Tag Archives: Earthquake

The California Earthquake Authority (CEA) and RMS Co-host Webinar to Share Insights on California Earthquake Risk Using North America Earthquake Version 17.0

Together with the California Earthquake Authority (CEA), RMS co-hosted a webinar on May 17 for the CEA’s global panel of catastrophe reinsurers to explore how new earthquake science and RMS modeling impacts the CEA and its markets. The CEA is one of the largest earthquake insurance programs in the world with nearly one million policyholders throughout California. In the webinar, we analyzed and shared insights about the risk to the CEA book using the new Version 17 RMS North America Earthquake Models which was just released on April 28.

The new RMS model, representing over 100 person-years of R&D, incorporates significant new developments in earthquake science and data over the past decade, including the new U.S. Geological Survey (USGS) seismic hazard model which introduced the Uniform California Earthquake Rupture Forecast Version 3 (UCERF3). The new RMS model also incorporates the Pacific Earthquake Engineering Research Center’s (PEER) new ground motion predictions equations referred to as the Next Generation Attenuation Functions for Western U.S. Version 2 (NGA-West2, 2015). This leverages six times more ground motion recordings (21,332 versus 3,551 to be exact) across almost 4,150 stations, compared to 1,611 stations in the previous version, NGA-West1 (2008). Both UCERF3 and NGA-West2 were funded by the CEA.

New insights from billions of dollars in insured losses from global events such as the 2010-11 Canterbury Earthquake Sequence in New Zealand among others have also been incorporated, along with an unprecedented resolution of data on soil-related conditions to better characterize local variability in ground motion and liquefaction.

Earthquake crack in the mountains

For California, the incorporation of both new earthquake science and improved computational methods enhances our ability to characterize the risk and increases confidence associated with the impacts of large events. A key insight from the new model is that we now understand that more of the risk in California is driven by the “tail.” New science surrounding the potential for earthquake activity in California suggests less frequent moderate-sized earthquakes, but a relative increase in the frequency of larger earthquakes which can rupture across a network of faults creating more correlated damage and loss.

While modeled average annual losses (AALs) may be lower for many policies or portfolios, the severity of losses at critical return periods remains consistent, and in some cases even greater.  The intuition here is a shift in the relationships between frequency and severity, increasing the variance. Earthquake is a tail-risk peril and now more than ever, risk management strategies and business practices need a holistic approach to pricing and capital, with a full consideration of the distribution throughout the tail.

Another generalized insight from the new model is a more balanced geographic distribution of risk across California. On an industry state-wide level, earthquake risk is now becoming more balanced between Southern and Northern California where it was once skewed more towards Southern California. These new regional patterns of risk, including new correlations within the sub-regions of California and across the state, will suggest new priorities for risk management and new opportunities to diversify risk and deploy capacity in more efficient ways. Of course, specific impacts will vary significantly depending on the particular composition of an individual book of business.

A third new insight is that within California, there is now more differentiation in location-to-location risk, allowing us to discern more variability in the risk at the individual locations or at the account-level. For example, the higher resolution models of surficial deposits increase local variability. Thus, relative to average changes in localized territories, there is now more dispersion in those territories. And, much finer-grained treatment of liquefaction allows us to see that many locations previously thought to be susceptible to liquefaction are not, and some are even riskier.

Better science and computational methods provide new measures of risk, but it’s more than just the numbers. It’s about the new insights, and the opportunities they create to build a more resilient book of business and create new solutions for the market.

From Real-time Earthquake Forecasts to Operational Earthquake Forecasting – A New Opportunity for Earthquake Risk Management?

Jochen Wössner, lead modeler, RMS Model Development

Delphine Fitzenz, principal modeler, RMS Model Development

Earthquake forecasting is in the spotlight again as an unresolved challenge for earth scientists, with the world tragically reminded of this after the deadly impacts of recent earthquakes that hit Ecuador and Italy. Questions constantly arise.  For instance, when and where will the next strong shaking occur and what can we do to be better prepared for the sequence of earthquakes that would follow the main shock? What actions and procedures need to be in place to mitigate the societal and economic consequences of future earthquakes?

The United States Geological Survey (USGS) started a series of workshops on “Potential Uses of Operational Earthquake Forecasting” (OEF) to understand what type of earthquake forecasting would provide the best information for a range of stakeholders and use cases.  This included delivering information relevant for the public, official earthquake advisory councils, emergency management, post-earthquake building inspection, zoning and building codes, oil and gas regulation, the insurance industry, and capital markets. With the strong ties that RMS has with the USGS, we were invited to the still ongoing workshop series and contributed to the outline of potential products the USGS may provide in future.  These can act as the basis for new solutions for the market, as we outline below.

Operational Earthquake Forecasting: What Do Seismologists Propose?

The aim of Operational Earthquake Forecasting (OEF) is to disseminate authoritative information about time-dependent earthquake probabilities on short timescales ranging from hours to months. Considering the large uncertainty in the model forecasts, there is considerable debate in the earth scientist community whether this effort is appropriate at all – especially during an earthquake sequence when the pressure to disseminate information becomes intense.

Our current RMS models provide average annual earthquake probabilities for most regions around the world, although we know that the latter constantly fluctuate due to earthquake clustering on all timescales.  OEF applications can provide daily to multi-year forecasts based on existing clustering models that update earthquake probabilities on a regular schedule or whenever an event occurs.

How Much Can We Trust Short-Term Earthquake Forecasting?

A vast amount of research focused on providing short-term earthquake forecasts (for a month or less) has been triggered by the Collaboratory Study for Earthquake Predictability (CSEP), spearheaded by scientists of the Southern California Earthquake Center (SCEC). The challenge is that the forecasted probabilities are very small.  They may increase by factors of 1000, but remain very small even when they jump from one-in-a-million to one-in-a hundred thousand. Only in the case of an aftershock sequence would this climb to above a 10 percent chance for a short period, yet again with considerable uncertainty between different models. While this is a challenging task, the developments over the last 20 years have allowed for increased confidence as these models are already implemented in some countries, such as New Zealand and Italy.

How Can We Use OEF and What Do We Require?

RMS is dedicated to understanding new potential solutions that can fill market needs. OEF has the potential to generate new solutions if paired with reliable, authoritative, consistent, timely, and transparent feeds of information. This potential can translate into innovations in understanding and managing earthquake risk in the near future.

About Jochen Wössner:

Lead Modeler, RMS Model Development

Jochen Wössner works on earthquake source and deformation modeling with a focus on Asia earthquake models. He joined RMS in 2014 from ETH Zurich following the release of the European Seismic Hazard Model as part of the European Commission SHARE project which he led as project manager and senior scientist. Within the Collaboratory for the Study of Earthquake Predictability (CSEP), he has developed and contributed to real-time forecasting experiments, especially for Italy.

About Delphine Fitzenz:

Principal Modeler, RMS Model Development

Delphine Fitzenz works on earthquake source modeling for risk products, with a particular emphasis on spatio-temporal patterns of large earthquakes.  Delphine joined RMS in 2012 after over ten years in academia, and works to bring the risk and the earthquake science communities closer together through articles and by organizing special sessions at conferences.

These include the Annual Meeting of the Seismological Society of America (2015 and 2016), an invited talk at the Ninth International Workshop on Statistical Seismology in Potsdam, Germany in 2015, on “How Much Spatio-Temporal Clustering Should One Build Into a Risk Model?” and an invitation to “Workshop One: Potential Uses of Operational Earthquake Forecasting (OEF) System” in California.

Has That Oilfield Caused My Earthquake?

“Some six months have passed since the magnitude (Mw) 6.7 earthquake struck Los Angeles County, with an epicenter close to the coast in Long Beach. Total economic loss estimates are more than $30 billion.  Among the affected homeowners, the earthquake insurance take-up rates were pitifully low – around 14 percent. And even then, the punitive deductibles contained in their policies means that homeowners may only recover 20 percent of their repair bills.  So, there is a lot of uninsured loss looking for compensation. Now there are billboards with pictures of smiling lawyers inviting disgruntled homeowners to become part of class action lawsuits, directed at several oilfield operators located close to the fault. For there is enough of an argument to suggest that this earthquake was triggered by human activities.”   

This is not a wild hypothesis with little chance of establishing liability, or the lawyers would not be investing in the opportunity. There are currently three thousand active oil wells in Los Angeles County. There is even an oil derrick in the grounds of Beverly Hills High School. Los Angeles County is second only to its northerly neighbor Kern County in terms of current levels of oil production in California.  In 2013, the U.S. Geological Survey (USGS) estimated there were 900 million barrels of oil still to be extracted from the coastal Wilmington Field which extends for around six miles (10 km) around Long Beach, from Carson to the Belmont Shore.

Beverly Hills High School Picture Credit: Sarah Craig for Faces of Fracking / FLICKR

Beverly Hills High School   Picture Credit: Sarah Craig for Faces of Fracking / FLICKR

However, the Los Angeles oil boom was back in the 1920s when most of the large fields were first discovered. Two seismologists at the USGS have now searched back through the records of earthquakes and oil field production – and arrived at a startling conclusion. Many of the earthquakes during this period appear to have been triggered by neighboring oil field production.

The Mw4.9 earthquake of June 22, 1920 had a shallow source that caused significant damage in a small area just a mile to the west of Inglewood. Local exploration wells releasing oil and gas pressures had been drilled at this location in the months before the earthquake.

A Mw4.3 earthquake in July 1929 at Whittier, some four miles (6 km) southwest of downtown Los Angeles, had a source close to the Santa Fe Springs oil field; one of the top producers through the 1920s, a field which had been drilled deeper and had a production boom in the months leading up to the earthquake.

A Mw5 earthquake occurred close to Santa Monica on August 31, 1930, in the vicinity of the Playa del Rey oilfield at Venice, California, a field first identified in December 1929 with production ramping up to four million barrels over the second half of 1930.

The epicenter of the Mw6.4 1933 Long Beach earthquake, on the Newport-Inglewood Fault was in the footprint of the Huntingdon Beach oilfield at the southern end of this 47 mile-long (75 km) fault.

As for a mechanism – the Groningen gas field in the Netherlands, shows how earthquakes can be triggered simply by the extraction of oil and gas, as reductions in load and compaction cause faults to break.

More Deep Waste Water Disposal Wells in California than Oklahoma

Today many of the Los Angeles oilfields are being managed through secondary recovery – pumping water into the reservoir to flush out the oil. In which case, we have an additional potential mechanism to generate earthquakes – raising deep fluid pressures – as currently experienced in Oklahoma. And Oklahoma is not even the number one U.S. state for deep waste water disposal. Between 2010 and 2013 there were 9,900 active deep waste water disposal wells in California relative to 8,600 in Oklahoma. And the California wells tend to be deeper.

More than 75 percent of the state’s oil production and more than 80 percent of all injection wells are in Kern County, central California, which happens to be close to the largest earthquake in the region over the past century on the White Wolf Fault: Mw7.3 in 1952. In 2005, there was an abrupt increase in the rates of waste water injection close to the White Wolf Fault, which was followed by an unprecedented swarm of four earthquakes over Magnitude 4 on the same day in September 2005. The injection and the seismicity have been linked in a research paper by Caltech and University of Southern California seismologists published in 2016. One neighboring well, delivering 57,000 cubic meters of waste water each month, was started just five months before the earthquake swarm broke out. The seismologists found a smoking gun, a pattern of smaller shocks migrating from the site of the well to the location of the earthquake cluster.

To summarize – we know that raising fluid pressures at depth can cause earthquakes, as is the case in Oklahoma, and also in Kern County, CA. We know there is circumstantial evidence for a connection between specific damaging earthquakes and oil extraction in southern California in the 1920s and 1930s. According to the location of the next major earthquake in southern or central California, there is a reasonable probability there will be an actively managed oilfield or waste water well in the vicinity.

Whoever is holding the liability cover for that operator may need some deep pockets.

Closing the Resilience Gap: A Tale of Two Countries, Nepal and Chile

Nepal house smallOn April 25, 2015, a magnitude 7.8 earthquake struck nearly 50 miles (80 km) northwest of Kathmandu, the capital of Nepal.  This resulted in more than 8,600 fatalities, the destruction of around half a million homes, and left 2.8 million people displaced.

Some two years on and rebuilding efforts have barely started, as US$4.1 billion of pledged international aid is reportedly stalled within Nepal’s National Reconstruction Authority.

As of February 2017, 14,000 homes have been rebuilt and some 30,000 homes are in construction – less than a tenth of the total number of homes destroyed.

Contrast this with the situation in Chile. Since a magnitude 9.4 earthquake in 1960, the country has focused on adequate seismic design requirements within its building code, with both government and the public willing to follow the principles of earthquake-resistant building design. And it’s paying off.

After a magnitude 8.8 quake in 2010, structures in areas that experienced strong shaking had less damage than would have been seen if building codes were weaker. Of 370,000 housing units affected by the earthquake, nearly half experienced only minor damage, and just 22 percent were destroyed.  Where commercial buildings were designed with the help of structural engineers, only five were destroyed, according to the U.S. Geological Survey.

This wide inequity in resilience between two countries facing major seismic hazard brings into sharp focus the urgent need for better quantification, mitigation, and post-event protection for all people, regardless of their location.

Bridging the Divide

Communities around the world can become more resilient both before an event strikes, through practices such as construction education and the implementation of building codes, or post-event by providing insurance and other appropriate risk transfer solutions for individuals and governments. By empowering these stakeholders, our industry can play a vital role in helping to ensure a safer world for all.

Social enterprises such as Build Change, who work on the ground in countries like Nepal, Columbia, and Haiti, are helping to bridge some of this ‘resilience gap’ by working with local governments to institute building codes and train their construction sectors in locally attainable and safe building practices. Over the past 10 years, Build Change has trained over 25,000 people in the basics of safe construction, created over 12,000 local jobs, and enabled 245,000 people to live and learn in safer homes and schools within some of the most catastrophe-prone regions of the planet.

Nepal builder smallThis week, during the annual RMS Impact Trek, both our employees and our clients representing major insurance and reinsurance firms are working together on the ground in Nepal with Build Change, exploring solutions to bring greater synergy and resilience capacity-building to the forefront of our market. We are proud to partner with Build Change by also providing grants to jumpstart and enhance its country programs, and allowing the organization to use our products for free in order to better quantify the risk landscape of the countries in which they operate.

All of us within the insurance industry have an opportunity to reshape the future for communities around the globe by allowing them to better measure and understand their risk, so that responsible mitigation efforts can take shape. We can create tools to help ensure that those who are struck by catastrophe can recover quickly and completely.

At RMS, we remain focused on contributing to this mission by strengthening resilience from the ground up, and continuing our work alongside impactful organizations like Build Change.

Billions in Liabilities: Man-Made Earthquakes at Europe’s Biggest Gas Field

The Groningen gas field, discovered in 1959, is the largest in Europe and produces up to 15 per cent of the natural gas consumed across the continent. With original reserves of more than 100 trillion cubic feet, over the decades the field has been an extraordinary cash cow for the Dutch government and the two global energy giants, Shell and ExxonMobil, which partner in managing the field. In 2014 alone, state proceeds from Groningen were approximately €9.4 billion ($9.8 billion).

But now, costs to the Dutch government are mounting as the courts have ordered that compensation is paid to nearby propery owners for damage caused by the earthquakes induced by extracting the gas. Insurers who were covering liabilities at the field now find that the claims have the potential to extend beyond the direct shaking damage to include the reduction in property values caused by this ongoing seismic crisis. And the potential for future earthquakes and their related damages has not disappeared – a situation which again illustrates the importance of modeling the risk costs of liability coverages, a new capability on which RMS is partnering with its sister company Praedicat.

The Groningen gas reservoir covers 700 square miles and, uniquely among giant gas fields worldwide, it is located beneath a well-populated and developed region. The buildings in this region, which half a million people live and work in, are not earthquake resistant: 90% of properties are made from unreinforced masonry (URM).

The ground above the gas field has been subsiding as the gas has vented out from the 10,000-feet deep porous sandstone reservoir and the formation has compacted. This compaction helps squeeze the gas out of reservoir, but has also led to movement on pre-existing faults that are present throughout the sandstone layer, a small number of which are more regional in extent. And these sudden fault movements radiate earthquake vibrations.

How A Shake Became a Seismic Crisis

The first earthquake recorded at the field was in December 1991 with a magnitude of 2.4. The largest to date was in August 2012 with a magnitude of 3.6. In most parts of the world, such an earthquake would not have significant consequences, but on account of the shallow depth of the quake, thick soils and poor quality building construction in the Groningen area, there were more than 30,000 claims for property damage, dwarfing the total number from the previous two decades.

Since the start of 2014 the government has limited gas production in an attempt to manage the earthquakes, with some success. But the ongoing seismicity has had a catastrophic effect on the property market, which has been compounded by a class-action lawsuit in 2015. It was filed on behalf of 900 homeowners and 12 housing co-operatives who had seen the value of their properties plummet. The judge ruled that owners of the real estate should be compensated for loss of their property’s market value, even when the property was not up for sale. The case is still rumbling on through the appeal courts but if the earlier ruling stands, then the estimates of the future liabilities for damage and loss of property value range from €6.5 billion to €30 billion.

Calculating the Risk

While earthquakes associated with gas and oil extraction are known from other fields worldwide, the massive financial risk at Groningen reflects the intersection of a moderate level of seismicity with a huge concentration of exposed value and very weak buildings. And although limiting production since 2014 has reduced the seismicity, there still remains the potential for further highly damaging earthquakes.

Calculating these risk costs requires a fully probabilistic assessment of the expected seismicity, across the full range of potential magnitudes and their annual probabilities. Each event in the simulation can be modeled using locally-calibrated ground motion data as well as expected property vulnerabilities, based on previous experience from the 2012 earthquake.

There is also the question of how far beyond actual physical damage the liabilities have the potential to extend and where future earthquakes can affect house values. The situation at Groningen, where it took almost thirty years of production before the earthquakes began, highlights the need for detailed risk analysis of all energy liability insurance covers for gas and oil extraction.

After the devastating 2015 earthquake how is Nepal recovering?

It’s more than 20 months since a magnitude 7.8 earthquake hit Nepal in April 2015, swiftly followed by another earthquake of magnitude 7.3 the next month.

Nearly 9,000 people died. More than 600,000 houses were destroyed and around 290,000 were damaged, according to the United Nations.

On the face of it local people now appear to be getting on with life as normal but look closer and reminders of the disaster are never far away. Whether it be a snaking crack in a wall, large enough to put an arm through – or the still air now taking the space where temples once stood.

International donors have pledged some $4 billion following the earthquake but this is yet to produce the required progress in Nepal’s rebuilding or significantly improve the life of people on the ground.

Framing of a schoolhouse in village hit by earthquake

The scale of the damage is huge and the reconstruction costs – to a country already poor – are overwhelming. The challenge is to rebuild in a way that makes Nepal more resilient to future earthquakes which, in such a seismically active region, are more a question of ‘when’ not ‘if’.

The capital, Kathmandu, wasn’t affected as badly as many feared but as you head out into the hills you see conditions deteriorate considerably. Partially collapsed buildings and piles of rubble are a common sight. Rural Nepalese houses normally consist of three stories, with the first used for livestock, the second for living and the third for agricultural use. These tall buildings are made from heavy and brittle materials, typically stone and mud mortar, which produce a vulnerability to earthquake to match that in many other regions of the world.

Earthquake damage to a traditional three-story house

Recently I saw the damage for myself. Along with four of my RMS colleagues, I travelled to Nepal to support Build Change’s work to strengthen the resilience of rural communities. It’s an organization focussed on helping people in developing countries make their homes and schools better able to withstand earthquakes and hurricanes.

Immediately after the 2015 Nepal earthquake it deployed teams to the affected areas to perform surveys of the damage and validate engineering assumptions as to why some buildings remain standing when others had collapsed.

Build Change’s site engineers oversaw the retrofitting and rebuilding work carried out by local builders who themselves had been trained by Build Change. Being scientists and engineers, the RMS team was impressed to see the high quality of workmanship and design, the positive response of Build Change’s staff to our suggestions for incremental improvements – as well as the engagement of the wider community.

RMS and Build Change staff advise on house retrofitting

And on a personal level, it was this community which made an especially powerful impression on me. Kindness and generosity were shown by the Nepalese who have been hit so hard, yet are so willing to share – we were routinely offered food by the local people who were so interested to know why there are foreigners in their village. Perhaps they took hope from seeing that they hadn’t been forgotten.

Money is not abundant in Nepal, but the engineering expertise is developing. And along with this expertise there is more than enough human grit and determination among the Nepalese people to rebuild their country stronger.

The Cost of Shaking in Oklahoma: Earthquakes Caused by Wastewater Disposal

It was back in 2009 that the inhabitants of northern Oklahoma first noticed the vibrations. Initially only once or twice a year, but then every month, and even every week. It was disconcerting rather than damaging until November 2011, when a magnitude 5.6 earthquake broke beneath the city of Prague, Okla., causing widespread damage to chimneys and brick veneer walls, but fortunately no casualties.

The U.S. Geological Service had been tracking this extraordinary outburst of seismicity. Before 2008, across the central and eastern U.S., there were an average of 21 earthquakes of magnitude three or higher each year. Between 2009-2013 that annual average increased to 99 earthquakes in Oklahoma alone, rising to 659 in 2014 and more than 800 in 2015.

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During the same period the oil industry in Oklahoma embarked on a dramatic expansion of fracking and conventional oil extraction. Both activities were generating a lot of waste water. The cheapest way of disposing the brine was to inject it deep down boreholes into the 500 million year old Arbuckle Sedimentary Formation. The volume being pumped there increased from 20 million barrels in 1997 to 400 million barrels in 2013. Today there are some 3,500 disposal wells in Oklahoma State, down which more than a million barrels of saline water is pumped every day.

It became clear that the chatter of Oklahoma earthquakes was linked with these injection wells. The way that raising deep fluid pressures can generate earthquakes has been well-understood for decades: the fluid ‘lubricates’ faults that are already poised to fail.

But induced seismicity is an issue for energy companies worldwide, not just in the South Central states of the U.S.. And it presents a challenge for insurers, as earthquakes don’t neatly label themselves ‘induced’ and ‘natural.’ So their losses will also be picked up by property insurers writing earthquake extensions to standard coverages, as well as potentially by the insurers covering the liabilities of the deep disposal operators.

Investigating the Risk

Working with Praedicat, which specializes in understanding liability risks, RMS set out to develop a solution by focusing first on Oklahoma, framing two important questions regarding the potential consequences for the operators of the deep disposal wells:

  • What is the annual risk cost of all the earthquakes with the potential to be induced by a specific injection well?
  • In the aftermath of a destructive earthquake how could the damage costs be allocated back to the nearby well operators most equitably?

In Oklahoma detailed records have been kept on all fluid injection activities: well locations, depths, rates of injection. There is also data on the timing and location of every earthquake in the state. By linking these two datasets the RMS team was able to explore what connects fluid disposal with seismicity. We found, for example, that both the depth of a well and the volume of fluid disposed increased the tendency to generate seismic activity.

Earthquakes in the central U.S. are not only shallow and/or human-induced. The notorious New Madrid, Mo. earthquakes of 1811-1812 demonstrated the enormous capacity for ‘natural’ seismicity in the central U.S., which can, albeit infrequently, cause earthquakes with magnitudes in excess of M7. However, there remains the question of the maximum magnitude of an induced earthquake in Oklahoma. Based on worldwide experience the upper limit is generally assumed to be magnitude M6 to 6.5.

Who Pays – and How Much?

From our studies of the induced seismicity in the region, RMS can now calculate the expected total economic loss from potential earthquakes using the RMS North America Earthquake Model. To do so we run a series of shocks, at quarter magnitude intervals, located at the site of each injection well. Having assessed the impact at a range of different locations, we’ve found dramatic differences in the risk costs for a disposal well in a rural area in contrast to a well near the principal cities of central Oklahoma. Reversing this procedure we have also identified a rational and equitable process which could help allocate the costs of a damaging earthquake back to all the nearby well operators. In this, distance will be a critical factor.

Modeling Advances for Manmade Earthquakes

For carriers writing US earthquake impacts for homeowners and businesses there is also a concern about the potential liabilities from this phenomenon. Hence, the updated RMS North America Earthquake Model, to be released in spring 2017, will now include a tool for calculating property risk from induced seismicity in affected states: not just Oklahoma but also Kansas, Ohio, Arkansas, Texas, Colorado, New Mexico, and Alabama. The scientific understanding of induced seismicity and its consequences are rapidly evolving, and RMS scientists are closely following these developments.

As for Oklahoma, the situation is becoming critical as the seismic activity shows no signs of stopping: a swarm of induced earthquakes has erupted beneath the largest U.S. inland oil storage depot at Cushing and in September 2016 there was a moment magnitude 5.8 earthquake located eight miles from the town of Pawnee – which caused serious damage to buildings. Were a magnitude 6+ earthquake to hit near Edmond (outside Oklahoma City) our modeling shows it could cause billions of dollars of damage.

The risk of seismicity triggered by the energy industry is a global challenge, with implications far beyond Oklahoma. For example Europe’s largest gas field, in the Netherlands, is currently the site of damaging seismicity. And in my next blog, I’ll be looking at the consequences.

[For a wider discussion of the issues surrounding induced seismicity please see these Reactions articles, for which Robert Muir-Wood was interviewed.]

Indonesia’s Protection Gap – How the Sumatra Earthquake Shows that Coverage Must Spread

On December 7, 2016, a shallow magnitude 6.5 earthquake struck northern Sumatra in Indonesia, severely damaging or destroying more than ten thousand homes and many businesses, as well as causing over a hundred deaths. The disaster struck a poorer area away from the major cities, where the standards of building design, construction methods, and material quality are not sufficient to withstand such an earthquake.

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USGS Shake map for Mw 6.5 Earthquake

We have up-to-date research on local building design and construction practices in Indonesia, which we have incorporated into the latest version of the RMS® Indonesia Earthquake Model. This research was done last year when members of the RMS vulnerability team, including me, visited southeast Asia as part of the process to update the model. We held workshops with local earthquake engineering experts who practice there, and attended an earthquake engineering conference, as well as visiting commercial and industrial buildings, including those under construction, to see first-hand how they were designed and built.

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A workshop with local experts

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International Conference – Jogja Earthquake in Reflection (May, 2016)

This on-the-ground research provided insights into Indonesia’s rules and practices around construction, seismic design, code enforcement, as well as information on the relative quantities of different types of buildings in the country. We discovered significant differences between mainstream construction and those buildings covered by earthquake insurance, namely:

  • Past earthquakes have demonstrated that single family dwellings and/or low rise buildings are the most vulnerable building types compared to those built for commercial and industrial use, because of a lack of engineering design, poor construction, and lower material quality.
  • Buildings outside of major cities are mostly low rises and they may not be designed for earthquake risk.
  • Major cities such as Jakarta, Bandung, and Surabaya enforce a strict structural design review process for the construction of mid- and high-rise buildings.
  • Insurance penetration rates are higher for commercial and industrial buildings in and near major cities, with much lower penetration for residential properties in rural areas.

It’s perhaps not surprising that if poorer communities have less insurance protection, that they also cannot afford to invest in the higher quality construction that is designed to better withstand earthquakes. This is one of the primary reasons for the ‘protection gap’. As these countries become more developed, there’s the potential for that gap to start closing. In fact, Indonesia is one of the fastest growing economies in southeast Asia, with the property insurance and (re)insurance market expanding rapidly.

But as the earthquake disaster demonstrated, there are still many poorer regions with low insurance penetration which are also prone to repeated natural disasters. Sadly, there is still a long way to go before people in those places benefit from the resilience in their built environment which other, richer parts of the world may take for granted.

Understanding Risk Accumulations in Taiwan’s Science Parks

“The 6.4 magnitude Tainan earthquake in February 2016 resulted in a sizeable insured loss from the high-tech industrial risks and reminded the insurance industry of the potential threat from the risk accumulated in science parks.” (A.M. Best Special Report, Sept 2016)

Reading the sentence above you might be forgiven for wondering why science parks would give insurers and reinsurers any particular cause for concern. But consider this statistic: although Taiwan’s three major science and industrial parks occupy only 0.1% of the island’s total land mass, they represent 16% of Taiwan’s overall manufacturing – they are hugely significant, both economically and with regards to the insured exposure in Taiwan.

For example, the Hsinchu Science Park (HSP), known for semiconductor production, employs more than 150,000 people and contributes over $32 billion in revenues – approximately 6% of national GDP. By one estimate HSP represents over $319 billion in total insured values. In addition, some of the latest high tech areas within HSP, such as advanced “clean rooms,” present additional challenges due to their vulnerability to ground shaking or power interruption. The importance of this risk was observed in February’s Tainan earthquake where some significant losses to high-tech industrial risks were caused by damage to the equipment and the related business interruption due to power outage.

Improving data quality for advanced and detailed modeling is an important way to manage these risks, concludes the A.M. Best report quoted above. This is so as to accurately assess the potential loss impact on insurers’ books. RMS has already been analysing earthquake risk in Taiwan for 12 years – long before this year’s Mw 6.4 event – and in that time our view of seismic risk in Taiwan has not changed, since our model benefits from spectral response-based hazard and damage functions, that even include local liquefaction and landslide susceptibilities.

The 1999 Chi-Chi Earthquake (known in Taiwan as the 921 Earthquake) was the key event in building the RMS® Taiwan Earthquake Model in terms of the quake’s seismicity, ground motion, soil secondary effects and building response. Since then there have been no significant events to justify a re-calibration of the components of the model. In fact, the damages observed in this year’s event were broadly in line with RMS’ expectations and validated the robustness of the current model.

But although A.M. Best views the Taiwan insurance industry as prudently managed with relatively high catastrophe management capability, there are still lessons to be learnt from the 2016 event, and RMS has solutions which offer additional insight into understanding the risk posed by these business parks in Taiwan.

Concentration of Exposure into Science Parks

The RMS® Asia Industrial Clusters Catalogs were released in 2014 to identify hotspots of exposure, and profile their risk. The locations and geographic extent of the science parks within Taiwan are detailed to help understand risk accumulations for industrial lines and develop more robust risk management strategies.

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Example of industrial cluster captured in the RMS Taiwan Industrial Clusters Catalog. The red outline illustrates the digitized boundaries of the Formosa Petrochemical Co. Plant in Yunlin Hsien.

High Fragility of the Semiconductor Industry

For coding of Industrial Plants, the RMS® Industrial Facilities Model (IFM) captures the unique nature of different industrial risks, as a high percentage of property value is often associated with machinery and equipment (M&E) and stock. This advanced vulnerability model supports the earthquake model to define the damageability of a comprehensive set of industrial facilities more accurately, and calculate the financial risk to these specific types of facilities, including building, contents, and business interruption (BI) loss estimates. The IFM differentiates the risks for different types of business within the science parks, and highlights the higher fragility of semiconductor plants compared to other industrial units, as shown below.

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Lessons Learnt?

The huge damage from the 1999 Chi Chi earthquake has not halted the rapid development of Taiwan’s science parks in this seismically active area – indeed the island’s third biggest science park has since been built there. But this year’s comparatively small Mw 6.4 event further highlighted the substantial exposures concentrated within this sector, reminding the industry of the potential for significant losses without sound accumulation management practices, informed by the best modeling insights.

“Italy is Stronger than any Earthquake”

Those were the words of the then Italian Prime Minister, Matteo Renzi, in the aftermath of two earthquakes on the same day, October 26, 2016. As a statement of indomitable defiance at a scene of devastation it suited the political and public mood well. But the simple fact is there is work to do, because Italy is not as strong as it could be in its resilience to earthquakes.

There’s a long history of powerful seismic activity in the central Apennines: only recently we’ve seen L’Aquila (2009, Mw6.3), Amatrice (August 2016, Mw6.0), two earthquakes in the area near Visso (October 2016, Mw 5.4 and 5.9) and Norcia (October 2016, Mw6.5). These have resulted in hundreds of fatalities, mainly attributed to widespread collapse of old buildings, emphasizing that earthquakes don’t kill people – buildings do. Whilst Italy’s Civil Protection Department provides emergency management and support after earthquakes, there is too little insurance help for the financial resiliency of the communities most affected by all these events. While the oft-repeated call for earthquake insurance to be compulsory continues to be politically unobtainable, one way it could be spread more widely is through effective modeling. And RMS expertise can help with this, allowing the market to better understand the risk and so build resilience.

Examining High Building Fragility

The two most significant factors for earthquake risk in Italy are (i) construction materials and (ii) the age of the buildings. The majority of the damaged and destroyed buildings were made from unreinforced masonry, and built prior to the introduction of the most recent seismic design and building codes, making them particularly susceptible. With the RMS® Europe Earthquake model capturing both the variations in construction types and age, as well as other vulnerability factors, (re)insurers can accurately reflect the response of different structures to earthquakes.  This allows the models to be used to evaluate the cost benefits of retrofitting buildings.  RMS has worked with the Italian National Institute for Geophysics and Volcanology (INGV) to see how such analyses could be used to optimize the allocation of public funds for strengthening older buildings, thereby reducing future damage and costs.

Seismic Risk Assessment

The high-risk zone of the central Apennines is described well by probabilistic seismic hazard assessment (PSHA) maps, which show the highest risks in that region resulting from the movement of tectonic blocks that produce the extensional, ‘normal’ faulting observed. The maps also show earthquake risk throughout the rest of Italy. RMS worked with researchers from INGV to develop our view of risk in 2007, based on the latest available databases at that time, including active faults and earthquake catalogs. The resulting hazard model produces a countrywide view of seismic hazard that has not been outdated by newer studies, such as the 2009 INGV Seismic Hazard Map and the 2013 European Seismic Hazard Map published by the SHARE consortium, as shown below:

blog_italy-eq

The Route to Increased Resiliency

Increasing earthquake resiliency in Italy should also involve further development of the private insurance market. The seismic risk in Italy is relatively high for western Europe, whilst the insurance penetration is low, even outside the central Apennines. For example, in 2012, there were two large earthquakes in the Emilia-Romagna region of the Po valley, where there are higher concentrations of industrial and commercial risks. Although the type of faults and risks vary by region, such as the potential impact of liquefaction, the RMS model captures such variations in risk and can be used for the development of risk-based pricing and products for the expansion of the insurance market throughout the country.

Whilst Italy’s seismic events in October caused casualties on a lesser scale than might have been, the extent of the damage highlights once again the prevalence of earthquake risk. It is only a matter of time before the next disaster strikes, either in the Central Apennines or elsewhere. When that happens, the same questions will be asked about how Italy could be made more resilient. But if, by then, the country’s building stock is being made less susceptible and the private insurance market is growing markedly, then Italy will be able to say, with justification, it is becoming stronger than any earthquake.