Viewpoint: Risk Management Lessons From COVID-19 Extend Far Beyond Pandemics

By David Geller | November 10, 2020

Even though we are still mired in the COVID-19 pandemic, it is not too early for insurance and risk management professionals – as well as society as a whole – to do what humans have done for centuries: Learn from tragedy and emerge a more resilient and prepared society.

A clear byproduct of the COVID-19 outbreak is that we are now acutely aware of the damage a pandemic can cause; the scars borne out of this crisis very well could lead to more swift and aggressive responses to any future contagions that have pandemic potential.

However, the lessons that we should glean from COVID-19 extend beyond the recognition that pandemics are catastrophic. What about other low-probability, high-severity risks? Yes, COVID-19 reminded us of the uniquely devastating impacts that pandemics can pose. But it also served as a harsh reminder of what can ensue when unlikely risks are overlooked.

Guided by this understanding, it’s worth calling attention to three unlikely scenarios that could have catastrophic impacts on both a local and global scale: Solar storms, an earthquake in New York City, and a volcanic event.

Solar Storms

In 1859, telegraph operators were shocked – both literally and figuratively – by the impacts of a massive solar flare, a burst of radiation coming from the Sun’s release of magnetic energy. These storms – now referred to as the “Carrington Event” – wreaked havoc on telegraph lines, reportedly causing “streams of fire,” as one telegraph manager described it, to shoot out of the circuits.

A report published by the U.S. National Academy of Science in 2008 projected that a storm akin to the Carrington Event could trigger damages and disruption that levy over $1 trillion of damage, with recovery efforts lasting 4-10 years. The centralized power grid remains considerably vulnerable to this level of geomagnetic power, with the potential for numerous transformers to be rendered useless. Additionally, a solar storm could cripple satellites, paralyze GPS systems, and contribute to the failure of heating and air conditioning systems. These dynamics could facilitate an avalanche of business interruption claims reminiscent of what came to pass during COVID-19.

Our technologically dependent society has been fortunate to avoid being slammed with a massive solar storm. But there have been some close calls. For example, in July 2012, a coronal mass ejection (CME) that was comparable to the Carrington Event came dangerously close to impacting Earth.

Earthquake in New York City

Raise the issue of earthquakes to the average American, and their minds will naturally wander to sunny California, which has been – and likely will continue to be – inflicted with catastrophic earthquakes.

But what about California’s counterpart on the East Coast, New York City? Rarely can we say something in the Big Apple is overlooked, but in the case of earthquake risk, this may be the case.

A 2018 Long-Term National Seismic Map published by the United States Geological Survey (USGS) deemed New York City, as well as the southeast corner of New York State and the northwest corner of New Jersey, to be at “moderate” risk of an earthquake. In fact, some researchers believe that New York is susceptible to a magnitude 5 earthquake every 100 years, a magnitude 6 every 670 years, and a magnitude 7 every 3,400 years.

If this is the case, then the city that never sleeps appears to be overdue for a serious seismic awakening. The last two NYC earthquakes that were projected to have exceeded 5 on the Richter Scale took place in 1884 and 1737.

Although the potential for a massive earthquake at the magnitude of, say, the Bay Area earthquake of 1989 (6.9), is extremely slim, the geographical and architectural features of New York City makes the city exposed to severe damages in the event of even a moderate earthquake.

The composition of soil is considered a key driver of damages that an earthquake could cause. The softer the soil, the more vulnerable the structures. This is a concerning correlation, as the high rises, walkups, and brownstones so prominent throughout the city were erected primarily over wetlands and swamps. Additionally, prevailing building standards for developing these structures rarely sought to address earthquake risks until 1995, when the first seismic provisions were incorporated in the New York City Building Code.

Given that the majority of buildings in NYC were constructed before 1995, the exposure levels to a moderate earthquake may be quite high. A report published in 2003 by The New York City Area Consortium For Earthquake Loss Mitigation (NYCEM) pointed to many neighborhoods being at risk to an earthquake, but referenced Manhattan’s Chinatown and Upper East Side as being particularly vulnerable to the highest degree of damages.

The property damage exposures are clear. However, more extreme consequences may hinge on how key infrastructures – both in the city and in New York State – would hold up in the event of an earthquake. In addition to the subway systems and bridges laden within the city, New York State contains dams, nuclear power facilities, and other plants that contain hazardous materials.

Volcanic Event

A 2018 Volcanic Threat Assessment undertaken by the USGS identified 161 volcanoes in the United States that “pose potential threats to American lives and property.” Of those volcanoes, 18 were deemed to be at a very high threat level, 39 were labeled as high, and another 49 were considered moderate.

The risks posed by volcanic events can be felt from the ground level all the way into the atmosphere. With respect to the former, ash particles emitted by volcanoes can be both a health and property hazard for several miles. Ashcan also cause disruptions skyward, posing various threats to aviation, including the clogging of air filters, engine erosion, and even complete engine failure.

On the more severe end of the spectrum, a volcanic event can also have global implications, including an alteration of climate. When Mt. Tambora in Indonesia erupted in 1815 a stream of volcanic ash and sulfate aerosols was hurled into the stratosphere and dispersed around the world. As a result, temperatures for the next two years dropped by as much as 3oC. This precipitated a series of unusual and dangerous phenomenons, such as flooding during dry season and the sudden disruption of microbial ecology that contributed to the spread of disease.

Experience is the Best Teacher – But It Can’t be the Only Teacher

A study published in the European Journal of Social Psychology expressed that “the human notion of risk is a mental construct” and is impacted by personal experience.

Does this suggest that first-hand knowledge of a risk – or lack thereof – could impact society’s willingness to address it? As COVID-19 infiltrated the U.S. in January, this dynamic may have been borne out. While, the public had generally been aware that a pandemic could happen, the response was initially slow. Ultimately, it took until the outbreak became rampant for a major reaction to occur in March. And as we approach the one-year mark since COVID-19 began infecting people around the world, the initial lack of preparedness and mobilized response is continuing to exert an immense price on society.

These developments highlight a couple of powerful lessons:

  • Generally speaking, people may be inclined to dismiss rare but severe scenarios until the full brunt of the impact manifests.
  • The only thing worse than a catastrophe may be a catastrophe that society is not prepared for.

Human nature can be a risk in itself. For insurance and risk management professionals, acknowledgment of this unpredictability could be the first step to recalibrate perceptions not just of pandemic risk, but a number of low-probability, high-severity risks that may feel easy to dismiss… until it becomes reality.

About David Geller

David Geller is an emerging issues senior analyst at ISO. He is responsible for research in emerging risks that may affect the insurance industry to support product development, and to maintain the ISO Emerging Issues website.

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