RMS Releases New North American Earthquake Risk Models

Risk Management Solutions (RMS) has released its next-generation models for North America earthquake risks, covering the U.S. and Alaska, Canada, and Mexico. The new models are likely to lead to a reduction in U.S. earthquake insured loss estimates of 10 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, according to an RMS source.

RMS says it has drawn on the latest scientific research to enhance customers' differentiate the risk between individual properties more precisely and gain greater insight into the factors affecting uncertainty in model results. The release also includes a suite of new and upgraded earthquake models for Central and South America to provide an integrated and seamless basis for managing earthquake risk across the entire Americas region, the vendor says.

The most significant changes will be in California, where modeled loss estimates will reduce by approximately 5 to 15 percent for most commercial portfolios and 25 to 35 percent for the majority of residential portfolios, according to RMS.

"Our new model reveals that the landscape of earthquake risk is changing in California," says Paul VanderMarck, chief products officer, 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 U.S. and Eastern Canada, losses in some areas of the Pacific Northwest, Southeast, and Western Canada will increase, according to RMS.

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 epicenter, known as ground motion attenuation, according to RMS. This latest research, which has been incorporated by the U.S. Geological Survey (USGS) in their 2008 National Seismic Hazard Maps, reveals that previous approaches to assessing ground motions were generally too conservative, particularly for extreme event scenarios, the vendor claims. As an integral part of incorporating the latest scientific developments, RMS has thoroughly reviewed all aspects of the models to ensure they remain calibrated with historical loss experience, the RMS source notes.

The new models also incorporate ground-breaking 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, according to RMS. 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.

The vendor emphasizes what it characterizes as the application of 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," comments 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."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio