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Home Markets Insight Earthquake insurance: Reacting to new data
Earthquake insurance: Reacting to new data PDF Print E-mail
Written by Lloyds of London   
Monday, 22 March 2010 15:41
Loss estimates fall dramatically thanks to better understanding of ground motion during earthquakes.





The new decade got off to a devastating start with countries across the globe still counting the cost of earthquakes and winter storms. The human cost has been particularly high, with death toll estimates rising to 230,000 in Haiti, 528 in Chile and 57 in Turkey.

But despite their devastation, each catastrophic event provides scientists with crucial information. And, as recent updates to US earthquake models show, new data can make a big difference to insurance exposures.

Ground motion studies


Studies of recent earthquakes led to significant updates in the US Geological Survey maps in 2008. The updates were a result of a project called Next Generation Attenuations (NGA), carried out by top researchers in ground motion.

They found that ground shaking for a particular type of earthquake, called a strike-slip earthquake, decreases with distance from an earthquake’s epicentre. Examples of strike-slip events include the 1906 San Francisco Earthquake and subsequent San Andreas ruptures.

This change in understanding had a profound impact on insurance industry catastrophe models. “This was the biggest single driver of the change we had and not just us - it was the biggest change in the USGS hazard maps,” said Don Windeler, director in the Nat Cat and Portfolio Solutions group, in charge of earthquake modelling in the Americas at Risk Management Solution (RMS).

“This was a landmark study in understanding ground motions and collated five to ten more years of data on ground motion than we’d had before." He added: “There were more data recorded for large earthquakes during that time, captured on higher quality instruments that measure more characteristics of the ground motion than we had previously.”

Exposure reduction


Last year’s release of RMS’ North American earthquake models incorporated the changes to USGS maps. It showed reductions in insured loss estimates of ten to 25 per cent for the average insurer across all lines of business. Modelling firms AIR and Eqecat showed similar reductions in their updated models.

“The ground motions predicted for large strike-slip events were decreased, which consequently had some large effects on our loss estimates for California and much of the Western US,” said Windeler. For Los Angeles, the changes were less profound as the city is also subject to 'thrust' earthquakes, the shaking estimates for which did not change as significantly.

The updated model also incorporated new understanding of how different construction types behave in an earthquake. “Some construction classes increased in their modelled vulnerability,” said Windeler. “Particularly some of the older, less ductile types of structures such as unreinforced masonry, tilt-ups and non-ductile reinforced concrete.” He added that he expects further lessons on property damage to be gleaned from the Chile Earthquake, a massive magnitude 8.8 event so powerful that, according to NASA scientists, it is likely to have shifted the earth on its axis.

“It’s the first time we’ve had one of these enormous earthquakes – a great earthquake – that is affecting modern structures built to high seismic requirements," Windeler explained. "Santiago has lots of high rise buildings that are built to very stringent requirements and while this is not a full test for Santiago, it’s going to be really useful for engineers to look at how buildings performed.”

Understanding uncertainty


Learning about how construction types perform in an earthquake is crucial to improving catastrophe modelling, explained Paul Nunn, head of exposure management at Lloyd’s.

“Every event is an opportunity for the cat modelling companies to go and validate the way they’ve built mathematical vulnerability functions, which determine how much damage is sustained for a given intensity of earthquake,” he said.

Despite the updates to the US earthquake models, there has not been a significant change in how Lloyd’s insurers and reinsurers price earthquake risk.

“Directionally it has come down but there are still huge amounts of uncertainty associated with the modelling of estimated losses,” explained Nunn. “In particular relating to some of the secondary peril aspects of earthquakes.”

These secondary aspects include fire-following-earthquake, sprinkler leakage and demand surge. Understanding this uncertainty, and making informed decisions with that knowledge, is an ongoing challenge for re/insurers. “Ten years ago the industry was using cat models fairly naively without fully appreciating just how much uncertainty there is,” Nunn said. “Having now recognised that uncertainty how do you actually make decisions in the face of that uncertainty? That’s still something we’re grappling with a little bit.”
Last Updated ( Monday, 22 March 2010 15:50 )