How NSHMP 2014 and UCERF3 have changed the earthquake risk landscape in the US

Marleen Nyst, Delphine D. Fitzenz, & Nilesh Shome

Submitted August 15, 2017, SCEC Contribution #7844, 2017 SCEC Annual Meeting Poster #083

Early 2017 RMS released an updated North America Earthquake Model to the insurance market with risk models for the US, Canada and Mexico. Here we will focus on California, the Pacific Northwest (PNW) and New Madrid. This new model has updates for all components, most notably hazard, consisting of events and GMPEs, soil amplification and building response. The hazard is based on the NSHMP 2014 and UCERF3. The previous RMS model was based on NSHMP 2008 and UCERF2. The update in the hazard has changed the risk landscape considerably. Insurers manage their risk by considering various risk metrics. We discuss the changes in US risk by presenting changes in some commonly used risk metrics for the RMS insured exposure model: 1. Summing the product of loss and annual rate for all events that affect an exposure determines average annual loss (AAL). By annualizing expected loss due to all events, annual premiums can be set with longer term risk planning in mind. In most regions, moderate magnitude, frequent events contribute most. 2. The exceedance-probability (EP) curve is also derived from the full set of events that impact and exposure. The EP curve plots the probability of exceeding a particular loss level in a year. EP curves provide quantification to assess solvency issues and manage portfolio risk: Insurers may use 250 or 500 year return period (RP) loss levels to guide their financial capacity requirements. The shift in frequency of M6.5-7.0 to larger magnitude events, partly accommodated by the relaxed segmentation assumptions in UCERF3, has a strong effect on state-wide California risk. It reduces AAL, but increases RP loss of 500 year and up. This poses a challenge to the primary insurer, who now collects less premium, but needs more financial capacity. If we dig into the smaller scale changes at the sub-state level we see different EP curve changes, which provide underwriters with ways to face the portfolio-wide challenges. In NM AAL decreases, 250 and 500 year RP loss go up, but EP loss farther out on the tail come down again, due to changes in both sources and GMPEs. In the PNW both AAL and all relevant RP losses decrease, mostly due to the changes in the GMPEs for all types of sources. Overall, US AAL went down, whereas 500 and 1000 year RP went up. At this point in time, it is not clear how the industry will deal with changes. We will discuss various ways companies as well as the industry as a whole may choose to navigate the new risk landscape.

Key Words
Earthquake risk, insurance, hazard, US

Nyst, M., Fitzenz, D. D., & Shome, N. (2017, 08). How NSHMP 2014 and UCERF3 have changed the earthquake risk landscape in the US. Poster Presentation at 2017 SCEC Annual Meeting.

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