Turkey's Disaster Was Preventable... by Insurers

Contractors and government inspectors are to blame for the shoddy construction that let so many buildings collapse, but insurers can blunt future disasters.


The death toll in the earthquake in Turkey is staggering -- more than 37,000 people are known to have died, as I write this, and the UN says the actual total  could be twice that. But the number who died didn't need to be nearly so high, even though the earthquake and its aftershocks were massive. Tens of thousands of people should still be walking this Earth -- shaken up but very much alive. 

The blame falls squarely on contractors who constructed shoddy buildings and on all those who falsely sold companies and individuals on the earthquake-resistant qualities of the spaces they were buying or renting. Blame also belongs to those government officials who failed to spot and publicize the problems that caused entire blocks to collapse even though buildings were supposedly built to modern standards in an area known to be vulnerable to earthquakes. 

But I do think insurers can help prevent future disasters. It won't be easy. It will require finding a way to share the industry's evaluation of risks in ways that go beyond the narrow confines of a policy and that range beyond the one-year time frame of the normal insurance contract. But it's worth a try. 

I've had occasion to think about earthquakes and building standards ever since I was searching for a new office as the bureau chief in Mexico City for the Wall Street Journal in 1994. Memories were still fresh from the 1985 earthquake that had collapsed buildings throughout the city and killed at least 5,000 (the official count) and probably more like 10,000 people. So, I wasn't just trying to find more space as I hoped to consolidate Dow Jones operations in Mexico but was looking for resilience in the face of earthquakes, and I got quite an education on just how much force buildings could be constructed to withstand. 

My problem as a buyer boiled down to two issues: information and incentives. And those two issues not only confront other buyers as they think about where to locate in earthquake zones but create hurdles for the broader, societal desire to keep earthquakes from causing billions of dollars of damage and killing tens of thousands of people.

The information issue was simple: Others had it, and I didn't. Those who constructed the buildings I visited certainly knew what standards they had or hadn't met. Government inspectors did, too. But I was operating at a severe information disadvantage. I could look at the brochures I was presented and maybe dig into government reports, but I still wasn't going to really know just how a building would perform once the shockwaves of a major quake starting rolling through the drained lakebed that Mexico City is built on.

The agents for those builders also didn't have any incentive to be open with me about the resilience of an office. They just wanted to make a sale. I'm not saying there were necessarily dishonest. I'm merely acknowledging the realities of capitalism. They had every reason to gloss over any imperfections, just as the builders had incentives to keep costs as low as possible during construction. 

Government inspectors also didn't have incentives that lined up very well with mine or with those of society writ large. They produce their reports for decision makers in the bureaucracy, not for the public, so they use obscure language and don't even have a very good way of informing the public about the relative safety of buildings. And -- let's be frank -- inspectors aren't always as pure as the driven snow in a political culture like Mexico's in the mid-1990s. Bribes were known to happen. 

Here's where insurers come in. They have both the right information and the right incentives. They can not only help an individual like me circa 1994 but can also educate a whole populace about risks in ways that could greatly limit the devastation from future earthquakes. 

As I said, it won't be easy. Yes, underwriters have all the data they need on the general risk of an area such as Mexico City or on the recently devastated area along the Turkish-Syrian border, where three tectonic plates come together. Insurers also have accurate data on all the buildings whose owners or renters they underwrite. And insurers have reason to want to help clients avoid losses, especially as we move more toward a "predict and prevent" model and away from the traditional "repair and replace" approach to insurance. 

The biggest problem is that the decision to rent or buy tends to happen before insurance enters the equation. In addition, the cost of insurance is typically reflected in one-year increments, as policies come up for renewal. 

But what if insurers in Turkey had warned prospective occupants a decade ago that certain buildings weren't, in fact, built to modern standards for withstanding earthquakes, despite what the owners' agents claimed? What if insurers had also said that risks (and premiums) would increase each year because pressure continually builds where tectonic plates cross, until an earthquake releases that tension? What if the insurers had put a hefty price tag on those increasing risks, showing prospective occupants that they wouldn't save nearly as much as they'd hoped by moving into a building constructed to a sub-par standard? And what if those insurance conversations had happened before the lease or mortgage was signed, rather than afterward?

How many occupants would have been dissuaded (and lived)? How many builders would have retrofitted offices or at least adhered to high standards in future construction?

I saw such broad conversations about cost have an impact in the personal computer industry in the late 1980s and through the 1990s. Many budget brands lost credibility when consultants began rating the total cost of ownership over the lifetime of a PC, and buyers could see what they'd likely spend on maintenance, software that wasn't included in the base model, etc. These days, makers of electric vehicles are changing the conversation along similar lines. Yes, EVs cost more up front than those with internal combustion engines (even with government incentives, in many cases), but they require much less maintenance and, of course, don't require gasoline. 

So, while I realize a lot has to happen between my noodling on earthquakes and broad societal impact, I'm hoping that we can change the timing and nature of conversations about insurance and blunt at least some of the effects of earthquakes in years to come.