New Earthquake Risk Models Likely To Reduce Insured Loss Estimates

August 6, 2009

Newark, Calif.-based Risk Management Solutions (RMS) has unveiled its next-generation models for North America earthquake risks, covering the United States and Alaska, Canada and Mexico. The new models are likely to lead to a reduction in U.S. earthquake insured loss estimates of 10 percent to 25 percent for the average insurer across all lines of business, with more modest changes in loss estimates for commercial business lines and larger reductions for residential lines, the company said.

The new models incorporate advancements to help companies differentiate the risk between individual properties more precisely and gain greater insight into the factors affecting uncertainty in model results, according to RMS. The latest release also includes a suite of new and upgraded earthquake models for Central and South America to provide an integrated basis for managing earthquake risk across the entire Americas region.

The most significant changes in North America will be in California, th company said, where modeled loss estimates will reduce by approximately 5 percent to 15 percent for most commercial portfolios and 25 percent to 35 percent for the majority of residential portfolios. Results will vary by company based on the geographic distribution of their portfolios as well as the building characteristics of the insured properties and policy conditions.
“Our new model reveals that the landscape of earthquake risk is changing in California,” commented Paul VanderMarck, chief products officer at RMS. “With modeled loss estimates decreasing more in the San Francisco peninsula than in Los Angeles, where earthquake risk was previously estimated to be lower, the relative risk in the two cities is now much more similar. Given the amount of property exposure in Los Angeles, insurers could now see it accounting for as much as 60 percent of their overall California risk.”

While overall modeled loss estimates are expected to decrease moderately across most of the United States and Eastern Canada, losses in some areas of the Pacific Northwest, Southeast, and Western Canada will increase, RMS said.

The principal driver of changes in modeled loss estimates for the Western U.S. and Canada is a new body of science on how ground shaking decreases with distance from an earthquake’s fault rupture, known as ground motion attenuation. This latest research, which has been incorporated by the U.S. Geological Survey (USGS) in its 2008 National Seismic Hazard Maps, reveals that previous approaches to assessing ground motions were generally too conservative, particularly for extreme event scenarios. As an integral part of incorporating the latest scientific developments, RMS has reviewed all aspects of the models to ensure they remain calibrated with historical loss experience.

The new models also incorporate new research into the modeling of expected property damage and human casualties due to earthquakes. These advances enable companies to differentiate their portfolio risks in more detail, the company said. For example, they can now more precisely characterize the potential damage and collapse probability of individual buildings based on their height, construction type, age, soil conditions, and other more detailed information.

Additionally, RMS said it has focused on providing greater insight and transparency around the uncertainty in the model. “While science develops and models become increasingly sophisticated, estimating losses from catastrophic events remains an inherently uncertain endeavor,” commented Mr. VanderMarck. “With this model release we’ve taken major steps to characterize the uncertainty more explicitly. For the first time in a catastrophe model, we have implemented functionality to enable companies to quantify how uncertainty in key areas of the underlying science propagates through into uncertainty in modeled loss estimates.”

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