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The Rising Cost of Disasters

A new report from Allianz analyzes the fact that the insurance claims from natural disaster are becoming more expensive. The key reason is not so much that there are more disasters, just more buildings, more development and more insurance. And as parts of the developing world, specifically China and India, continue to become more affluent, we can likely expect this to continue.

One way this is illustrated is by looking at the most powerful and more deadly earthquakes in each of the past ten years. In some years (2003, 2008 and 2011 so far), the strongest quake is also the most deadly.

But in other years, notably last year with the 8.

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8 magnitude earthquake in Chile killing 507 people and the 7.

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0 earthquake in Haiti killing more than 200,000, that has not been the case. The two main reasons for this is that the stronger quake either hits a very remote location where people don’t live or it hits a location with modern building codes and shake-resistant buildings.

Markus Treml, seismology expert at Allianz SE Reinsurance, explains.

The Energy factor shows the ratio between the seismic energy released by the two earthquakes. For example, the quake in Chile released 500 times more energy than the quake in Haiti. This table shows that those regions where tectonic plates clash are at highest risk. Six tremendous earthquakes happened in Indonesia in the last decade. All other earthquakes in this table – except Haiti – are also in high-risk zones. The amount of energy released does not necessarily mean more damage or casualties. Instead, weak buildings or secondary effects of earthquakes such as tsunamis or fires are the most common reason for high fatality rates.

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This was the case in Haiti in 2010, in Northern Sumatra in 2004 and will probably be the case for Japan.

As he mentions, the “energy factor” in the chart below represents how much more powerful the strongest earthquake was each year than the most deadly.

Rebuilding Japan May Cost More Than $300 Billion

According to the office of Prime Minister Naoto Kan, the cost of Japan’s rebuilding efforts following the earthquake may exceed $300 billion, which would easily make it the world’s most expensive natural disaster on record. (Hurricane Katrina, with an estimated $125 billion, inflicted the previous-record amount of damage.) There is often a big difference between early estimates and final tolls — particularly estimates coming from those who are directly affected — but the World Bank is also expecting the costs to come in around $250 billion.

Rebuilding after the 9.0-magnitude quake and tsunami, which ravaged the northeastern coast of the main Japanese island of Honshu, will cost up to $309 billion, Mr. Kan’s office said Wednesday. The World Bank, citing private estimates, said on Monday that the figure could reach $250 billion.

More on the insured loss estimates from the Japanese earthquake can be seen here.

Q&A: The Automotive Industry After the Quake

Though many industries were affected after the Japan earthquake and tsunami, there were some that were hit especially hard — electronics and automotive.

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To get a better glimpse of what the automotive industry was going through, I contacted Fred Hubacker, automotive supplier expert with Conway MacKenzie, a Detroit-based crisis management firm. The following is what transposed:

The earthquake and tsunami in Japan has created chaos for most companies
with operations in the area. How has the automotive industry fared. In your
opinion, was it the industry hardest hit?

FH: In general, the automotive industry has suffered tremendous loss from this
tragedy. Lost auto production, in Japan, could reach 335,000 units by the
end of this week (3/25). In addition, the effect is starting to be felt in
North America with overtime elimination and at least one assembly facility
down (GM Shreveport [Louisiana]) and downtime in Europe. Automotive seems to be the
hardest hit, at least on an immediate basis, however, the effect on other
industries such as electronics and aviation have not been widely reported
yet.

What were the major risks posed to automotive companies with operations
in the affected areas?

FH: The major risks include damage to their own assembly and component
manufacturing facilities, damage to suppliers producing many components
including electronics, petro-chemical products and powertrain components,
the loss of infrastructure including power, roads, water and transportation,
and of course, the issues created from the huge loss of human lives.

Was there one particular automotive company that was hit hardest?

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FH: Not entirely clear at this point but it appears that Honda has a heavier
concentration of suppliers in the quake zone than the other manufacturers.
Toyota, for example, is losing all Prius model production at the moment.

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How will such business interruptions in the automotive industry affect
other industries?

FH: Widespread component shortages and production downtime could ripple effect
to thousands of other auto component and logistics suppliers who were not
directly affected by the quake. Normal just-in-time suppliers will not be
able to continue production.

What can be done, if anything, to prevent such interruptions in the wake
of a catastrophe?

FH: Alternative sources can be developed, but generally that is a lengthy and
expensive process.

The Psychological Hurdle to Earthquake Preparedness

The final death toll from the earthquake and resulting tsunami in Japan is now expected to exceed 18,000. While that number paints a far graver picture than the initial, much lower estimates, many believe that the human fallout from a magnitude 9.0 quake would have been worse if it wasn’t for the country’s strict building codes.

In that sense, Japan’s path towards resiliency should be a lesson to other nations threatened by seismic activity. Either modernize and fortify your construction and infrastructure or jeopardize the lives of your citizens when the next major earthquake hits.

Unfortunately, improved building standards are not the only impediment to better preparedness. A new study from a University College London researcher Helene Joffe has shown that there are some significant psychological hurdles as well — and the underlying rationale may vary from culture to culture.

In Japan, for example, responses to her survey about how safe people would feel if an earthquake hit revealed a fatalistic outlook, meaning that many people didn’t believe that improved building standards — or any other preparedness efforts, really — would ultimately make any difference.

Japanese participants, while being the most confident in the structural integrity of their buildings, had a more negative response than those in the US when asked “How safe would you feel being inside your house during an earthquake?” The Japanese also scored lowest on the number of seismic adjustments they had made: an average of seven, compared with nine in the US. Joffe says there was far more talk of worry, anxiety, fear and a sense of vulnerability from Japanese respondents, while those in the US had a much greater feeling of optimism.

Japanese participants gave the impression that damage is caused by the force of an earthquake alone rather than arising as the result of interactions between uncontrollable geophysical events and controllable features of the built environment, says Joffe. “We found the Japanese participants to be more fatalistic than we expected,” she says. “The feeling was that you can do whatever to your house but what is going to happen is going to happen and there is very little you can do to change that.”

Other survey participants came from Turkey, another nation with high seismic risks. Here, too, people had a “there’s nothing you can do” attitude, something that was skewed both by religion and a distrust of government.

In Turkey, there was much more talk of earthquakes being an act of God. There was also much more talk of distrust in government and corruption. “They thought that their buildings were badly built and that there was nothing they could do to prepare because everything was negatively affected by corruption,” says Joffe.

We already know that there many hurdles to better disaster preparedness: budget constraints, complacency, a lack of urgency and an “it won’t happen to me” attitude, to name just a few. But according to Joffe, this new information means that policymakers must also begin to incorporate cultural understanding into their efforts.

Joffe’s team says the current models of seismic adjustment need to give a more prominent role to these cultural influences. They will use their results to identify how best to motivate people to make changes.

“If we find that fatalism is leading the Japanese not to make necessary adjustments, then it may be better to go in on the engineering side and retrofit their houses,” she says. “In Turkey, on the other hand, you’re not going to change vulnerability without starting with corruption.”

For more on the other psychological hurdles, read this excellent piece that FM Global’s Ruud Bosman wrote for us recently highlighting research that his company conducted.