The document discusses the importance and evolution of catastrophe modeling, particularly in regards to earthquakes and the insurance industry. It highlights the frequency and impact of earthquakes in the U.S., the role of insurance in risk management, and various methodologies for loss estimation. The insights provided emphasize the need for improved resilience assessments and modeling techniques to better prepare for future seismic events.

1. Source:
Catastrophe Modeling Workshop Earthquakes
Casualty Actuarial Society Ratemaking and Product Management Seminar
David Lalonde, FCAS,FCIA,MAAA
Society of Actuaries General Insurance Infographic http://www.soa.org/general-ins/
Cat Modeling http://www.casact.org/community/affiliates/case/0312/Wang.pdf

2.  First practiced by ancient Chinese and
Babylonian traders, General Insurance, also
known as Property and Casualty, has played a
critical role in the evolution of modern society.
 An immense field continuing to grow in size
and complexity. As increased globalization, and
new economies and volatilities emerge, so do
new opportunities—especially for risk-focused
professionals.

3.  In the United States about 5,000 quakes strike each year. Since
1900 earthquakes have occurred in 39 states and caused damage in
all 50.
 Insured losses from earthquakes were about $45 million in 2013,
far below 2011’s $54 billion, the highest amount ever recorded,
according to Swiss Re.
 The California Earthquake Authority, the state-run entity that is
the largest provider of earthquake insurance in the U.S., has some
800,000 policies in force in the state. Only about 12 percent of
Californians purchase earthquake coverage.
 In the past, earthquake loss was assessed using a collection of
mass inventory data and was based mostly on experts' opinions.
Today it is estimated using a Damage Ratio (DR), a ratio of the
earthquake damage money amount to the total value of a
building. Another method is the use of HAZUS, a computerized
procedure for loss estimation.

4.  The insurance industry is vital in the process of increasing societal
resilience, especially in planning for and recovering from low-frequency,
high-severity catastrophic events.
 The Swiss Re’s Economics of Climate Adaptation (ECA) research shows
that transferring risk to insurance markets can be the most cost-effective
alternative to manage residual risk for developing economies that can’t
afford massive investments for low-frequency events.
 Insurance also relieves strain on public budgets when disasters occur,
making communities more resourceful.
 Improvements to infrastructure also need to be recognized in a
standardized way. Insurers and investors have no standardized metric for
assessing the resilience of a community. Creating a common 'resilience
rating' might help create the necessary market conditions for doing so,"
Smith told the audience

5.  2010 had the most devastating earthquakes in recent times. The
largest quakes in Haiti, Chile and New Zealand claimed well over
200,000 lives, almost exclusively in Haiti, and roughly 50 billion
USD in damage to the economy.
 Actual losses varied substantially across affected regions. In the
case of Chile and New Zealand, the events showed that strict
implementation of building codes does save lives by significantly
reducing building damage. Cat modeling assumptions have been
proved to be accurate in this regard.
 From an insurance perspective, one of the key lessons learned is
that so-called secondary loss agents – such as liquefaction and
tsunamis – are generally undervalued in loss modeling. Business
interruption is another widely underestimated risk, especially for
certain industries such as pulp manufacturers, breweries and
refineries.

6. Only one regional insurance company survived, offering
company stock in place of cash to settle claims.

7. Earthquake risk is estimated with the help of seismologists.
Losses are reinsured, spreading the risk globally.
Today

8. Number of Insurer Insolvencies
0
10
20
30
40
50
60
70
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
NumberofInsolvencies
A few insurers go insolvent every year for different reasons.
Catastrophes are no longer the leading cause of insolvencies.

9.  A rapid, relative displacement of the rock on either side of a
fracture, or fault, in the interior of the solid earth; the energy
released produces seismic waves that radiate outward in all
directions from the initial point of rupture

11. Ninety percent of the world's earthquakes
Occur along plate boundaries

12. #1 Chile, 1960
M9.5
#2 Alaska, 1964 M9.2
#3 Sumatra,
2004
M9.2
#4 Tohoku, Japan,
2011 M9.0

13.  The magnitude 9.0 2011 Tohoku, Japan, and 2004
Sumatra-Andaman, Indonesia, earthquakes were
black swans1 to many earthquake scientists
because of their unexpectedly large magnitudes.
The devastating tsunamis triggered by each
earthquake killed more than 250,000 people and
caused massive economic losses. With the wake-up
call from these two megaquakes, scientists and
businesses want to know the maximum size
earthquake that can occur in a region so that the
seismic hazard can be better addressed and
businesses can be better prepared.
 Black swan is a metaphor, developed by Nassim Nicholas Taleb in his 2007 book, The Black Swan, to describe
an event that is considered rare and unpredictable, has a massive impact, but is retrospectively predictable.

14.  Earthquake modeling system
Structure/Building
Vulnerability
Hazard
Financial
Event
Generator
Intensity
Calculator
Damage
Estimation
Insured
Loss
Calculation
Exposure
Information
Policy
Condition

15. KNOWLEDGE DATA
 How regional tectonics – Historical
and instrumentally impact fault
distribution and activity
 How rupture interactions of
fault segments cascade into
large magnitude earthquakes
 How to model time dependent
fault rupture scenarios
 How earthquake ground
motions propagate through a
region
 What are the mechanisms of
local site amplification
 Historical and
instrumentally recorded
earthquake data
 Active and potentially active
faults identified by
geologists
 Paleoseismic and
paleoliquefaction data
 Regional geodetic data
 Earthquake ground motions
(attenuation equations)
 Shear wave velocity in
shallow soils

16. U.S. Geological Survey (USGS)
California Geological Survey (CGS)
Southern California Earthquake Center
(SCEC)

17. Global/regional tectonic and geologic information
– Provides a framework for understanding the dynamics of the
regional seismic activities and spatial distribution of earthquakes
Earthquake catalog data
– Spatial distribution of earthquakes
– Rates of small to medium size earthquakes
Paleoseismic & paleoliquefaction data
– Locations and magnitudes of past earthquakes
– Faults slip rates
– Magnitudes and recurrence intervals of characteristic earthquakes
Regional strain rate (GPS) data
– Rate of regional volumetric stain accumulation that can be
translated to regional earthquake potential

19. The Gutenberg-Richter (GR) distribution is an empirical
relationship between the frequency and magnitude of
earthquakes.
The cumulative annual frequency of earthquakes
decreases as the magnitude increases
But how do you estimate the frequency of
very large events, when there are so few in
the historical record?
Historical catalog ~ 150 yrs
Paleoseismic ~ 10,000s yrs
Geodetic ~ Current Plate Movement

21. Figure 1.
Deformation regimes
as defined by
Kreemer et al. (2002):
Subduction (S);
diffuse Oceanic (O);
Ridge-transform (R);
Continental (C). Also
shown are 189
shallow earthquakes
above = 5.66 from the
CMT catalog, 1977-
2009.03, which did not
fall into any of these
regimes. These are
considered intraplate
(I) earthquakes.
Figure 1.

22. Plotting to GR
Relation
Frequency/magnitude
plot of the 189 shallow
intraplate earthquakes
from Figure 1. Also
shown are 3 tapered
Gutenberg-Richter
model curves (Jackson
and Kagan, 1999; Kagan
and Jackson, 2000). All
models have the same
asymptotic spectral
slope of β = 0.63, but
differ in the choice of
corner magnitude
mc. While the match to
the curve with corner
magnitude of 9 appears
best, it must be noted
that this depends on the
size of the single largest
earthquake.
Figure 2.

23.  Fault Trenching Reveals Offsets in Rock and Soil Layers;
 Carbon Dating Provides Information on Recurrence Rates

25. Land Survey Stations in San
Francisco Bay Area
• Each satellite broadcasts radio signals
with two different wavelengths
• A position on the earth can be located
by recording and processing signals
from three satellites with known orbits
• Relative locations of stations are used
for horizontal and vertical land survey

26. ?

27.  Frequency/magnitude curve of the SHIFT/GSRM
long-term shallow earthquake forecast,
retrospectively compared to the CMT catalog of
1977-2009.03. No single tapered Gutenberg-
Richter model is expected to fit this global
composite of different tectonic regimes. Therefore
a straight-line Gutenberg-Richter model with
spectral slope β = 0.63 is shown for
comparison. Error bars on CMT earthquake
counts are two-sigma sampling errors if and only if
the distribution of earthquake counts follows the
binomial distribution; actual sampling errors are
probably larger due to earthquake clustering.

29.  For each fault, moment rate calculated using
fault length, fault width, and slip rate
 Magnitudes of the characteristic earthquakes
calculated using fault-length relationships
 Total moment rate released by some
combination of the characteristic and
Gutenberg-Richter type earthquakes
 Rupture location for each earthquake
calculated using its related fault geometry and
incorporating random azimuthal and location
uncertainties

30. Simulated earthquakes to occur not only directly on known faults, but also, with some probability,
anywhere within the region. The addition of smoothed background seismicity
is designed specifically to recognize the potential for earthquakes to occur
where there has been little or no recorded historical seismic activity.

31. Smoothed background seismicity allows for earthquakes to
occur where there is no historical record, ensuring full spatial
coverage

32. Ground Motion
Intensity
Building
Capacity
Damage

33. Damage is computed by the Capacity Spectrum Method
(CSM) and damage functions.
An earthquake demand spectrum curve characterizes the
demand on various buildings imposed by the earthquake.
A building’s capacity curve correlates lateral displacement of
the building to various levels of earthquake demand.
An intersection of the 2 curves corresponds approximately to
the maximum roof displacement of the building in response
to the earthquake.
A damage function correlates the maximum roof
displacement to the expected mean damage on the building.

34. 1. In general, better seismic code (if enforced correctly)
leads to a significant reduction in vulnerability to
earthquake damage.
2. Of two buildings with equal characteristics, the one
built according to a stricter seismic code is likely to
experience less damage in an earthquake.
3. Special buildings are often required to respect even
stricter seismic requirements. For example fire
stations, hospitals, police stations and all emergency
buildings that need to function during and after an
earthquake event.