Earthquake Modeling Continues to Evolve: How Today’s Technology Is Paving the Way for Better Seismic Risk Management

For a low frequency, high severity peril like earthquake, businesses need to know their risk management plans before a single pebble falls out of place.
By: | August 6, 2021

Earthquakes aren’t just a “California thing.”

Below our feet, the earth moves every day, shifting and settling, as it has done since the beginning of time. That doesn’t mean every single movement will result in shaking and quaking; but it does mean that the possibility of an earthquake exists, regardless of the “hotspot” tectonic plates that make headlines.

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“Prevalence of risk depends on location of the business — certainly California and the West Coast stand out when you think about earthquake risk, but there are other geographic locations exposed to seismic activity,” said Erdem Karaca, head catastrophe perils Americas, Swiss Re.

What it comes down to, he said, is that no matter where the risk lies, these events are high severity, low frequency, and so that makes it more difficult to predict future events.

But that doesn’t mean businesses and residents in earthquake-prone areas can’t prepare.

“Business owners want to protect their livelihood and lives. In that sense, earthquake cover is almost a must for sustaining operations and protecting assets,” Karaca said.

“Earthquake modeling allows insurers and insureds to make more informed decisions. If confidence in models is higher, you can make better decisions on individual buildings or on portfolios.”

Earthquake modeling has come a long way since inception. While it isn’t failproof, it does provide an overview of the damages that could be done in addition to helping the more earthquake-prone areas understand just how prevalent and unrelenting an earthquake can be for their business and community.

What Earthquakes Can Do

Damages from an earthquake are caused primarily from the ground shaking, which can break open cracks in the earth, send vibrations strong enough to crumble vulnerable infrastructure and create a slew of secondary perils for an affected area — among which include landslide, tsunamis, liquefaction, fires and even aftershocks.

Meredith Kraner, scientist, AIR Worldwide

According to Optimum Seismic, a California-based earthquake engineering firm, a major earthquake event could cost a community as much as $252 billion. By its definition, Optimum Seismic classifies a 6.7-magnitude earthquake or higher as a major event.

In the short-term following a quake, businesses will first look at safety and making sure employees and/or loved ones are safe. The long-term effects turn more toward damages to the building and its structure and foundation, followed by any business interruption implications or disruptions to the supply chain.

“Depending on the scale of the earthquake, recovery could be days, months or even years. Business patterns could be derailed. People might choose to live — or not live — in certain areas,” which could impact the available talent pool in those areas, said Karaca.

“You can have serious damage to bridges, dams and roads, all of which could contribute to business interruption.”

“Businesses must be watching seismicity as it returns to normal after a quake,” said Meredith Kraner, a scientist at AIR Worldwide.

“They must inspect the damages, review structures that have fallen. Start the process of rebuilding infrastructure, like collapsed bridges, buildings, roads, tunnels, et cetera.”

Recovery after a quake requires upping risk management efforts as well. And that’s where earthquake modeling can really go a long way in cutting costs and protecting assets.

What the Models Have to Say

Earthquake models incorporate data from historical and recent events in an effort for scientists, engineers, seismologists and the communities they serve to better understand seismic activity and the stressors they can place on existing infrastructure.

“The models are based on applied technologies council coding of structures, where you try to estimate probabilities of damage to structures based on historic damage to structures of like kind. They are fed by actual loss experience, so the more loss data is collected from actual events, the more the model is informed. And, of course, science and engineering principles are applied,” explained Mike Panfil, managing director, property risk consulting, commercial risk solutions at Aon.

“Science and engineering continue to advance and feed into development of higher quality models,” added Karaca.

“They can do post-event damage surveys and apply new learnings to existing models. Each new event provides an opportunity to learn more about earthquake risk. Since these are rare events, the science and engineering community can utilize global observations to help design new functionalities [for models] based on the data collected.”

The main output of these models is an exceedance probability curve, known as an EP curve, which describes the probability various levels of loss will be exceeded. Through detailed calculations, an EP curve helps insurers and their clients make more informed decisions on earthquake exposures.

“These models allow insurance companies to review where their exposures lie. Are they more exposed or less exposed in certain areas? That can further allow insurers to diversify and spread their risk or determine if they can afford to take on more risk in a certain area,” Kraner said.

Additionally, large corporations are using models for competitive pricing, as well as for the development of insurance tools that will aid in financial loss events. The main risk management benefit that comes from earthquake modeling is the ability to help insurers be more resilient and better prepare.

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Because earthquakes are not easily predictable, nor are they really a consistent or persistent peril in only one spot, insurers “can’t rely on historical experience alone. They have to rely on catastrophic modeling,” said Kraner.

She said this was true of all modeling, using hurricane models as an example.

As a result of Hurricane Andrew, a Category 5 hurricane that struck the Bahamas, Florida and Louisiana in August 1992, twelve insurers went insolvent in the aftermath. But thanks to CAT modeling, she said this is no longer the case; insurance companies are better prepared because they have reviewed data from past events and have adjusted their risk appetite accordingly.

Further, earthquake modeling can influence rate. There is no direct correlation between modeling earthquakes and rate itself but having the information and the ability to run scenarios and view data provides information to insurance carriers that may influence rate making down the line.

The Future of Earthquake Modeling

Technology has played a significant role in the advancement of earthquake modeling over the last several decades.

Erdem Karaca, head catastrophe perils Americas, Swiss Re

“IoT is gaining momentum in our industry. Technology, such as water sensors, are evolving from residential use to commercial use. Hail sensors that can determine the size and kinetic energy of hail stones are available. Structural health monitoring devices for buildings subject to earth movement are providing key engineering data such as a building’s natural frequency. These seismic platforms use artificial intelligence and models to detect changes in the structure. At some point in time, this information might be beneficial to the modeling process. Our goal is to evaluate the data from the various IoT platforms and determine if they can make a difference in risk management decisions,” Panfil said.

Sensors are becoming a key tool in understanding earthquakes and advancing models. Such seismic sensors can be installed in a building and track ground motion on a daily basis. Artificial intelligence is built right in and starts to learn the natural frequency of the ground moving below.

However, even though “such technology will change modeling in the future, right now it is not commonplace,” Panfil noted. “It’s very compelling technology, though, and some earthquake engineering firms are already starting to gather data this way.”

One such technology firm already utilizing sensors to collect data is Safehub, which utilizes a structural engineering solution to provide actionable information to brokers, customers and re/insurers to protect against earthquake risk.

Established in 2015, Safehub integrates sensors to quantify damage as well as build performance during and after a quake. This data is meant to bridge the gap between earthquake risk for a building, the organization that uses the building and the insurance industry.

“The really exciting opportunity in CAT modeling is the ability to capture building-specific attributes in the broad framework of modeling,” said Andy Thompson, co-founder and CEO of Safehub.

As Thompson explained, when earthquake monitoring technology is used at the building-specific or small-portfolio level, individualized views of damage and risk are possible. When viewing earthquake damage or risk at the citywide level or using technology that is intended for large portfolios, information can become muddled.

“We have found results can be off by hundreds of percent at the asset-specific level. It’s difficult to use a tool that is meant for large portfolio catastrophe modeling at the granular, individual-risk level.”

But by capturing building-specific attributes and viewing them across global portfolios, more can be gleaned. That’s Safehub’s overarching goal: To use the data collected from the sensors to continuously improve understanding of earthquake risk across the globe and across building classes. This data can then be used to help enhance CAT modeling moving forward for brokers, risk managers and insurers alike.

In addition, Safehub is looking to use its technology to provide a building-specific trigger for parametric insurance products. “Using our sensors as the trigger for a parametric policy should significantly reduce basis risk, which will be of benefit to everyone across the risk spectrum,” Thompson added.

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Prepping for a Quake Today

Due to the low frequency, high severity risk of earthquake, this is one CAT peril that does not often get the attention that a hurricane or wildfire might. In fact, take up rates are very low for earthquake insurance.

Even in California, where earthquake is practically synonymous with the state, take up is much less than 50% in the U.S., according to Kraner.

“Earthquake is the biggest driver for the protection gap. Models help qualify these gaps and help insurers understand where their needs are and start to close the gap,” said Kraner.

“Businesses need to be aware of earthquake risk, because it is a low frequency, high impact peril. In a matter of minutes, tens of thousands can be dead. The financial impact can reach into the hundreds of billions of dollars,” she said. “Earthquakes are unpredictable. There’s a lot to think about for a business — and being prepared in advance, being ready to build resiliency, is just the start.” &

Autumn Demberger is the content strategist at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]