Transcript Download Handout 2

2004 CAS RATEMAKING SEMINAR
INCORPORATING CATASTROPHE MODELS
IN PROPERTY RATEMAKING (PL - 4)
PRICING EARTHQUAKE INSURANCE
DAVE BORDER, FCAS, MAAA
PRICING EARTHQUAKE INSURANCE
Overview
 Earthquake
Ratemaking
 Earthquake Modeling
 Uses of Earthquake Models
 Whose Fault is it?
EARTHQUAKE RATEMAKING
Earthquake insurance is typically a
separate optional coverage
 Wide usage of deductibles
 Fire Following exposure
 Great variation of pricing

» Territorial
» Construction
EARTHQUAKE MODELING
Comparison with Hurricane
Separate coverage vs. package
coverage
 Historical data – Future reliability
 Frequency estimates – Landfall vs.
Fault Rupture
 Damage estimation – Advances in both
areas

EARTHQUAKE MODELING
Advantages

Many years of seismological data
» Many good sources of geological and seismological
data
» Paleoseismology – Science of identifying and dating
past earthquakes by geological studies
Damageability information by construction type
 Current distribution of insured exposure to risk

EARTHQUAKE MODELING
Alphabet Soup

Many sources of historical information
» USGS – United States Geological Service
» CDMG – California Division of Mines and Geology
» SSA – Seismological Society of America
» EERI – Earthquake Engineering Research Institute
» AGU – American Geophysical Union
» SCEC – Southern California Earthquake Center
MODELING BASICS

Simulate location and magnitude of earthquake
» Gutenberg-Richter Magnitude
» Modified Mercalli Intensity (MMI)
Estimate components of earthquake
 Estimate event intensity
 Damage estimation

EARTHQUAKE MODEL

For each simulated earthquake:
» Establishes probability of occurrence
» Establishes focal depth and rupture length
» Determines shaking intensity and liquefaction
» Determines damageability ratios

Calculates expected damageability ratios at a
location for all simulated events
» Distance from rupture
» Soil conditions
REVIEW OF MODEL
Consistent with guidelines in ASOP 38 (Using
Models Outside the Actuary’s Area of Expertise)
 Level of geographic detail available to run the
model
 Is current book of business representative of future
book?

MODEL OUTPUT
Very similar to hurricane output
 Average Annual Losses and
Mean Damageability Ratios (MDR’s) by:

» Zip code or portion of zip code in a territory
» Building / contents / ALE coverage
» Construction type
» Occupancy type
ADDITIONAL CONSIDERATIONS
Aftershocks
 Debris Removal
 Demand Surge
 Loss Adjustment Expense

» More internal damage
» Additional adjusters needed
USES OF EARTHQUAKE MODEL

Determination of earthquake rates
» Territorial determination
» Deductible pricing

Manage catastrophe exposure
» Underwriting criteria
» Deductible usage
» Reinsurance usage

Damage estimation following an event
TERRITORIAL CONSIDERATIONS
Known fault lines
 Blind-thrust faults
 Cascading faults
 Seismic zones with estimated frequency

TERRITORIAL RATEMAKING

Model – AAL’s and MDR’s based on percentage
deductible
» Select Deductible requirement
» Price alternative deductibles as appropriate

Group zip codes into territories
» Cluster based on MDR’s
» Reasonability check based on known fault configuration

Different loss costs by construction type
EARTHQUAKE RATEMAKING

Convert loss costs into rate
» Incorporate provision for expenses
– Agent commission
– Other variable and fixed expenses
» Profit provision
– Great variability of results

Determine overall indicated change
SPECIAL CONSIDERATIONS

State facility established (CEA)

Losses impacting primary policy caused
by earthquake
» Fire Following
» Sprinkler Damage
FIRE FOLLOWING EARTHQUAKE

Fire Following losses are typically covered
under primary policy
» Must provide modeler with full set of exposure data
» Broader exposure set than Earthquake policies

Damage ratio should be incorporated into
package rate
» Replace actual fire following losses
» Low significance in most areas
WHOSE FAULT IS IT?

Arguments exist regarding variation of rupture
intensity
» Smoothing provides good estimate, or
» Each fault has a single rupture point

Return time consideration in annual pricing
» Price to the average, or
» Consider time since last occurrence
RETURN TIME ARGUMENTS

Increasing time since last event decreases time
until next occurrence

Increasing time since last event increases time
until next occurrence

Appropriate to use average annual loss
ADDITIONAL REFERENCES

Pricing the Earthquake Insurance Using
Modeling
» Debra Werland and Joseph Pitts
» 1997 Winter Forum

U.S. Earthquake Frequency Estimation
– Ratemaking for Unusual Events
» Stuart Mathewson
» 1999 Winter Forum