectively. These veiy roughly correlate
with peak horizontal accelerations of 0.1g, O.2g, and 0.4g. However, there may be a wide
variation in the actual intensities expected at different sites within these zones as functions of
proximity to active faults, local geologic effects, and a variety of other local wave propaga-
tion effects. Moreover, based on previous studies, we have allowed the b-value to range from
-1.1 to -1.5, the latter being a more typical value for worldwide seismicity and the former sug-
                                                 B-3
gesting proximity to a fault system with high magnitude potential. (The rule of thumb on p.
30 of Algermissen and Perkins, 1976, roughly corresponds to a b-value of -1.5.)
      Based on these considerations and tested in terms of previous intensity estimates,
(especially Taylor, Atkisson and Petak, 1981), we have developed Table B- 1 to derive a range
of possible intensity frequency estimates for the various zones of interest. As compared to
Taylor, Atkisson, and Petak (1981), the values proposed here are conservative. As compared
to estimates in BSD (1989, p. 22), Supporting Document, the estimates provided here are
also conservative. For seismic zone 4, our estimates are more conservative except at inten-
sity X. BSD estimates tend to be low-to-intermediate relative to our seismic zone 3 es-
timates. For seismic zone 2, BSD estimates tend to be intermediate except that they are
lower for intensities VI and VII. The range of values proposed in Table B-1, however, allows
for sensitivity analyses of possible outcomes.
                               TABLE B-1
              SUMMARY TABLE FOR DIVERSE INTENSITY ESTIMATES
                                                 '500                             b
            Seismic Zone(s)
                                                                                -1.5
                                                 7.0
                        2
                                                                                -1.2
                                                 7.5
                2* or 3
                                                                                -1.5
                                                 7.5
                2* or 3
                                                                                -1.5
                                                 8.0
                2* or 3
                                                                                -1.2
                                                 8.0
                2* or 3
                                                                                -1.2
                        3                        8.5
                                                                                -1.5
                                                 8.5
                        3
                                                                                -1.1
                                                 9.0
                    3 or 4
                                                                                -1.5
                                                 9.0
                    3 or 4
                                                                                -1.1
                                                 9.5
                        4
                                                                                -1.1
                                                10.0
                        4
                                                                                -1.5
                                                 9.5
                        4
                        1500 is the shaking intensity expected every 500 years. b is the value
            Note:
                        provided in equation (B-i) in order to derive 'a"and hence other inten-
                        sity estimates.
                                                       B-4
B3    Estimates of Costs and Conditional Benefits forAnalyzing BuildingPractice LRhs
      Given estimates of intensity frequencies for the different macrozones, to evaluate
building practice LRMs it is necessary to
      o formulate them in a risk and decision framework,
      o estimate costs, -and
      o estimate benefits conditional on the occurrence of specific intensities.
      The formulation of loss-reduction activities has. been made in terms of contrasts be-
 tween structural types given the status quo and the mitigated structure relative to building
practice LRMs specified and numbered in Table 3-2. For instance, activities numbered 100
through 160 involve implementation of seismic code designs. To illustrate these mitigations,
we have selected five representative types of structures for which the loss-reduction activity
might be applicable. For sensitivity analysis purposes, we also include the more generic
categories from Wiggins and Taylor (1986), which suggest that less seismically resistant
buildings tend to perform more poorly than is indicated by some building loss algorithms. In
each case, we contrast the status quo (unmitigated) with the mitigated situation. Types of
structures have been selected because they either are potentiall hazardous structures or
they are residential sector structures. Subcases considered also incorporate possible dif-
ferences in costs for seismic design and retrofit in diverse seismic zones.
      Tables B-2, B-3, and BA are used to develop and document Table B-5, which contains
          o a full listing of representative subcases for each loss-reduction activity,
          o average cost estimates for implementation, and
          o estimated benefits at different intensities.
Table B-2 contains estimated seismic retrofit costs for various cases. Table B-3 contains es-
timated conditional benefits for various subcases with respect to seismic design. Table B-3
contains both status quo and mitigated new design estimates of losses expected at different
intensities. Table BA contains both status quo and mitigated (retrofit) estimiates of losses ex-
pected at different intensities. Table B-5 thus draws on these tables to develop cost and con-
ditional estimates for proposed building measures, including subcases relating to building
types and seismic zones. All estimates in Tables B-2 through B-5 are documented in foot-
notes (at the end of this appendix).
                                             B-S
                                                            TABLE B-2
               ESTIMATED RETROFIT COSTS FOR VARIOUS BUILDING PRACTICE LOSS-REDUCTION ACTIVITIES
                                                                                                                Retrofit Cost
                                                                  Average
                                                                              Direct Retrofit Costs
                                                                 Replace-                                           X of
                                                    Seismic
                               Stvstems
               Struertural
                                                                                           S/f tz
                                                                 ment Cost Sources/                              Replacement
                                                     Zone
                                                                                                  lie^
                                                                 .IS/ft2
                                Retrofit System                                                                     (Cost)
     Oriinal Svstem                                                          Notes     Range
                              Partially Rein-                                                                        40
                                                                                         5 - 40
                                                       2*              50    1,2                        20
     Unreinforced
                                                                                                        20           33
                                                                                         5 - 50
                                                       3               60
                              forced Masonry
     Masonry (URM)
                                                                       65                4 - 72
                                                       4                                                15           23
     (Includes Infill
     wallts)
                                                                             3''4                       15           23
                                                       2*
     Non-Ductile Con-                                                                           40
                                                                       65              10
                              1. Semi-Ductile                                               -
                                                       3               70                               15           21
                                                                                                45
                                                                                       10
                                 Concrete
     crete Frames                                                                           -
                                                                                                50
                                                                                       10   -           15           20
                                 Frames, or            4               75
     (Cast-In-Place)
                              2. Concrete Shear
                                 Walls
                                                       2*                                                3           10
                                                                             5,6,7       1 - 25
                                                                       30
                              Improved Concrete
     Concrete Tilt-Up
                                                       3
                              Tilt-Up Shear                            30                                            10
     Shear Wails
                                                                                                                      8
                              Walls (Post-1976)        4               35
     (Pre-1976)
                                                                                                       15
                                                       2*                                                            25
                                                                                       10 - 40
                                                                             8,9
     Pre-Cast Concrete        1. Semi-Ductile                          60
                                                       3                                               20
                                                                                       10 -45                        33
     Frames --                                                         60
                                 Concrete
                                                                                                                     30
                                                                                                       20
to                                                     4                                    - 50
                                                                       65
                                 Frames, or                                            10
     Non-DuctIle
                              2. Concrete Shear
                                 Walls
                                                                                                                         2
                                                                                      0.50-1 .50
                                                                             10,11
                                                     2*,3,4
                              graced/Removed                           50
     Unbraced Parapets/
     Ornamentation            Parapets
     (URM, RN,
     Concrete, ete)
                                                     2*,3 , 4
     Dwellings (Wood                                                         12
                                                                       50
     Frame + Others)
                                                                                                        1 .00        2
                                                                                      1.00-1.50
     Unanchored to            Anchored
     FoundatIon
                                                                                                        1.00
                                                                                      0.50- 1 .00                    2
                              Wall Reinforced
     Cripple Wall
                              at Foundation
                                                                                      2. 00 - 3 .0 0                 6
                              Chimney Reinforced,
     Unreinforced
                              Removed or
     Chimney
                                                                                      3.00-5 .00        3.00
                              Rep.laced
                                                                                                       20.00        40
                                                                                       15 - 25
                              Story Over Garage-
     Story Over Garage-
                              Reinforced
     Unreinforced
                                                                                                                     3
                                                                                      0.50- 1.50        1. O
                                                                                                           0
                              Mobile Homes                             30    12
                                                     2*,3,4
     Mobile Homes
                              (Braced)
     (Unbraced)
                          i
     I                                                          J..a                                            1
                                                                     TABLE B-3
                             CONDITIONAL SEISMIC BENEFITS FOR NEW DESIGN BY SEISMIC ZONE
                                                                                         ~Damage                     L_ ss-_
                                                                                                                      o
                                                                                                   -
                                                                                  ==
                                                                                                       I                                   Loss
                                                                                                               New Design
                                                                                No New Desjqn
                                                    seismic
            Strueturel Systems
                                                                                                                                         Reduction
                                                                                                           Damage I
                                                                                      =
                                                                             Damage
                                                     Zone
                            with
          Without
                                                                                                                                 tion (Repl.    Cost) .
                                                                                                            actor!Ass
                                                              MMI
    _sSelsmic                                                 "_                        Assumption
                DesignlI              Desisn=
                           Seismic                                           _Factor_
                                                                                                                                             3 ,0
                                                                                                                               (3)
                                                      3                                                      1.0
                                                                                4.0         (2)
                                                               6
                           Reinforced
    Unreinforced
                                                                                                                                             8.0
                                                                                                             3.0
                                                                               11.0
                                                               7
                           Masonry
    Masonry
                                                                                                                                            26.0
                                                                                                             8.0
                                                               8               34.0
                                                                                                                                            40.0
                                                                                                            16.0
                                                                               56.0
                                                               9
                                                                                                                                            50.0
                                                                                                            27.0
                                                                               77.0
                                                              10
                                                       2*                                                                      (4)
                                                                                                             2.0
                                                                                4.0         (2)
                                                               6
                                                                                                                                             5.0
                                                                                                             5.5
                                                                               11.0
                                                               7
                                                                                                            12.0
                                                               8               34.0
                                                                                                                                            33.0
                                                                                                            23.0
                                                                               56.0
                                                               9
                                                                                                                                            40.0
                                                                                                            37.0
                                                                               77.0
                                                              10
                                                       3                                                                                     0.6
                                                                                                             1.0
                                                                                1.6                                            (6)
                                                                                            (5)
                                                               6
    Non-Ductite            Ductile
                                                                                                                                             2.2
                                                                                5.0                          2.8
                                                               7
                           Concrete
    Cast-In-Place
                                                                                                                                             7.4
                                                                                                             5.6
                                                                               13.0
                                                               8
    Concrete Frame         Concrete
                                                                                                                                            13.8
                                                                                                            1 .2
                                                                               15.0
                                                               9
W                                                                                                                                           21 .4
                                                                                                            18.6
                                                                               40.0
                                                              10
                                                       2*                                                                                    O, 2
                                                                                                              2 .1             (6)
                                                                                2.3
                                                               6                            (7)
                                                                                                                                              2.5
                                                                                                              5.0
                                                               7                7.5
                                                                                                                                              7.0
                                                                                                            1 o. 0
                                                               8               17.0
                                                                                                                                            16.0
                                                                                                            16. 0
                                                                               32 .0
                                                               9
                                                                                                                                            2 2.0(
                                                                                                            24.0
                                                                               46.0
                                                              10
                                                                                                                                             3Z.2
                                                                                                             1.0
                                                                                4.2                                            (9)
                                                       3                                    (8)
                                                               6
                           Concrete
    concrete
                                                                                                                                             7.6
                                                                                9.6                          2 .0
                                                               7
                           Tilt-Up
    Ti l t-Up
                                                                                                                                            10.9
                                                                                                             7.3
                                                               8               18.2
    Buildings              Buildings
                                                                                                                                            17.8
                                                                               31.6                         13.8
    wio Seismic                                                9
                           w/seismic
                                                                                                                                            27.2
                                                                                                            22 .0
                                                                               49.2
                                                              10
                                                       2*                                                                                    3.5
                                                                                                                           ( 1)
                                                                                                             1.5
                                                                                           (10 )
                                                                                 5.0
                                                               6
                                                                                                                                             7.6
                                                                                                             4.0
                                                               7               1 1.6
                                                                                                                                            11.4
                                                                                                            10.6
                                                                               22.0
                                                               8
                                                                                                                                            20.0
                                                                                                            18.5
                                                                               38.0
                                                               9
                                                                                                                                            30.0
                                                                                                            28.7
                                                                               60.0
                                                              10
                                                                                                                               (6)           2.0
                                                       3                                                     1.0
                                                                                           (12)
                                                                                3.0
                           Ductile                             6
    Non-Ductile
                                                                                                                                             4.0
                                                                                                             2.5
                                                                                6.5
                                                               7
                           Concrete
    Precast Concrete
                                                                                                                                            10.0
                                                                                                             5.6
                                                                               15,3
                                                               8
    Frames                 Frame
                                                                                                                                            21.0
                                                                                                            11.2
                                                                               32.0
                                                               9
                                                                                                                                            33.0
                                                                                                            18.6
                                                                               52.0
                                                              10
                       I                        I
                                       r                            zv~cz.
                                                                            TABLE B-3
                                                                           (Continuation)
                                                                                                       Damage = Loss                  I
                                                                 I            I
                                                                                                                                      I
                                                                                                            I1
                                                       Seismic                                                                              Loss
                                                                                                                     New Design
                                                                                   No New Desian
                       Structural Svstems
                                                   1 zone                     bDa5mage I                                                  Reduction
                                                                                    rDaage
                                       With
                     Uithout
                                                                                                                           Assumption (% Reel.
                                                                     MMI
                                                   I             I                                                                               Cost)
                                                                                                                     or_
                                                                                    ctor_   AssumptionFa_
                                  Seismic Design
           Seismic Design
                                                                      6             4.5
                                                          2*                                                      2 .0         (6)            2.5
                                                                                                  (13)
                                                                      7             9.5                           5.0                         4.5
                                                                      8                                          10.0
                                                                                   22.0                                                      12.0
                                                                                                                                             24.0
                                                                      9            40.0                          16.0
                                                                                                                                             38.0
                                                                     10                                          24.0
                                                                                   62.0
                                                                      6                             (14)          0.8
      Wood Dwellings                                                                                                                          2.0
                                  Wood Dueltings                                    2.6
                                                        2*, 3                                                               I(14)
                                                                      7
                                  Anchored and                                      4.8                           1.5
      Unachored and/or                                                                                                                        3.5
                                  Reinforced                          8            11.0                           4.7                         6.5
      Unreinforced
                                                                                                                                             11.0
                                                                      9                                           9.2
                                                                                   19.7
                                                                                                                                             22.0
                                                                     10                                          19.8
                                                                                   39.8
                                                                                                                              (;15)           4.0
                                  Mobile Homes-                                                                   0.8
                                                                      6                            (15)
                                                                                     ' .7
      Mobile. Homes-                                    2*, 3
                                                                                   11.0
                                                                      7                                                                       8.0
      |Unanchored and/            Anchored and                                                                    3.0
                                                                      8                                                                      12.0
                                  Reinforced                                       17.4                           6.0
      jor Unreinforced
                                                                      9            30.0                          16.0                        15.0
                                                                                   48.0
                                                                                   1                                                         20.0
                                                                     10                                          28.0
wo
too
                                  a= 2                     2
      I=1                                                             6                            (16)        0.06                           0.07
                                                                                                                              (16)
                                                                                   i0.13
                                                                                    4.5
                                                                      7
       (Commercial)               (Commercial)                                                                 0.9                            3.6
                                                                      8            79.4                        6.9                           72.5
                                                                                  100.0
                                                                      9                                       28.2                           71.8
                                                                     10                                      100 . 0
                                                                                  100.0                                                       0.0
                                                                      6                                                                       0.18
                                  0s 2                                                                                        (16)
                                                           2                        0.*46           (16)          0.28
                 I
      10 =
                                                                      7
       (Residential)              (Residential)                                                                   6.5                         8.0
                                                                                   14.5
                                                                      8                                                                      16.3
                                                                                                                 13.3
                                                                                  i29.6
                                                                      9            63.2                          27.4                        35.8
                                                                                  100.0
                                                                     10                                                                      43.8
                                                                                                                 56.2
                                                                                                                                              0.07
                                                                      6
                                  0-3                      3                         0.13                         0.06
                                                                                                    (16)                      (16)
                 11
            s
      10
                                                                      7              4.5                          0.6                         3.9
      (Commercial)                (Commercial)
                                                                                                                                             76 . 3
                                                                                    79.4
                                                                      8                                           3.1
                                                                      9           100.0                           6.7                        93.3
                                                                                  1 00. 0
                                                                     10                                          14.5                        85.5
                                                                                                                                              0.26
                                                                                                    (16)
                                                           3                        0.46                          0.20        (16)
                                                                      6
                                      3
                                  Q
      (ResIdential)
                                                                                                                                             11.5
                                                                                   14.5
                                  (Residential)                                                                   3.0
                                                                      7
      [(Residential)
                                                                                   29.6                                                      23.7
                                                                                                                  5.9
                                                                      8
                                                                                   63.2                                                      51.5
                                                                                                                 11.7
                                                                      9
                                                                                                                                             76.6
                                                                                  100.0                          23.4
                                                                     10
                                                               TABLE B-4
                                       CONDITIONAL SEISMIC BENEFITS FOR RETROFIT BY SEISMIC ZONE
             StructS                                                                                                ...
                                                                                                    . Damae =              . L. SS
                                                                                                                              O                  s
                                 meg                   Seismic
                                                        Zone                                       As is              Retrofit              Reduction
                                                                                                                                   --
        Original                 Retrofit                                        MMI     Damage    Assumption/ Damage Assumption/           (% Rept.
                                                                                                              --- ctorX __Source .
                                                                                          _FactorX .__Source    Fa                            Cost)
                                                              _____       ____    ____     ______
                                                        2*,3,4                                                                                 1.2
                            Partially Rein-                                       6        ,4.0      (2)           2.8      (3)
     Unreinforced
                            forced Masonry
     Masonry (URN)                                                                7        12.0                    8.0                         4.0
                                                                                  8        34.0                   17.0                        17.0
                                                                                  9        56.0                   30.0                        25.0
                                                                                           77.0
                                                                                 10                               46.0                        30.0
                                                                                                                                               0.6
                                                         3,4                      6         1.6      (4)           1.0      (5)
     Non-Ductile            a) Semi-Ductile
     Cast-in-Place             concrete                                           7         5.0                    3.4                         1.6
                                                                                                                   7.0                         6.0
     Concrete Frames           Frames                                             A        13.0
                               or                                                 9        25.0                   14.0                        11 .0
                            b) Concrete                                          10        40.0                   24.0                        16.0
                               Shear Walls
                                                                                                                   1.9      (5)
                                                         2*                       6         2.3      (6)                                        0.4
                                                                                                                   5.4                         2.1
                                                                                  7         7.5
                                                                                                                                               6.0
                                                                                  8        17.0                   11.0
w                                                                                 9        32.0                   20.0                        12.0
                                                                                                                                              16.0
                                                  .                              10        46.0                   30.0
'0
                                                                                                     (7)           1.0      (a)                3.2
     Concrete Tilt-Up       Improved                     3,4                      6         4.2
     walt Buildings         Concrete                                              7         9.6                    2.0                         7.6
     (Pre '76 UHC)          Tilt-Up Wall                                          8        18.2                    7.3                        10.9
                                                                                                                                              17.8
                            Buildings                                             9        31.6                   13.8
                                                                                                                                              27.0
                                                                                 10        49.0                   22.0
                                                                                                                                                3.5
                                                                                  6          5.0     (9)           1.5      (10)
                                                         2*
                                                                                  7        11 .6                   4.0                          7.6
                                                                                  8        22.0                   10.6                        11.4
                                                                                                                                              20a.0
                                                                                  9        3 8. 0                 18.S
                                                                                                                  28.7                        30.0
                                                                                 10        60.0
                                                                                                     (11)          1.0      (5)                2.0
                            a) Semi-Ductile       |      3,4              |       6         3.0
     Non-nuctile
                                                  I
     Pre-Cast                  Concrete                                           7         6.5                    3.4                         3.0
     Concrete                  Frames or                                          8        15.3                    7.0                         8.0
     Frames                 b) Concrete                                           9        32.0                   14.0                        18.0
                                                                                           52.0                   24.0                        28.0
                               Shear                                             10
                               Walls
                                                                                                                   1.9      (5)                2.5
                                                          2*                      6         4.5      (12)
                                                                                  7         9.5                    5.4                         4.0
                                                                                  8        22.0                   11.0                        11.0
                                                                                  9        36.0                   20.0                        16.0
                                                                                                                     0
                                                                                           62Z ___________6
                                                                                             0
                                                                                 10o
     ! __________________                                                                                                _ __     ___ __=     32.0
                                                                                             030.
                            ___________________       _______         _
                                                                                   TABLE B-4
                                                                                 (Continuation)
                                                                                       I                                                    Loss
                                                                                                                       Loss1
                                                                                                          Damsae
                                                                    Seismic |
                     Structural Systems                                                                            =
                                                                                       I
                                                                            |                                                             Reduction
                                                                                                                    Retrofit
                                                                                                As Is
                                                                     Zone
                                    I                                                                                                     (X Rept.
                                                                                                Assumption/ Damage Assumption/
                                                                                        Damage
                                                                            |""I
                                            Retrofit
            original
                                                                                                                                            Cost)
                                                                                                            FactorX
                                                                                                  Source
                                                                                       |FactorX
                                                                            |                                          Source
                                            .
                                    |
                                                                                       I                                                      1.8
                                                                                                                                  (13)
                                                                                                           (13)            0.8
                                                                     2*,3,4 |     6            2.6
                                        Wood Dwellings
     Wood Dwellings
                                                                            I                                                                 3.3
                                                                                                                           1.5
                                                                                  7            4.8
                                        Anchored and
     -Unanchored and
                                                                                                                                              6.3
                                                                                                                           4.7
                                                                                             11.0
                                                                                  8
                                        Reinforced
     Unreinforced
                                                                                                                                             10 .5
                                                                                                                           9.2
                                                                                  9          1 9 .7
                                                                                                                                             20. 0
                                                                                                                          19.8
                                                                                             39.8
                                                                                 10
                           I~~~~~~~~~~~~~~                                                   1979i1.
                                                                                                                                  (14)        4.0
                                                                                                                           0.8
                                                                                  6           4.7          (14)
                                                                     2*3, 4i
                                        Mobile Homes
     Nobile Homes -
                                                                                                                                              8.0
                                                                                                                           3.0
                                                                                  7          11.0
                                        Anchored and
     Unanchored and
                                                                I                                                                            11.5
                                                                                                                           6.0
                                                                                             17.4
                                                                                  8
                                        Reinforced
     Unreinforced
                                                                I.                                                                           14.0
                                                                                                                          16.0
                                                                                             30.0
                                                                                  9
                                                                I            I
                                                                            &
                                                                       |
                                                                                                                                             20.0
                                                                                 10          48.0                         28.0
                                                                            |
                                                                             I
                                                                I0 3,4
                                          xZ
     0=1                                                                                                                                      0.07
                                                                                                                                   (15)
                                                                                                           (15)            0.06
                                                                                  6          0.13
                                                                             I
                                                                I                                                                             3.6
                                                                                                                           0.9
                                                                                             4.5
                                                                                  7
                                        (Commercial)
     (Commercial)
I-
                                                                                                                                             72.5
                                                                                                                           6.9
                                                                                            79.4
                                                                                  8
0~
                                                                                                                          28.2               71.8
                                                                                  9        100.0
                                                                                                                                              0.0
                                                                                                                         100.0
                                                                                 10        100.0
                                                                I                                                                             0.07
                                                                                  6                                                (15)
                                                                                                                           0.06
                                                                                                           (15)
                                                                                             0.13
                                                                      4
                                        013
                                                                I                                                                             3.9
                                                                                                                           0.6
                                                                                             4.5
                                                                                  7
                                        (Commercial)
     |(Commerciat)
                                                                                                                                             76.3
                                                                                                                           3.1
                                                                                            79.4
                                                                                  8
                                                                                  .
                                                                                                                                             93.3
                                                                                                                           4.7
                                                                                  9        100.0
                                                                                                                                             85.5
                                                                                                                          14.5
                                                                                 10        100.0
                                                                I                                                                  (15)       0.18
                                                                                             0.46          (15)            0.28
                                            IO = 1      0       1      3          6
                                            2               s
                                                                                                                                              8.0
                                                                                                                           6.5
                                                                                   7        14.5
                                    | (Residential)
     |(Residential)
                                                                                                                                             16.3
                                                                                  a                                       13.3
                                                                                            29.6
                                                                                                                                             36.8
                                                                                                                          27.4
                                                                                  9         63.2
                                                                                                                                             43.8
                                                                                                                          56.2
                                                                                 10        100.0
                                                                i                                                                             0.26
                                                                                                                                   (15)
                                                                                                           (15)            0.20
                                                                                  6          0.46
                                                                      3,4
                                        0a 3
     Q0= 1
                                                                                                      I
                                                                I                                                                            11.5
                                                                                                                           3.0
                                                                                            14.5
                                                                                  7
                                        (Residential)
     (Residential)
                                                                                                      I                    5.9               23.7
                                                                                  8I        29.6
                                                                I                                     I                                      51.5
                                                                                                                          11.7
                                                                                            63.2
                                                                                  9
                                                                                                      1                                      76.6
                                                                                                                          23.4
                                                                                 10        100.0
                                                                            |
                                _
      __________________
                                                                                          TABLE B-5
                                                   COSTS AN?) CONWTIONAL BENEITS FOR BUILDING MEASURES ANALYZED
                         T                                                                                                                ESTIMATED AVERAGE __
                                                                                                                                           _ _ __
                                                                                                                   VERAGE --
                                                  -_
                                                                                                                                           LOSS REDUCTION
                                                                                                                 COST T0
      table
                                                                                                                                        1% oeplacowent
                                                                                                                          SOURCE/                       Cost)                  SOUN~e/
                                                                                 CONDITION AFTER                 IMPLIt
       3.2     2EISMIC                  CONDltlON SEtORE
                                                                                                                                                Al Mnl                         COMMENT
                                                                                                                    MENt  COMMENT
                                                                                 IMPLEMENTATION
                                         IMPLEMENTATION
       i        ZONE
                                                                                                                                            IvIL IM1111 IX I '
                                                                                                                                    Vl
                                                                                                                 (
                             __ _._
                              .CL                                                                         _
                                                                                             _   _
                                              _    _   _   _   __
                                                                                                                                                     76                 36
                             o                                                                                                      0.1      4                   93
                                                                    o a 3 (Commercial)                              3                                                           table
                                 I (Commercial)
                 23
       110,                      a
                                                                                                                                             a       26          40
                                                                                                                                    3                                   50       1-3
                                                                                                                           (1).
                             Unreinforced Mesonry                   Reinforced mhnonry                              5
       160
                                                                                                                                             2        7
                                                                                                                                    0.6                                 21
                                                                                                                    3                                            14
                                                                    Ductile Concrete Frame                                 (2)
                             Non-Ductile CIP cone Frame
                                                                                                                                                     10
                                                                                                                    3                        4                          33
                                                                                                                                                                 21
                                                                                                                                    2
                             Non-Doutile Preeast Cone Framelouctile Concrete Frame
                                                                                                                                             a                          27
                                                                                                                                                     1
                                                                                                                    2                                            Ia
                                                                    Tilt-up with Sleimic                                            3
                             Tilt-up - so Seismic
                                                                                                                                                      6
                                                                                                                    2
                                                                    Wood Duelling. - Anchored                                                                    11
                             Wood Dwelling. - Unenchored                                                                                                                22
                                                                                                                                    2
                                                                                                                                    0.3l 12
                                                                                (Residential)                                                                           [rr
                                                                                                                                                     24
                                                                    a .3
                             O                                                                                      2                                            5Z
                                     1 (Retldential)
W
                                                                                                                                    2                22                 40
                                                                                                                                                                 33
                                                                    Partially Reinforced Masonry                                                                                Table
                 2*                                                                                                 3
                             unrainferced Masonry
       100,.
t-A
                                                                                                                                                                 16              '-3
                                                                                                                                                  7
                                                                                                                                    0.2                                 22
                                                                                                                                             2.5
                                                                    Partially Ductile Cone Frame                    2
                             Nonh-uetile CIP Cone Frame
       150
                                                                                                                                             4.5 12              24     31
                                                                                                                    3               2.S
                                                                    Parttilly
                             Non-Ductile Precast Cone Frame                            Ductile Cone      Freme
                                                                                                                                                                 20     30
                                                                                                                                             T.5 11
                                                                                                                    2
                                                                    Tilt-up with seiamic                                            3.5
                             Tilt-up - we Seimmic
                                                                                                                                                  A                     22
                                                                                                                                             3                   11
                                                                                                                                    2
                                                                                                                    I
                             Wood Dwellings - tinnnehored                                   - Anchored
                                                                    wood Dwellings
                                                                                                                                             a   1i                     44
                                                                                                                                                                 36
                                                                                                                                    0.2
                                                                    Oa
                             q * I (Residential)                                                                    I
                                                                          2 (Rasid-ntial)
                                                                                                                                             3.6 73                      0
                                                                                                                                    0.I                          72
                                                                                                                    2
                             O   I (Cummarcial)                         a Z (Commercial)
                                                                    Q
                                                                                                                                                                  4.5 6
                                                                                                                    I               1.0                                          (4)
                             Partially Neinforeed Maconry           Rein frorced eMaonry
                                                                                                                                                             ;
       120
                                                                                                                                                 5                3.0     5
                                                                                                                    I                        1
                                                                                                                                    0.5                  1
                                                                                                                           (3)
                                                                    Ductile concrete Frame
                             Partially Duetile Cone Frame
                                                                                                                                                                          5
                                                                                                                                                                  2.0
                                                                                                                    0.5             0.3
                                                                    improved Tilt-up
                             Tilt-up
                                                                                                                                                                 25              (5)
                                                                                                                                                 17                      s3
                                                                                                                                             4.0
                                                                                                                                    1.2
                                                                                                                   25      Tablt
                             Unreinforeed Wasonty           Partially Reinforced Masonry
               3, 4                                                                                                                                                              *nd
                                                                                                                                    0.6                                  16
                                                                                                                                                                 11
                                                                                                                   20       S-2              1L6
                             Non-Ductlte CIP Concrete Frame Semi-Ductile Fromelshear Watl
       190
                                                                                                                                                                                Table
                                                                                                                                                                         25
                                                                                                                                                                 18
                                                                                                                                             3.0
                                                                                                                   30               2.0
                             Non-Ductile Preast Cone Frame Semi-Ductile Fremo/shear Woll
                                                                                                                                                                         2?      u-4
                                                                                                                                             7 6 I11             Ia
                                                                                                                    9               3. 2
                                                            improved Tilt-Up
                             T.llt-Up (pre'76)
                                                                                                                                             36 713                        a
                                                                                                                                                                 77
                                                                                                                                    0.1
                             q * I (Commercial)                                                                    20
                                                            a w 2 (Commercial)
                                                                                                                                                                         30
                                                                                                                                             4.0
                                                                                                                   40                                            Z5
                                                                                                                                    I.2
                                                            Partimlly Reinforced Masonry
                             Uaprponforeed Masonry
       170
                                                                                                                                                                         16
                                                                                                                                                                 12
                                                                                                                                                      6
                                                                                                                   23                        2.1
                                                                                                                                    0a4
                             Non-Ductile CIP Concrete frame Semi-Ductile FramelShear Malt
                                                                                                                                                                 16
                                                                                                                   25                        4.0     11                 30
                                                                                                                                    2.5
                             Non-Ductile Precast Cone Frame semi-Ductile FrametShear Watl
                                                                                                                                                                 20
                                                                                                                   1a               3.2                                 30
                                                            Improved tilt-Up
                             lilt-Up                                                                                                         3.6 73                       0
                                                                                                                                                                 72
                                                                                                                                    0.1
                                                                                                                   20
                             a * 1 (Comwercial)             O a 2 (commercial)
                         -                                                                           -
                                                                                   -
                                                                   TABLE B-5
                                                                  (Continuation)
                                                                                     AVERAGE                    ESTIMATED AVERAGE
     Table                                                                           COST TO                     LOSS REDUCTION
      3.2  SEISMIC           CONDITION SEFORE                CONDITION AFTER         INPLE-   OUNCh            CZ Replacement cost)               SOURCE/
       a    ZONE              INPLEMENTATION                 IMPLEMENTATION             PENT CONNENT                 At MNI *                     COMMENT
                                                                                                                    yJ1 Vill I x
                                                                                     .        PXC)
     230             Unreinferced Peropot Waite     Reinforced/Removed
             4                                                                            2          Table   0.2    0.7       1.7    2.8    3.6      (6)
                                                       Parapet Vells                                  0-2
             2,                                                                                                          21
      170            Unreinfereed Maeonry           Partially Reinforced Masonry         21            (9)   2.0                    31     36        (a)
                                                                                                                    3
                     Mon-Ductile CIP Concrete Frame Semi-Ductile Cone Frae-              12                  0.6                    15     21
                                                                                                                          O
                                                       Sheer Wall
                     Uon-Ductile Preceat Cenc Frome Semi-Ductile Conc Frame/             14                  3.0    5     13        21     36
                                                       Shbear Waill
t,                   Tilt-Up                        Improved Tilt-Up                      6                  3.2    6     12        21     33
                     a * 1 (Commerciat)             O * 2 (Commercial)                   20                  0.1          73        72      0
                                                                                                                    4
..
     1 30.
                                                                                                                                     I
     140.    2,3.4   Weed fmelling, Unanchered      Wood Duelling - Anchored              2          (10)    1.5     2.5 5                 iS       (11)
                                                                                                                                           TY
                     a                              O * 3 (Residential)
     200.                I (Resldential)                                                  2           and    0.3    12   24         52
     210,                                                                                            Table
     220                                                                                              *2
             4
     240             Unenheored Woter Nesters       Strapped/Anchored voter Neater        0.2         (13)   0.01   0.1       0.5    1      2       (12)
     250e    3,4     Unanchered Equipment           Anchored Equipment                    2.0         (14)
     260
       The approach taken here permits the general loss-reduction activities to be disag-
gregated into subcases. The socioeconomic analysis thus provided illustrative ratings of
these disaggregated subeases and aggregated them again differently based on these ratings.
Likewise, public policy and legal analyses yielded more diverse combinations of subcases
than those initially proposed from an engineering standpoint.
       Many qualifications need to be made of the results here. First, as indicated in Eguchi et
al. (1989), there is no single universally accepted scheme for estimating losses at specific in-
tensities.. The conditional estimates produced here could be compared to estimates
produced by other schemes in order to determine further the sensitivity of results to diverse
estimation methods. Second, the procedures used here employ only mean estimates of costs
and conditional benefits. As, a result, the scatter among possible cases is ignored. The treat-
ment of outliers or cases with special circumstances, such as clear cases in which retrofits can
be achieved more economically, may be ignored. In view of these and other considerations
(many of which are discussed in the project risk analysis report), the risk analysis results
should be regarded as being chiefly for policy-level purposes.
BA    Illustrative Decision Alternatives to Analyze Landuse LRMs
      As mentioned earlier,, it is difficult to develop seismic risk estimation models for lan-
duse measures. Data tend to be lacling for assessing the likelihood and severity of given
hazards (except perhaps for the occurrence of surface fault rupture in well-defined fault
zones of deformation) and for estimating the degree of loss from these hazards. Moreover,
unlike building measures, landuse measures often involve real estate considerations other
than structural replacement and/or retrofit costs. For these reasons, the alternatives
presented here will be merely for current policy-level analyses. Risk and decision analyses of
these alternatives may at least suggest conditions under which various landuse measures may
be warranted in socioeconomic terms (such as by virtue of community liabilities that may
otherwise be incurred should such measures, not be adopted).
      Table B-6 summarizes representative landuse measures evaluated in seismic risk and
decision analyses. These parallel to a large extent those activities identified in Section 3;
however, the loss-reduction activities identified in Section 3 have been listed in Table B-6 in
order to develop specific risk and decision outputs. In addition, the view in Section 3 that an
Alquist-Priolo Act can be extended to potential ground failures other than surface fault rup-
ture has been broken down into the three major sources of ground failures examined here:
liquefaction, landslide, and faulting. Results of risk and decision analyses can be comr bined
to consider measures that incorporate all three sources in one measure.
                                             B - 13
                              TABLE B-6
                  REPRESENTATIVE L4NDUSE MEASURES
             FOR POLICY-LEVEL RISK AND DECISION ANALYSIS
Number Brief Description
1000    Purchase (if necessary) existing construction or properties in very active fault zones of
        deformation (hence in seismic zone 4) and convert to low-density purposes or open space
        only.
1100    Purchase (if necessary) existing construction or properties in moderately active fault zones
        of deformation and convert to low-density usage or open space only.
1200    Restrict new development in very active fault zones of deformation (in seismic zone 4) to
        low-rise residential construction. (Assume that residences and other construction would
        be designed to seismic code.)
1300    Restrict new development in moderately active fault zones of deformation in seismic zone
        4 to low-rise residential construction. (Assume that residences and other construction
        would be designed to code.)
1400    Restrict new development in moderately active fault zones of deformation in seismic zone
        3 to low-rise residential construction. (Assume that residences and other construction
        would be designed to code.)
1500    In seismic zone 4 as deemed appropriate by geotechnical engineers prior to development,
        drive piles, use vibro-compaction, or use dynamic deep compaction in order to minimize
        potential ground failures owing to liquefaction. (Assume that seismic codes are adopted
        and enforced.)
1600    In seismic zone 3, as deemed appropriate by geotechnical engineers prior to development,
        drive piles, use vibro-compaction, or use dynamic deep compaction in order to minimize
        ground failures owing to liquefaction. (Assume that seismic codes are adopted and en-
        forced.)
1700    In seismic zone 4 restrict new development in very susceptible liquefaction zones to low-
        rise residential structures.
1800    In seismic zone 3 restrict new development in very susceptible liquefaction zones to low-
        rise residential structures.
1900    In seismic zone 4 allow major modifications of existing structures in very susceptible
        liquefaction zones only for which suitable geotechnical techniques can be used to mini-
        mize hazards resulting from ground failures.
2000    In seismic zone 3 allow major modifications of existing structures in very susceptible
        liquefaction zones only for which suitable geotechnical techniques are used to minimize
        hazards resulting from ground failures.
2100    In seismic zone 4, in very susceptible landslide locales, restrict new development to open-
        space uses.
2200    In seismic zone 3, in landslide locales, restrict new development to open-space uses.
2300    In seismic zone 4 purchase (if necessary) land and/or severely damaged construction and
        convert existing development in very susceptible landslide locales to open-space uses.
2400    In seismic zone 3 purchase (if necessary) land and/or severely damaged construction and
        convert existing development in very susceptible landslide locales to open-space uses
                                                B - 14
       In Table B-6, loss-reduction activities 1000, 1100, 2300, and 2400 involve purchase of
existing properties. For policy-leveI risk and decision analyses, we assume that the structures
purchased have been rebuilt elsewhere - presumably on locations without severe ground
failure potential. We further assume that the strong ground motions expected mithe new
locations are no worse than those in the fault zone of deformation or landslide zone. In prac-
tice, these options may not be available in a fewjurisdictions. (E.g., Davis County, Utah, has
limited options.) Land for development may be limited to fault zones of deformation, high
liquefaction or landslide susceptible zones, or regions with high relative strong motion site
response factors. Even where better options are available for seismic hazards, other natural
hazards may further constrain available options.
       Table B-7 supplemented by Table B-8 is designed to illustrate costs of loss-reduction
activities. Even though the benefits of such measures as 1000, 1100, 2300, and 2400 may be
high, the costs are often extreme. It is anticipated that there will be only special circum-
stances under which such loss-reduction activities could be warranted in socioeconomic
terms. These circumstances include extreme life-safety risks, extremely high mandated in-
surance premiums, or buildings that are approaching the end of their life-cycle but whose
functions are vital or extremely remunerative.
                                             B-15
                                 TABLE B-7
                     POLICY-LEVEL COST CONSIDERATIONS
                        FOR LANDUSE LRMs ANALYZED
              Description of costs
              (all presuppose mappin. survey. testing. and administrative costs)
Number
1000,1100     Costs of properties purchased. These may be low or high depending on market
              considerations. Cost of properties includes land values and for existing construc-
              tion the market value of structures. Relocation and other costs may be involved.
              Assume 2x (replacement value of structure), as a rough estimate of these variable
              costs.
1200, 1300,
1400, 1700,
1800          Loss of market value of properties zones for commercial, industrial, or high-
              occupancy residential usage.
1500, 1600    Costs of liquefaction mitigation techniques if and as required. Based on Table B-2,
              Table B-8, and 1988 Building Valuation Data for Los Angeles, we assume that
              costs are 2-3 percent of replacement costs except for dwellings, for which costs are
              as much as 10 percent of replacement cost but which could be reduced to perhaps 4
              percent if piles were provided for many wood frame dwellings in a tract.
1900,2000     Costs for existing structures are perhaps double those for LRMs 1500 and 1600.
2100, 2200,
2300, 2400    Cost of land (assume to be a percent of replacement cost)
                                               B -16
                                                               TABLE B-8
                                                 SAMPLE COSTS FOR PROJECTS TO MINIMIZE
                                          LIQUEFAC1ION/SETLEMENT PROBLEMS IN NEW DEVELOPMENTS
                                                                                   LIQuEFACTION MITIGATION            TECHNIQUE
                                          COST                _.   DRIVE   PILES          2. VIBRO-COMPACTION           |D-C              EEP COMPACTION
                                         NORMAL1                                                                                                             AREA
                                                                                      2
      STRUCTURE TYPE
                                      |FOUNDATION             TOTAL     COST/Sa t          TOTAL          COST/SqFt        T0tAL                COST/SqFt    SqFt_.
                                                          _
     8-story Commercial $423,200                         $423,200          $18.50         $254,250         $11.30         $105,300                $4.68     22,500
     3-story Commercial                $180,000          $195,800            $5.44        $381,600         $10.60         $158,040                $4.39     36,000
     2-story                                                                                                               S74,760
                     Apartment                            $37Z270            $2.66        $180,600         $12.90                                 $5.34     14,000
w    School                                               $82,520           $3.66         $194,812           SB.62        $108,480                $4.80     22,600
,_
I-
     House                                                $20,700           $2.35         $120,912         $13.74          $50,072                $5.69      5,5n00
               t These are   extra foundation costs required to prevent excessive settlements in loose sands (exclusive of seismic concerns).
           2 Cost    per square foot is for area of building footprint (not total floor area).
           3 Figure  represents cost of excavation and recompaction of upper 10 feet of loose sands, including dewatering.
                However, any of the 3 techniques for liquefaction mitigation could be selected here for preventing nonseismic settlements.
           4    Figure represents cost of pile foundation.
        Loss-reduction activities numbered 1200, 1300, 1400, 1500, 1600, 1700, 1800,2100, and
 2200 pertain to restrictions on new developments. As this report has consistently em-
 phasized, seismic decisions made or omitted in the siting and design phases are often the
 most critical in terms of cost-effectiveness. What is chiefly lost in loss-reduction activities
  1200, 1300, 1400, 1700, and 1800 is the value of land for commercial/industrial/public and
 high occupancy residential purposes. The value of land is reduced completely to open-space
 uses in activities 2100 and 2200. These reductions in the value of land can be considerable in
 some regions of the country. However, further economic and legal analysis is needed to
 determine whether or not the externalization of natural hazard losses in land values is one
 factor (whether small or large) in current market values.
        Loss-reduction activities numbered 1900 and 2000 deal with major modifications of ex-
 isting properties. In these cases we shall assume that seismic retrofit is performed.
 Moreover, for structures with definite and severe potential problems of liquefaction-induced
 ground failure, we shall assume that geotechnical engineering techniques are used to
 eliminate or minimize potential ground failure hazards. Table B-8 summarizes costs for
 various sample projects used prior to development. In dealing with potentially deep subsur-
 face liquefaction potential, and in securing the building against likely liquefaction problems
 at depth, we assume that piles or vibro-compaction techniques are used, whichever is less ex-
 pensive. Deep dynamic compaction(DDC) techniques may be used but may be less effective.
 Even with the use of piles, some further densification may lead to damage of the structure.
 Comparing these cost estimates with 1988 building cost for the Los Angeles region and with
replacement costs per square foot as estimated previously in Table B-5, we speculate that
 costs for non-dwellings run about 2-3 percent of replacement value. Economies of scale exist
for implementing these techniques for residential development. Costs for piles for a single
new dwelling may run 10 percent of replacement value; for a tract development, costs may be
decreased to perhaps 4 percent of replacement value. These cost estimates need to be fur-
ther considered in future studies. For illustrative purposes only, we assume that costs for ex-
isting structures are twice those for new developments.
       Table B-9 outlines in greater detail the loss-reduction activities represented and
various policy-level conditional benefits. Table B-9 draws largely from intensity frequency
estimates discussed in Section B.2 in terms of loss in order to calculate estimates for strong
ground motion hazards alone and for diverse structural classes. As with the estimation of
conditional benefits from structural loss-reduction activities, each subcase is developed to
represent a category of structure and a status quo situation is contrasted to a mitigated situa-
tion in terms of direct structural property benefits.
                                            B - 18
                                                TABLE B-9
            CONDITIONAL BENEFITS (% of replacement cost for structure only)
           FOR ANIDU SE MEASURES (including subcases as defined in the table)
                Definition of Subcase                            Expected Loss at Speced Intensity
                (both status quo = S and
Number          after mitigation = A in                                         Intensity
                terms of structure type)                      VI       VII         VIl       IX         X
 1000,          In very active fault zones of deformation, purchase properties and replace elsewhere at sites
                subject only to strong ground motion (seismic zone 4)
                S = Unreinforced Masonry
         1001                                                  4.0      11.0'      34.0     100.0     100.0
                A = Reinforced Masonry                         1.0       3.0'       8.0      16.0      27.0
         1002   S=     Reinforced Masonry                                3.0
                                                               1.0                   8.0    100.0     100.0
                       ReinforcedhMasonry
                A-                                                       3.0
                                                               1.0                   8.0     16.0      27.0
                       Non-ductile cast-in-place concrete
         1003   S=                                             1.6       5.0       13.0     100.0     W0.0
                       Make ductile
                A=                                                       2.8         5.6     11.2       18.6
                                                               1.0
         41{          Ductile c-i-p concrete
                S=                                                       2.8
                                                               1.0                   5.6    100.0     100.0
                A=     Ductile c-i-p concrete                            2.8
                                                               1.0                           11.2      18.6
                                                                                     5.6
                       Non-seismic tilt-up
         1005   S=                                             42        9.6        18.2    100.0     100.0
                A=     Seismic tilt-up                                               7*3
                                                               1.0       2.0                 13.8      22.0
                       Seismic tilt-up
         1006   S=                                                                   73
                                                               1.0       2.0'               100.0     100.0
                       Seismic tilt-up
                A=                                                       2.0         7.3
                                                               1.0                           13.8      22.0
                S = Non-ductile pre-cast concrete frame
         1007                                                  3.0       6.5       153      00.0     100.0
                    Ductile pre- cast
                A=                                             1.0                   5.6      11.2     18.6
                                                                         2.5
                       Ductile pre-cast
         1008   S=                                             1.0                   5.6    100.0     100.0
                                                                         2.5
                       Ductile pre-cast
                A=                                                       2.5                 11.2      18.6
                                                               1.0                   5.6
         1009    5-_ Unanchored wood dwelling                  2.6       4.8       11.0     100.0     100.D
                A = Anchored wood dwelling                     0.8       3.0                 16.0      28.0
                                                                                    6.0
                       Anchored wood dwelling
         1010   S=                                            0.8        3.0,               100.0     100.0
                                                                                    6.0
                       Anchored wood dwelling
                A=                                                       3.0
                                                              0.8                    6.0     16.0      28.0
                S = Unanchored mobile home
         1011                                                  4.7                 17.4
                                                                        11.0                100.0     100.0
                A = Anchored mobile home                                 3.0                 16.0
                                                               0.8                                     28.0
                                                                                     6.0
                       Unanchored mobile home
         10     S=                                             Cs        3.0         6.0    100.0     100.0
                A=     Anchored mobile home                              3.0         6.0
                                                               ;0.8                          16.0      28.0
                                                   B -19
                                            TABLE B-9 (Continued)
                 Definition of Subcase                              Expected Loss at Secified Intensity
                 (both status quo = S and
Number           after mitigation = A in                                          Intensity
                 terms of structure tvne)                      VI         VII        VIII        IX        X
 1100            Purchase properties in moderately active fault zones and replace elsewhere (seismic zone 4).
         1101-
          1102   defined as 1001-1012                        Benefits defined as 1001-1012 except that status
                                                             quo (S) cases are defined as follows at Intensity
                                                              IX:
                                                              78.0,        58.0,      57.5,      55.6,    65.8,
                                                              56.9,                              59.8,
                                                                           66.0,                          54.5,
                                                                                      55.6,
                                                              65.0,        58.0, respectively.
 1200            Restrict new developments in very active fault zones (seismic zone 4). Assume code adop-
                 tion, compliance, and enforcement.
         1201    S = Reinforced masonry                       Use 1002
                 A=     Reinforced masonry
         1202    S = Ductile c-i-p concrete                   Use 1202
                 A = Ductile c-i-p concrete
         1203    S=     Seismic tilt-up                       Use 1006
                 A=     Seismic tilt-up
         1204    S = Ductile pre-cast concrete                Use 1008
                 A = Ductile pre-cast concrete
                 Restrict new developments in moderately active fault zones (seismic zone 4). Assume code
 1300
                 adoption, compliance, and enforcement.
         1301    S=     Reinforced masonry                    Use 1102
                 A=     Reinforced masonry
         1302    S=     Ductile c-i-p concrete                Use 1104
                 A=     Ductile c-i-p concrete
         1303    S=     Seismic tilt-up                       Use 1106
                 A=     Seismic tilt-up
         1304    S=     Ductile pre-cast concrete             Use 1108
                 A=     Ductile pre-cast concrete
                                                    B -20
                                            TABLE B-9 (Continued)
                                                                  Expected Loss at Sngcifed Intensity
                 Definition of Subcase
                 (both status QUo = S and
Number           after mitigation = A in                                         Intensity
                 terms of structure tvve)                      VI        VII        Vxr        LK         x
                 Restrict new developments in moderately active fault zones (seismic zone 3). Assume code
 1400
                 adoption, compliance, and enforcement.
          1401    S=     Reinforced masonry                   Use 1102
                 A=      Reinforced masonry
          1402   S=      Ductile c-i-p concrete               Use 1104
                 A=      Ductile c-i-p concrete
          1403                                                Use 1106
                 S=      Seismic tilt-up
                 A=      Seismic tilt-up
          1404   S=      Ductile pre-cast concrete            Use 1108
                 A=      Ductile pre-cast concrete
                 Use the least costly geotechnical technique to eliminate or minimize liquefaction-induced
 1500
                 ground failures and/or differential settlement (seismic zone 4).
                                                                 1.0      13.5
          1501    S=     Reinforced Masonry                                          27.0      27.0       27.0
                         Reinforced Masonry                      1.0       3.0        8.0      16.0       27.0
                 A=
          1502   S = Ductile c-i-p concrete                      1.0       9.4       18.6      18.6       18.6
                 A = Ductile c-i-p concrete                      1.0       2.5        5.6      112        18.6
          1503           Seismic tilt-up                                                       2.0        22.0
                                                                 1.0      11.0       22.0
                 S=
                                                                 1.0       2.0        7.3      13.8       22.0
                 A=      Seismic tilt-up
          1504   S=      Anchored wood frame                                                   19.8       19.8
                                                                0.8        9.9       19.8
                                                                0.8        1.5        4.7
                 A=      Anchored wood frame                                                    9.2       19.8
                 Use the least cost geotechnical technique to eliminate or minimize liquefaction-induced
 1600
                 ground failure and/or differential settlement (seismic zone 3).
        1601-1604 defined asc 101-1504                       Use 1501-1504 for 1601-1604, respectively
                 Restrict new developments in high liquefaction susceptible regions, to dwellings and to struc-
 1700
                 tires that have used the least costly geotechnical techniques, to eliminate or minize
                 liquefaction-induced ground failures (seismic zone 4).
        1701-1703 defined as 1501-1503                       Use 1501-1503 for 1701-1703., respectively
                                                     B -21
                                             TABLE B-9 (Continued)
                  Definition of Subcase                              Expected Loss at Specified Intensity
                  (both status QuO = S and
Number            after mitigation = A in                                          Intensity
                  terms of structure type)
                                                                                                                   -
                                                                                      VIII
                                                                            VII
                                                                VI                                Ix        x
                  Restrict new developments in high liquefaction susceptible regions to dwellings and to struc-
 1800
                  tures that have used the least costly geotechnical techniques to eliminate or minimize
                  liquefaction-induced ground failures (seismic zone 3).
        1801-1803 defined as 1501-53                          Use 1501-1503 for 1801-1803, respectively
                  For major modifications of structures, where appropriate use the least costly geotechnical
 1900
                  technique to eliminate or minimize liquefaction-induced ground failures and/or differential
                  settlement (seismic zone 4).
        1901-1904 defined as 1501-L504                        Use 1501-1504 for 1901-1904, respectively
 2000             For major modifications of structures, where appropriate use the least costly geotechnical
                  technique to eliminate or minimize liquefaction-induced ground failures and/or differential
                  settlement (seismic zone 4).
        2001-2004 defined as 1501-1504                        Use L501-1504 for 2001-2004, respectively
 2100            Restrict new developments in very severe landslide or rockfall locales to open spaces (seismic
                 zone 4). Assume code adoption, compliance, and enforcement.
                  defined for reinforced masonry
          2101                                                Use 1002
                  defined for c-i-p concrete
          2102                                                Use 1004
                  defined for tilt-up
          2103                                                Use 1006
          2104    defined for ductile pre-cast concrete frame Use 1008
          2105    defined for wood frame                      Use 1010
          2106    defined for mobile home                     Use 1012
                  Restrict new developments in very severe landslide or rockfall locales to open spaces (seismic
 2200
                  zone 3). Assume code adoption, compliance, and enforcement.
        2201-2206 defined as 2101-2106                        Use 2101-2106 for 2201-2206, respectively
 2300            Purchase properties in severe landslide regions and replace elsewhere (seismic zone 4).
                                                                                                  zI
        2301-2306 defined as 2101-2106                        Use 2101-2106 for 2301-2306, respectively
 2400            Purchase properties in severe landslide regions and replace elsewhere (seismic zone 3).
        2401-2406 defined as 2101-2106                        Use 2101-2106 for 2401-2406, respectively
                                                      B -22
       For loss-reduction activities 1000, 1100, 1200, 1300, 1400,2100,2200,2300, and 2400--
pertaining to fault rupture, landslide - we assume that instances of ground failure lead to to-
tl structural loss. This assumption is extreme, as limited data show in Wiggins and Taylor
(1986) for fault rupture, landslide, and large flow failure and Wiggins et al. (1978) on Al-
leghany County landslide losses. More refined studies are needed that relate severity of loss
to severity of ground failure.
       For loss-reduction activities 1000 and 1200, we assume that all instances of intensity of
IX and X are associated with total loss from surface faulting in active fault zones. In specific
regions, these assumptions can be improved through risk studies that incorporate probabil-
ities of various severities of surface rupture at various sites in the fault zone of deformation.
A given earthquake involving the fault will not rupture at all locations, along the fault trace;
even where rupture occurs, the severity may be considerably less than the maximum surface
displacement within the entire rupture zone. For moderately active fault zones referred to in
mitigations 1100 and 1300, we assume that all occurrences of intensity X and that 50 percent
of the occurrences of intensity IX result in surface faulting sufficiently severe to cause total
structural loss. We make no discrimination among various types of structures with respect to
their capacity to withstand various severities of fault movement. We further assume perfect
knowledge of the width of the fault zone of deformation.
       We make similar assumption for landslide failures. We assume that sites were per-
fectly identified for these potential displacements, and that total constructive loss occurs
given these displacements. Moreover, in loss-reduction activities 2100, 2200, and 2300, we
assume that severe landslides occur whenever intensities, IX and X occur. More refined
probabilistic landslide models would lead to probabilities of different seventies of ground
failures resulting from landsliding failures; such models are currently under research.
       Loss-reduction activities 1500, 1600, 1700, 1800, 1900, and 2000 deal with potential
settlement/ liquefaction-induced ground failure (other than large flow failure). For these we
assume, based on limited empirical data from Wiggins and Taylor (1986), that the loss ex-
pected at shaking intensity X corresponds to the loss that would occur should these ground
failures occur. We further assume that differential ground displacements occur at intensities
VIII, IX or X in highly susceptible liquefaction regions. This latter assumption is extremely
cautious. As noted in the risk analysis report,. an alternative assumption in San Mateo
County is that a maximum of only two percent of locations in regions. highly susceptible to
liquefaction might suffer surface displacement.
       In view of the numerous assumptions that we make here in order to conduct risk and
decision analyses of landuse measures, one must be cautioned that the outputs will be for
                                             B -23
current policy-level discussion. Results assist in ruling out broad measures that are clearly
too expensive or whose benefits are slight or in defining further socioeconomic contexts un-
der which specific loss-reduction measures should be implemented.
                                           B -24
                                             NOTES FOR TABLE B-2
       1FEMA,       1988 a-6
       2 Retrofit cost assumes that costs in Los Angeles and the rest of Zone 4 will be lower dan in other seis-
mic zones. This is attributed to contractor experience and building department competence gain in areas
where retrofit is mandated by ordinance.
       3 FEMA,      1988 a-fl
       4 The values for retrofit costs in FEMA Figure 12 where judged to be slightly low, particularly given the
high sample bias toward military construction. A value of $15 per square foot was selected as more repre-
sentative of the average for these types of buildings.
       5 FEMA,      1988 a-14
       6BAREPP,       undated - Tilt-up Building
        7 Dames & Moore experience
                                        with tilt-up retrofit is similar to that described in BAREPP document
when only roof-to-wall anchorage and roof continuity ties are provided. A value of $1 to $2 per square foot is
typical for one-story industrial buildings. A range of S2 to $50 per square foot represents a reasonable range
for two- to three-story buildings.
       8FEMA, 1988 a-14
       9Sample    used in FEMA reference (three buildings) is deemed inadequate and nonrepresentative.
Retrofit costs for precast frames should be about the same as those for cast-in-place concrete frames in Zone 2
and up to one-third greater in the more active seismic zones.
       1 0FEMA,      1988 a-7
       "Average replacement costs taken as rough composite of reinforcement masonry and concrete shear
wall low rise (one to four story) buildings.
       1 2Retrofit   costs obtained from contractor's estimating data.
                                                        B -25
                                    ASSUMPTIONS NOTED IN TABLE B-3
        'Loss data obtained from ATC-13, Table G.1. Judgmental assumptions made for each structural
category are outlined in subsequent footnotes. Facility Classification numbers below are as defined in Table
3.1 of ATC-13.
       2 Unreinforced
                      masonry 'as is' damaged factor (DF) estimates are obtained using the following
assumptions:
a. The average of ATC-13 Facility Class 75 (URM low-rise) and Facility Class 76 (URM medium-rise).
b. For MMI intensities VI and VII, the "mean best" estimates (MEANB) are used for each facility class.
c. For MMI intensities VIII, X,: and X, a weighted average of "mean best' (MEANB) and "mean high"
    (MEANH) estimates calculated as follows for each facility class.
       3 Unreinforced
                      masonry "retrofit" damage factor (DM) estimates are obtained using the following
assumptions:
a. The average of ATC-13 Facility Class 9 (reinforced masonry low-rise) and Facility Class 10 (reinforced
   masonry mid-rise).
b. The "mean best" (MEANB) estimates for each facility class.
       4 Unreinforced
                       masonry "retrofit" damage factor (DF) estimates are obtained
using the following assumptions:
a. The average of ATC-13 Facility Class 9 (reinforced masonry low-rise and Facility Class 10 (reinforced
    masonry mid-rise).
b. The average of "mean best" (MEANB) and "mean high (MEANH) estimates for each facility class.
      "For seismic Zones 3 and 4 "as is" damage factor (DF) estimates for cast-in-place nonductile concrete
frames are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 87 (low-rise), 88 (mid-rise), and 89 (high-rise).
b. The "mean best" (MEANB) estimates are used for each of the above Facility Classes.
       6 The  (retrofit) damage factor (DF) estimates are used for each of the concrete frames (cast-in-place or
precast) are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 18, (ductile frame low-rise), 19 (ductile frame mid-rise), and 20
   (ductile frame high-rise).
b. For seismic Zone 3 the "mean best" (MEANB) estimates are used for each facility class.
c. For Zone 2*, the average "mean best" (MEANB) and "mean high" (MEANH) estimates are used for each
   facility class.
        7 For Zone
                      2*, the "as is" damage factor (DF) for cast-in-place nonductile concrete frames are obtained
using the following assumptions:
a. The average of ATC-13 Facility Classes 89 (low-rise), 88 (mid-rise), and 89 (high-rise).
b. The weighted average of "mean best" (MEANB) and "mean high" (MEANH) estimates are used for each
    facility class calculated as follows:    (2MEANB + MEANH)/3
       8 1nseismic Zones 3 and 4, the "as is"damage factor (DF) estimates for concrete tilt-up buildings are
obtained using the following assumption: ATC-13 Facility Class 21, the "mean high" estimate.
       9In seismic Zones 3 and 4, the "retrofit" damage factor (DF) estimates for concrete tilt-up buildings are
calculated using the following assumptions:
a. ATC-13 Facility Class 21
b. The average of mean low" (MEANL) and mean best" (MEANB) estimates.
                                                      B -26
ASSUMPTIONS NOTED IN TABLE B-3 (Continuation)
       10In seismic Zone 2* the 'as is" damage factor (DF) estimates for concrete tilt-up buildings are ob-
tained using the following assumption: The value estimated for Zones 3 and 4 multiplied by 1-2.
        lkln seismic Zone 2, the 'retrofit' damage factor (DF) estimates for concrete tilt-up buildings are ob-
tained using the following assumption The 'mean best' (IEANB) estimate for ATC-13 Facility Class 21.
       _12In seismic Zones 3 and 4, the 'as is' damage factor (DF) estimates for nonductile precast concrete
frames are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 81 Qow-rise), 82 (mid-rise), and 83 (high-rise).
b. The average of 'mean best' (MEANB) and 'mean igh (MEANH) estimates for each facility class.
       13In seismic Zone 2' the 'as is' damage factor (DF) estimates for nonductile precast concrete frames
are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 81 (low-rise), 82 (mid-rise), and 83 (high-rise).
b. The 'mean high' (MEANH) estimate for each facility class.
        14The damage factor (DF) estimates for woodframe dwellings are obtained using ATC-13 Facility Class
1, and the following assumptions:
a. The 'mean high' (MEANH) estimate for the was is' condition.
b. The "mean best' (MEAN) estimate for the 'retrofit' condition.
        bThe damage factor (DF) estimates for mobile homes are obtained using ATC-13 Facility Class 23 and
the following assumptions:
a. The "mean hig (MEANH) estimates for the 'as is' condition.
b. The 'mean best (MEANB) estimates for the 'retrofit" condition.
       1 6 These   estimates are derived from Wiggins and Taylor (1986), and incorporate preliminary Coalinga
loss data.
                                                       B -27
                                            NOTES FOR TABLE B4
       ILoss data obtained from ATC-13, Table G.1. Judgmental assumptions made for each structural
category are outlined in subsequent footnotes. Facility Classification numbers are as defined in Table 3.1 of
ATC-13.
       2 Unreinforced
                        masonry 'as is" damaged factor (DF) estimates are obtained using the following
assumptions:
a. The average of ATC-13 Facility Class 75 (URM low-rise) and Facility Class 76 (URM medium-rise).
b. For MMI intensities VI and VII, the "mean best" estimates (MEANB) are used for each facility class.
c. For MM! intensities VIII, IX, and X, a weighted average of "mean best" (MEANB) and "mean high"
   (MEANH) estimates calculated as follows for each facility class.
       3 Unreinforced
                       masonry "retrofit" damage factor (DM) estimates are obtained using the following
assumptions:
a. The average of ATC-13 Facility Class 9 (reinforced masonry low-rise) and Facility Class 10 (reinforced
    masonry mid-rise).
b. The average of "mean high" (MEANH) estimates for each Facility Class.
      4For seismic Zones 3 and 4 "as is" damage factor (DF) estimates for cast-in-place nonductile concrete
frames are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 87 (low-rise), 88 (mid-rise), and 89 (high-rise).
b. The "mean best" (MEANB) estimates are used for each of the above Facility Classes.
       5The (retrofit) damage factor (DF) estimates for nonductile concrete frames (cast-in-place or precast)
are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 18 (ductile frame low-rise), 19 (ductile frame mid-rise), 20 (ductile
   frame high-rise), 5 (shear wall low-rise), 7 (shear wall mid-rise) and 8 (shear wall high-rise).
b. For seismic Zones 3 and 4, the "mean best" (MEANB) and "mean high" (MEANH) estimates are used for
   each facility class.
c. For Zone 2* the average of the "mean best" (MEANB) and "mean high" (MEANH) estimates are used for
   each facility class.
       6 For Zone   2*, the "as is"damage factor (DF) estimates for cast-in-place nonductile concrete frames are
obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 87 (low-rise), 88 (mid-rise), and 89 (high-rise).
b. The weighted average of "mean best" (MEANB) and "mean high" (MEANH) estimates are used for each
   facility class calculated as follows:
       7 In seismic Zone
                         3 and 4, the "as is" damage factor (DF) estimates for concrete tilt-up buildings are ob-
tained using the following assumption: ATC-13 Facility Class 21, the "mean high" (MEANH) estimate.
       8 1nseismic Zone 3 and 4, the "retrofit" damage factor (DF) estimates for concrete tilt-up buildings are
calculated using the following assumptions:
a. ATC-13 Facility Class 21.
b. The average of "mean low" (MEANL) and "mean best" (MEANB) estimates.
       91n seismic Zone 2*, the "as is"damage factor (DF) estimates for concrete tilt-up buildings are obtained
using the following assumption: The value estimated for Zones 3 and 4 multiplied by 1.2.
       101n seismic Zone 2*, the "retrofit" damage factor (DF) estimates for concrete tilt-up buildings are ob-
tained using the following assumption: The value estimated for Zones 3 and 4 multiplied by 1.2.
                                                      B-28
NOTES FOR TABLE BA4 (Continuation)
      "Ik seismic Zones 3 and 4, the 'as is' damage factor (DE) estimates for nonductile precast concrete
frames are obtained using the following assumptions:
a. The average ATC-13 Facility Classes 8.1 (low-rise), 82 (mid-rise) and 83 (high-rise).
b. The average of 'mean best' (MEANB) and 'mean high' (MEANH) estimates for each facility class.
       12In seismic Zone 2*, the 'as is' damage factor (DF) estimates for nonductile precast concrete frames
are obtained using the following assumptions:
a. The average of ATC-13 Facility Classes 81 (low-rise), 82 (mid-rise) and 83; (high-rise).
b. The 'mean high (MEANH) estimate for each facility class.
        1The damage factor (DF) estimates for woodframe dwellings are obtained using ATC-13 Facility Class.
1, and the following assumptions:
        14The damage factor (DE) estimates for mobile homes are obtained using ATC-13 Facility Class. 23 and
the following assumptions:
a. The 'mean high' (MEANH) estimate for the 'as is' condition.
b. The 'mean best' (MEANB) estimate for the 'retrofit' condition.
       1These estimates are derived from Wiggins and Taylor (1986) and incorporate preliminary Coalinga
loss data.
                                                     B -29
                                           FOOTNOTES FOR TABLE B-5
       1 Implementation
                        costs are costs to add seismic design as per current Uniform Building Code (UBC) in
areas where seismic design is currently not practiced. In areas where limited seismic design is already imple-
mented, costs may be taken as half of those shown.
       2 See
               for example (ICBO, 1980) Table 1, page 5-3.
       3Add
             50 percent to costs of measure 100 in Zone 2* as allowance for ductile detailing. Increment cost
is shown here (not total).
       4 Zone
             2* damage with ductile seismic provisions is taken as average of Zone 2* without ductile detail-
ing and Zone 3. Values shown are increment loss reduction beyond 120 (not total). See Table BA.
       5 Although
                   the measure could affect new construction as well as existing buildings, assumed loss reduc-
tions are based on the assumption that the measure causes existing buildings to be retrofit. This is without an
assessment of what fraction of all buildings of the indicated type will be so affected by this specific measure.
Listed are only those key building types for which a hazardous rating is given.
       &'As-is' loss for parapets are taken as 15 percent of "as-is" losses for unreinforced masonry, as given in
Table BA. "Retrofit' loss is taken as 10 percent of retrofit loss for URM as given in Table B-4. Loss reduction
values shown are differences of the above.
       7Loss
               reductions for Zone 3 essential buildings are taken as those for retrofit of existing buildings. This
is based on the assumption that in most of Zone 3, seismic design is currently practiced for new buildings.
However, the loss reductions for each given MMI are judgmentally taken as 80 percent of the loss reductions
for Zone 4 for the following reasons:
a. Lower design forces
b. Less developed "infra-structure of competence in engineers, contractors and construction trades in Zone
    3 relative to Zone 4.
       8 For
             Zone 2*, it has been assumed that the results of this measure are both to obtain code level seismic
design where none previously existed, and to result in the upgrade of existing buildings to some reduced
criteria. Next, it is assumed that measures 100 and 120 are implemented. Therefore, the loss reductions given
here are the average of loss reductions for new constructions in Zone 2* (the sum of measures 100 and 120)
and the loss reduction for retrofit of existing buildings in Zone 2* (the values given for Zone 2* in measure
170).
       9 See
             note 8. The cost of implementing this measure is taken as the average of costs for new construc-
tion and of costs for retrofit of existing buildings in Zone 2*. Also, see Table B-2, and note 1 above.
       1 0 Measures
                     130 and 140 are less for wood-frame construction. Implementation cost is based on retrofit
of cripple stud walls and foundation anchorage only.
        11 Given
                 limited degree of retrofit as described in note 10, average loss reduction is taken as 80 percent
of loss reduction estimated for remediation of all key deficiencies (those indicated in Table B-4).
       1 2 Average
                    loss reduction is based on the assumption that dwelling (apartments and condominiums) loss
in fire following earthquake would be complete (100 percent) for percentage of total dwelling inventory shown.
      1 3 Judgmentally
                          estimated.
      1 4 Retrofit
                     costs for equipment are taken as percent of equipment costs--not building.
                                                        B -30
                             APPENDIX C
      ESTIMATION BASES FOR EFFICIENCY AND ALLOCATIVE ANALYSES
C.1 Considerations Affecting Economic Efficiency Analysis
      In addition to initial outlay costs and estimates of direct property benefits for specific
loss-reduction activities, we have considered the following associated costs and losses in ag-
gregate benefit-cost analyses:
      o costs associated with temporary housing,
          costs of and losses associated with business interruption,
      o
          losses associated with injuries and deaths,
      o
          losses associated with the cost of money (interest on loans), and
      o
          premium costs (if insurance is purchased).
      o
We have not considered costs and losses associated with the following:
     o contents damage,
      o damage to and damage by water systems and losses resulting from fire following
        earthquakes,
      o release of toxic or hazardous chemicals,
      o transaction, foreclosure and other similar activities associated with distributive costs
        and losses (with special caveats for 'loadings" associated with premium costs),
      o disaster cleanup, and
      o indirect' economic impacts (e.g., effects on prices, unemployment, and their
        multipliers).
Temporary Housing Costs
      If a dwelling is damaged, the homeowner may incur an additional cost if he must find
alternative temporary housing. For calculation purposes, we have estimated that for dwell-
ings damaged above 50 percent and whose structural value is $100,000, six months of tem-
porary housing will be needed at a monthly cost of $1,000. Any percentage of damage less
than 50 was linearly interpolated to adjust for the temporary housing cost. Investigations of
insurance and federal disaster assistance data on temporary housing costs after dwelling
damage could improve these assumptions.
                                                C-1
due to building structure or equipment damage, as well as the unavailability of needed
materials and services. For complex business operations, further analyses may be needed to
determine the extent to which damage to business facilities or to pertinent infrastructure
facilities may lead to business losses. In some cases, alternative buildings, equipment,
materials and supplies, and sources of energy, water, gas, sewage disposal, transportation,
and/or other services may be available to continue business and minimize losses.
       For simplification we have assumed that business interruption is a function of
          o industry type as denoted by Standard Industrial Classification (SIC) codes,
         o the "q-ratio" of the business (this ratio is defined as the market value divided by
           the replacement value of the business), and
         o unemployment insurance premiums paid by the business in order to cover short-
           term unemployment resulting from earthquake damage.
We also have assumed that businesses whose q-ratios are less than one and who are not in-
sured will not re-invest if the earthquake has caused significant damage. This is because the
cost to re-invest -- to replace what has been damaged -- is greater than the return that the
company expects to earn.
      For calculation purposes we have assumed a 10 percent deductible. We have assumed
further that only business owners with both earthquake property insurance and earthquake
business interruption insurance will be reimbursed by insurers for business interruption
losses. We have further assumed that 90 percent of business interruption loss is revenue and
that the remaining 10 percent is unemployment.
Losses Associated with Deaths and Injuries
       In order to estimate losses associated with deaths and injuries, we have developed in-
teractive parameters for the
   o number of occupants (a function of such factors as time of day, day of week, absentee
      rates, square footage, and occupancy rates per square footage when fully occupied),
      and
  o costs of deaths, serious injuries, and minor injuries.
We have followed AIRAC, 1987 (and ultimately Whitman and Cornell, 1976) in relating
moderate injuries, serious injuries, and deaths to degree of building damage. We have as-
sumed that minor injuries cost $1,600 and that serious injuries lead to $65,000 for
hospitalization and $7,500 in lost wages (see AIRAC, 1987). We have provided two qualified
estimates for costs of deaths: a stringent estimate of $300,000 and another estimate of
                                             C-2
hospitalization and $7,500 in lost wages (see AIRAC, 1987). We have provided two qualified
estimates for costs of deaths: a stringent estimate of $300,000 and another estimate of
$1,000,000. For project purposes of emphasizing losses in an insurance context, these types
of assumptions are appropriate; however, as is well known, use of such estimates should not
be taken to imply that the 'worth" of a life is reducible to economic terms.
Losses Associated with the Cost of Money
       A potentially more controversial element used in this analysis is a real discount rate,
used as a means. to determine the time-value of money (after discounting for inflation). In-
vestors, businesses, contractors, the elderly, and low-income residents, in many cases, may
greatly value marginal amounts of money and so treat money as a commodity to be spent on
activities with short-term, rather than long-term payoffs. These stakeholders may prefer very
high discount rates, which discourage activities with long-tern or uncertain benefits. In con-
trast, long-term perspectives may be encouraged by parties concerned with larger scale
projects or with effects of past and current investments on more distant future prospects. in
this perspective actual discount rates may be examined in more aggregate terms, and the real
discount Tate so evaluated may be lower.
      In order to avoid the many and prolonged debates over the suitable discount rate, we
have treated the discount rate as having a possible continuum of values. For illustrative pur-
poses, we have developed a three-tier approach, with
   o an 8 percent real discount rate at tier 1 (good investment or expenditure of money even
     for many with short-term horizons),
   o a 3 percent real discount rate at tier 2 (satisfactory discount rate -- similar to that used
     for many public projects), and
   o a 0 percent real discount rate at tier 3 (more suitable when life-safety and other public
     or spillover factors are emphasized).
These discount rates are used in conjunction with interactive assumptions on the effective
lifetime of an loss-reduction measure. For illustrative purposes, we have assumed that the
structural shells of buildings (in contrast to total buildings, for which extensive remodeling
may be done) last 80 years, and that retrofitted structural systems last 30 years. Sensitivity
analyses for these assumptions have been performed and are heavily dependent on the dis-
count rate used.
                                              C-3
Premium Costs
       In Section 2 we argued that, with the possible exception of mandated nationwide
primary coverage of selected classes of buildings, probabilistic multisite methods are needed
for estimating earthquake insurance rates. These methods incorporate surplus develop-
ment, expected annual losses, and catastrophic loss potential - all critical elements in deter-
mining the ability of an insurance program to pay off claims as they arise. These methods
thus provide means to account for the catastrophic loadings needed for earthquake rates, yet
unlike PML methods do not do so at the expense either of not covering expected annual
losses or of providing lower rates for higher risks and vice versa.
      A prima facie argument can also be developed that mandated national rates (for
selected classes of buildings) can, in theory, reduce rates through geographic dispersion
which reduces program disturbances caused by rare but catastrophic losses. It is also possible
to argue that government involvement in a tax-free reserve fund may provide possible lower
rates since greater available reserves reduce the likelihood of insufficient reserves to cover
catastrophic losses.
      Details of the following matters extend beyond the project scope:
         o administrative, mapping, and other program costs
         o verified behavioral models (e.g., models of the efficiency of private versus public
           sector involvement, models of response to risk-based versus non-risk-based
           premiums, models of voluntary purchase of earthquake insurance)
         o careful consideration of intergenerational transfers for any proposed federal
           program (including transfers that result from making rates initially attractive)
Hence, assumptions made in this project concerning premium costs are crude. These as-
sumptions considered a general loading on expected annual losses (the loading is a function
of uncertainties, administrative costs, taxation of reserves, fees, variances of loss distribu-
tions, and other possible factors), but do not consider, for instance, effects of risk-based
premiums on inducing loss-reduction activities and other factors associated with general
federal insurance program construction. In a fuller study of federal earthquake insurance
feasibility issues, modeling of these effects would be critical.
C.2 Bases Underlying the Economic Allocative Analysis
     In order to develop estimates of costs and benefits to diverse stakeholders, we have in-
cluded the following stakeholders in our interactive model:
   o owners,
   o mortgage lending institutions,
                                             C-4
   o government (federal, state, and local),
   o the federal taxpayer,
   o the state taxpayer,
   o the local taxpayer,
   o insurance companies (covering quake and non-quake,, respectively), and
   o employees.
As a result of project workshop discussions, we have also informally included tenants as,
stakeholders deserving special consideration. For estimating how costs, losses and benefits
are distributed among these various stakeholders, we have used or developed provisional
models for estimating
   o mortgage default losses,
   o general liabilities, and
   o governmental costs (disaster relief claims).
Mortgage Default Assumptions
      The general logic of mortgage default is fairly well understood from the standpoint of
lending institutions. Following an earthquake, owners whose property damage exceeds
(post-disaster) equity may, all other things being equal (such as q-ratios), decide to default.
Should default occur in these cases, lending institutions will sustain part of the loss
(remaining mortgage balance plus repair costs plus administrative and transaction costs
minus. sale value). For simplification, we have assumed that post-earthquake equity (after
repairs) equals pre-earthquake equity, and that the property owner will default if the
property damage exceeds this equity. Owing to appreciation in land values and to reductions
in remaining mortgage balances, after some number of years (perhaps 15 for average land
appreciation values given a 30-year mortgage), the equity value is assumed to be greater than
any property damage (soil foundation damage excluded). Hence, equity position is a critical
interactive parameter affecting potential losses to lenders.
General Liability: Property Damage
      It is assumed that the general liability property damage loss potential for earthquakes
can be approximated by use of loss-cost factors that were developed using information sup-
plied by members of the AIRAC Earthquake Losses Subcommittee (AIRAC, 1987). These
factors are listed in Table C-i for buildings (excluding single family dwellings) that sustain
various degrees of earthquake damage including extensive damage (5 pet cent to 19 percent
                                              C-5
 value lost), major damage (20 percent to 79 percent value lost), and "total" damage (90 per-
 cent to 100 percent value lost).
                                           Table C-1
                                 Loss-Cost Factors for Liability
                                         (AIRAC, 1987)
                                                     Degree of Building Damage
                                             Extensive        Major           Total
   Possible Outcomes                         0.05-0.19       0.20-0.79       0.80-1.00
   Percent with a Claim                          0.05            037              0.72
   Non-suit-pay
     Percentage                                  0.35            0.30             0.20
     Average Amount                           360,000       1,300,000       5,000,000
   Suit-pay
      Percentage                                 0.13           0.18              0.31
      Average Amount                          725,000      2,625,000       10,000,000
   Suit-CWP*
      Percentage                                0.10            0.15              0.24
      Average Amount                         175,000         435,000        1,300,000
   Non-suit-CWP*
     Percentage                                 0.42            0.37            0.25
     Average Amount                           87,000         220,000         650,000
   CWP*:    Closed without payment
General Liability: Injury Losses
      The size of general liability injury losses are also approximated by applying loss-cost
factors that were developed based on information supplied by members of the AIRAC
Earthquake Loss Subcomrmittee (AIRAC, 1987). Our estimates of life and injury-related
losses are used to determine how many people would sustain minor, major, or fatal injuries
and these figures are then used along with estimated percentages of claims filed and settled,
with and without pay, to calculate general liability bodily injury losses for our spectrum of
possible earthquakes. The numbers used to calculate the general liability bodily injury loss
potential are illustrated in Table C-2.
                                              C-6
                                         Table C-2
                            Estimates Used for General Liability
                                Bodily Injury Loss Potential
                                       (AIRAC, 1987)
                                                                            Fatalitv
                                                             Major Injurv
                                            Minor Injurv
                                                                   0.5          0.50
                                                    0.15
  Percent with a Claim
  Non-suit-pay
                                                                                0.20
                                                                    0.28
                                                    0.34
     Percentage
                                                                             177,000
                                                    7,000       120,000
     Average Amount
  Suit-pay
                                                                    0.20        0.31
                                                    0.14
      Percentage
                                                                             350,000
                                                    9,000      205,O00
     Average Amount
   Suit-pay
                                                                                025
                                                                   0.16
                                                    0.11
      Percentage
                                                                 28,000      25,000
      Average Amount                                5,500
   Non-suit-CWP*
     Percentage                                     0.41           0.36         0.25
                                                                               3,000
                                                                  1,600
                                                    750
     Average Amount
   CWP*: Closed without payment
General Liability: Workers' Compensation
       Workers' compensation is a compulsory system that requires employers to provide no-
fault insurance against on-the-job injury and disease, in return for a limited liability against
such events. Employers can meet their obligation in three ways: (1) self-insure, (2) purchase
insurance from a private carrier, or (3) purchase insurance from a state insurance fund. Not
all three options are available in all states. Eighteen states maintain state funds that sell
workers' compensation insurance. Six of these are monopolies in states that bar private car-
riers from selling workers' compensation insurance. The remaining twelve state funds com-
pete with private carriers for business (Butler and Worrall, 1986). To aIlocate workers' com-
pensation costs between the insurance industry and the government, we have made the
simplifying assumption that 70 percent of the costs are borne by private industry and 30 per-
cent are borne by state governments.
                                              C-7
       Workers' compensation loss potentials can be very roughly approximated by applying
loss-cost factors to the estimated overall number of fatalities and minor and serious injuries
to persons covered who are at work during the earthquake. Most firms are unable to self-
insure either because they are small or because they do not meet the requirements of the
state law and, therefore, must buy insurance from either a private carrier or a state agency. It
is assumed that 80 percent of employees are covered by workers' compensation insurance
and thus that 80 percent of the life and safety costs experienced by a business are covered by
workers' compensation insurance. Hence, overall,; 56 percent of workers' compensation
losses are assumed to be borne by private insurers, 24 percent by goverrnent insurance, and
20 percent by workers themselves (less the portion covered by liability).
Governmental Costs
      In assessing status quo governmental liabilities as well as governmental liabilities under
various forms of earthquake insurance involvement, we have explicitly modeled
      o For homeowners, Small Business Administration (SBA) subsidies in the form of 4
         percent, 30-year loans to individuals who do not have credit elsewhere (these apply
         after a disaster and imply that insurance does not cover the needed funds for repair).
      o For individuals who do not qualify for SBA disaster loans, FEMA sponsors the In-
        dividual and Family Grant Program (IFGP) in conjunction with state and local
        goverrnents; this program provides up to $10,400 (indexed to the CPI for the
        future) for immediate and necessary expenditures; the average grant is between
        $2,500 and $3,000 and the program is 25 percent state funded and 75 percent
        federally funded. (State matching funds may be available in some instances.)
      o For publicly owned buildings, 75 percent federal grants are made in declared dis-
        aster areas.
We have not explicitly modeled 8 percent SBA loans to individuals or to businesses affected
by disaster. Nor have we modeled general disaster clean-up costs, other than repair of
damaged structures.
Stakeholder Costs
      In order to distribute both aggregate and allocative costs and losses among various
stakeholders, we have assumed that the general taxpayer pays those costs modeled for the
federal government and that the State or local taxpayer pays those costs modeled for the
specific State or local governmnent. These distinctions are made, for instance, because
specific states and local governments may transfer earthquake costs to the federal govern-
ment. As a result, contributions to earthquake costs are not directly in accordance with the
                                              C-8
risks borne in specific states and municipalities. For state-owned buildings, we have assumed
that liability claims may arise as modeled above.
       For insurers we have assumed that non-quake insurers (and reinsurers) cover various
non-quake losses (emg., fire following, fatalities workers' compensation, general liability,
auto damage, theft). Quake insurers and reinsurers cover damage to structures and contents
and any business interruption or temporary housing costs less deductibles and up to limits of
liability. These costs are netted against premium income.
       For homeowners we assume the following costs:
       o the insurance premium costs if they bought insurance,
      o the mitigation cost if they engaged in mitigation,
      o the deductible or amount of earthquake loss, whichever is less if they have insurance
        (limits of liability are ignored or this analysis),
      o the total cost of damage if they do not have insurance, and
      o the (real) interest on loans necessary to fix any damage.
If homeowners default on their outstanding mortgage, they will lose the equity value in their
homes (and bear higher financing costs in the future owing to a bad credit rating). If the
homeowners receive grants, this is subtracted from their costs.
      Lending institutions are modeled as bearing mortgage default losses as discussed pre-
viously. If building owners have insurance we assume that no default occurs since, as a condi-
tion of the policy, the claims payment is made to the lender
      Business owners bear the following costs:
      o the insurance premium if they buy insurance,
      o the mitigation costs if they undertake mitigation,
      o the deductible or amount of earthquake property loss, whichever is less, if they buy
        insurance,
      o the total earthquake loss if they do not buy insurance,
      o the (real) interest on any loans necessary to fix damage,
     o business interruption losses, to the extent that they are not covered by insurance (or
       otherwise to the extent that there is a deductible or co-insurance clause), and
     o general liability costs, both for bodilinjury and for property damage not covered by
       insurance, or else by a deductible and/or a co-insurance clause.
                                             c-9
                                  APPENDIX D
                 FEDERAL FINANCIL ASSISTANCE CONSIDERATIONS
                            IN IMPLEMENTING LRMs
      In this appendix, we use an illustration in orderto show that
      o on the positive side, current federal policies can be used to justify federal assistance
        and other programs to implement ILRMs that in turn will reduce expected federal
        liabilities, and
      o federal disaster relief policy, regardless of its advantages, currently constitutes a
        major disincentive to loss-reduction for public and selected private nonprofit build-
         ings,
      o socioeconomic tools such as those developed in this project can be used to evaluate
        specific programs and proposals to estimate how much federal assistance may be
        warranted for specific LRMs targeted to reduce expected federal liabilities.
     In order to illustrate these conclusions, we have selected an extreme case in terms of
building risk. This case represents a public building in seismic zone 4 and with high soft soil
site shaking factors (I50%= 10, b = -1.1 in Table B-i). We have assumed that the building is an
unreinforced masonry (UTRM) structure, with a remaining 80 year lifetime. Following advice
from workshop participants, we have used a three (3) percent real discount rate. Building
replacement value has been estimated at 5 million dollars. Other assumptions are found in
Appendices. B and C. In particular, seismic retrofit cost has been estimated at 25 percent of
replacement value and is interpreted as a one-time up-front cost. Hence, as a result of high
estimates for the frequency of earthquake intensities, relative to other seismic mitigations for
UIRM construction, benefits will be high (or upper bound). However, relative to LRMs for
other selected types of construction, such a concrete tilt-up orwood frame structures, seismic
retrofit costs are high. Moreover, costs of seismic mitigations for new construction are far
less than for seismic retrofit. Hence, if federal assistance programs make sense for seismic
rehabilitaition, they make even more sense for new construction.
      Table D-1 summarizes benefits and costs of the proposed seismic LRM. Benefits in-
cdude clear economic benefits of reduced workers' compensation claims.. As noted in Ap-
pendix C and Section 4, the analysis here does not consider the widest range of possible
benefits.
                                              D-1
                                          Table D-1
                   Expected Losses and Benefits of Illustrative Seismic Retrofit
                                         Expected Losses                   Expected
                                         (Property only)                   Benefits
                                                                           Reduced
                                  NoLRM                    LRM              Losses
          Annual                   $157,600                $96,700           $60,000
          Lifetime (3%
          real discount           $4,807,200           $2,907,700         $1,899,500
                     Yrs)
          rate; 80            _
Table D-1 thus illustrates that with a 3 percent real discount rate the proposed LRM has a
favorable benefit-cost ratio (1.9: 1.25). With a higher real discount rate, the benefit-cost
ratio would be less favorable. With a wider range of benefits included, the benefit-cost ratio
would be more favorable.
      A favorable benefit-cost ratio does not entail that the benefit-cost ratio is favorable for
the owner. In the case of privately owned structures, some of the benefits may accrue to
others, such as buildings tenants and visitors. In this illustrative case, we distinguish among
the following stakeholders:
   o the local taxpayer -- or the taxpayer insofar as he pays taxes to a specific municipality
      and so pays for local government expenditures not otherwise funded, and
   o the federal taxpayer -- or the taxpayer insofar as he pays for federal government expen-
       ditures.
We have assumed that 75 percent of the expected property (non life-safety) losses are borne
by the federal taxpayer and that 25 percent are borne by the local taxpayer. After other
earthquakes in the future (see Olsen et. al., 1989), no state or Presidential declaration may be
made.
       Based on these assumptions, we develop the stakeholder analysis as indicated in Table
D-2.
                                               D-2
                                         Table D-2
                          Stakeholder Expected Losses and Benefits
                                    from Proposed LRM
                           *          Expected Losses                       Benefits
                                                                       (Reduced Losses)
                                No LRM               LRM
     Local Taxpayer
     o 25% of                    $1,202,000           $727,000                $475,000
       property damage
     o life-safety               $1,017,000           $239,000                $778,000
     o total                     $2219,000            $966,000              $1,253,000
     Federal Taxpayer            $3,605,000         $2,181,000              $1,424,000
     Total                       $5,824,000         $3,147,000              $2,677,000
Unlike Table D-1, Table D-2 includes an economic assessment of life-safety losses in terms
of workers' compensation claims and the like. Given these life-safety economic considera-
tions, the overall benefit-cost ratio of the project is 2.1, or very favorable. Even greater
benefits include not only decreased disaster relief costs but also many programmatic advan-
tages of local skilled labor working on a cost-effective project that has important symbolic
value for other projects in the local jurisdiction.
      However, Table D-1 also shows that for the local jurisdiction, if life-safety considera-
tions are ignored, the benefit-cost ratio is unfavorable (0.6) to the local jurisdiction. Thus,
owing to disaster relief assistance availability, benefits of such a seismic mitigation for the
state or local government will be less than the costs. Put more succinctly, the presence of dis-
aster relief greatly weakens economic argnuments for state or local governments to undertake
LRMs. A large share of the potential property losses are "externalized," in this case to the
federal government. Incentives for state and local loss-reduction programs are accordingly
seriously weakened.
                                              D-3
      Put positively, Table D-2 shows how a program of federal assistance can be justified to
reduce existing contingent federal liabilities. In the extreme case being analyzed, the federal
government can provide full assistance to the state and local government to undertake the
loss-reductions, and still have a favorable expected effect in reducing the deficit (the benefit
cost-ratio is 1.27). In the vast majority of cases in which the overall benefit-cost ratio is
favorable, federal cost-sharing can be estimated which nonetheless has a favorable benefit-
cost ratio. Hence, although some may desire the use of sanctions to induce state and local
governments to undertake cost-effective LRMs, a program of targeted federal cost-sharing
may also be warranted, with both potential deficit-reducing and symbolic benefits.
                                             D-4