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An earthquake of a snowstorm: Column

What happened in Chile in 2010 could teach us a thing or two about coping with this winter.

Erwann Michel-Kerjan, Howard Kunreuther and Michael Useem
Rochester, Minn. last month.

This winter's unexpected brutal snowstorms and deep freeze across the country caught us unprepared. Major disruptions and economic losses have been widespread, along with office and schools closings and flight and train cancellations. Under pressure, the head of the Massachusetts Bay Transportation Authority stepped down last month because the 100-year-old system could not handle the severe weather.

Don't blame the weather. Parts of our country are simply ill-prepared for anything that deviates from normal operations. And these weather conditions don't even begin to tip the scale when compared with the havoc caused by much more devastating disasters that could happen tomorrow.

One can only imagine how the country will cope if California is hit by a long-overdue high-magnitude earthquake. Today, 90% of its residents do not have earthquake insurance and aging infrastructure is likely to fail, causing paralysis for weeks and extreme economic losses. But rather than moving to action mode now, many prefer to bury their heads.

Our work with and research on business and government leaders around the world have taught us three principles that have become critical for coping with large-scale disasters:

  • Preparedness before a disaster matters . Readiness matters for residents, businesses, public infrastructure and government officials in a disaster-prone area. More executive suites have now taken this issue seriously to be competitive. Investing in our nation's resilience should be seen as a cost-saving national imperative, not something to keep procrastinating about.

  • Financial protection before a disaster matters. Insurance protection helps speed recovery after a catastrophe. But while banks require homeowners insurance as a condition for home mortgages, most still do not mandate earthquake insurance in high-seismic areas. Hence, most Californians are uninsured and will hope for a bailout as has become a norm in our country.

  • Competent leadership matters. There is a need for smart and decisive actions in the months after a major disaster. It is vital that those in charge can handle stress, set achievable recovery goals and, at the same time, create long-term strategies for mitigating future losses.

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These three principles are evident from the experience of other countries that have coped well with disasters in recent years, and Chile is high on our list. Last month marked the fifth anniversary of a magnitude 8.8 earthquake that devastated the nation in 2010, the sixth most-powerful earthquake on record. It shook the country more powerfully than any nuclear bomb ever built, and the energy released moved the entire country west and even tilted the Earth's axis permanently.

The damage proved massive: Economic losses totaled 18% of the country's gross domestic product. This would be the equivalent of $3 trillion in economic losses in the United States, more than 20 times greater than the damage inflicted by Hurricane Katrina in 2005, America's most costly disaster to date. That dwarfs the disruption from the snowstorms that Boston.

Yet, a year later, Chile's economy was back on track, its credit rating steady, its stock market up and its annual GDP growth rate had reached 6% at a time when the world economy was still reeling from the 2008-09 financial crisis.

Chile's remarkable comeback was possible because it already implemented our three principles:

  • Financial protection. More than 95% of the mortgaged residential properties in Chile were insured to some extent against earthquakes via a private insurance market where premiums accurately reflected real risk. Though the country had created a crisis fund for dealing with macroeconomic shocks, then-President Sebastián Piñera and then-Finance Minister Felipe Larrain decided to leave the fund intact for another rainy day — an act of long-term preparedness — by raising new funds through a temporary tax increase and limited debt issuance on international markets.

  • Leaders in place. As a former CEO, President Piñera brought extensive business leadership experience, and he initially focused on immediate recovery goals such as having all children back in school within 60 days of the quake. But he also resisted pressures to compromise his campaign pledge to jump-start a languishing economy, and insisted that the country go far beyond just rebuilding. To achieve those goals, he required that each of his Cabinet members achieve a host of tangible, aggressive and transparent goals on time without plunging the country into debt.

Large-scale risks of many kinds have increased in recent years, ranging from technological meltdowns to financial crises, disease pandemics and terrorist threats. If these three preparedness principles can be applied in the U.S., we will be in a better position than we find ourselves today. Is America up to the challenge?

Erwann Michel-Kerjan is executive director of the Wharton Risk Management Center and chair of the OECD Secretary-General Board on Financial Management of Catastrophes. Howard Kunreuther is professor of decision sciences and public policy and co-director of the Wharton Risk Management Center. Michael Useem is professor of management and director of the Wharton Leadership Center. They are the authors of Leadership Dispatches: Chile's Extraordinary Comeback from Disaster, published by Stanford University Press.

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