INSURANCE: A POLICY OPTION A city has two basic choices: 1) to be self-insured against losses from natural hazards, or 2) to purchase wind insurance, earthquake insurance, flood insurance, etc.
INSURANCE The capability for accurate hazard assessments (i.e., what is likely to happen) and risk assessments (i.e., what are the likely expected losses and Probable Maximum Losses) is a critical part of the business of insurance.
LAW OF LARGE NUMBERS The insurance sector is successful because of the “Law of large numbers.” This law means that the average loss insurers will pay in claims will converge very quickly to a predictable number with low uncertainty as the number of claims increases.
INSURANCE Reinsurance, the process by which one insurance company insures another insurance company as a strategy for controlling capacity, help to spread the risk.
EARTHQUAKES AND INSURANCE Earthquakes, like floods, are considered to be insurable, although the uncertainty in risk assessments for earthquakes is greater than that for floods.
INADEQUATE RESISTANCE TO HORIZONTAL GROUND SHAKING EARTHQUAKES SOIL AMPLIFICATION PERMANENT DISPLACEMENT (SOIL FAILURE AND SURFACE FAULTING ) IRREGULARITIES IN MASS, STRENGTH, AND STIFFNESS FLOODING FROM TSUNAMI WAVE RUNUP AND SEICHE POOR DETAILING OF STRUCTURALSYSTEM FAILURE OF NON-STRUCTURAL ELEMENTS CAUSES OF DAMAGE/DISASTER CASE HISTORIES
EARTHQUAKES AND INSURANCE Only large, multi-line and multi- state private-sector insurers indemnify against natural hazards, and only about 200 of these insurers sell earthquake insurance along with their other lines of business.
EARTHQUAKES AND INSURANCE These companies issue a contract whereby one party attempts to indemnify (compensate) another party against a loss, damage, or a liability arising from an earthquake.
EARTHQUAKE INSURANCE Earthquake Insurance is a financial mechanism to spread losses (risk) and to speed up payments of defined amounts for the repair of earthquake damage; thereby accelerating the recovery process.
EARTHQUAKE INSURANCE Earthquake insurance has a value to the customer, but at a price (the premium), which is related to the expected annual loss.
EARTHQUAKE INSURANCE Underwriting is the process of determining: a) whether to insure the risk, b) what fraction of the risk to cover, c) at what price (premium), and d) with what deductible (the shared loss with the insured).
EARTHQUAKE INSURANCE Underwriting advises against insuring houses and buildings that are vulnerable as a result of very poor construction, poor soil conditions, or locations close to known active faults.
EARTHQUAKE INSURANCE Actuaries use models to estimate the insurers' expected and Probable Maximum losses (risk) and expenses before the insurance company decides to assume the risk.
Individual Modeled Events Event Probability Dollars of Loss 1% 1/100 Threshol d Event Individual Modeled Events 1% Tail of the Distribution MODELED DAMAGE DISTRIBUTION FOR ALL EXPOSURES AND ALL EVENTS Total Area Under Curve = EAL for Entire Portfolio of Risks Layers & Slices = Retentions and Transferred Amounts
EARTHQUAKE INSURANCE The actual cost (risk) to the insurance company is determined after the product is sold and the earthquake has occurred, not before.
EARTHQUAKE INSURANCE The Probable Maximum Loss (PML) is an estimate of the largest loss an insurance company (or a community, or a company) might incur if the largest possible single event in a geographic area occurred (i.e., a worst case scenario).
CALIFORNIA EARTHQUAKE INSURANCE California has a State- managed and regulated earthquake insurance program based on dividing the state into discrete earthquake zones, each having a PML.
CALIFORNIA EARTHQUAKE INSURANCE The PML for single family dwellings (and every other element of the built environment) varies from fault zone to fault zone.
NOTABLE PAST DISASTERS SAN FRANCISCO 1906 EARTHQUAKE & FIRE 3,000 CASUALTIES $ 524 M LOSS (ORIGINAL VALUES) $ 180 M INSURED LOSS
EVERY CITY CAN MAKE ITS CITY MORE DISASTER RESILIENT THAN IT WAS IN THE PAST STEP 1: LEARN FROM THE PAST STEP 2: REDUCE COMMUNITY VULNERABILITIES THAT INCREASE RISK FOR PEOPLE, PROPERTY, AND INFRASTRUCTURE