Tag Archives: New Zealand Earthquake

Should New Zealand Be Content with the New EQC Coverages and Caps?

The revised earthquake coverages and caps proposed by the New Zealand Earthquake Commission (EQC) came into law as planned on July 1, 2019. As noted in an RMS blog back in February, these well signaled changes – to increase the building coverage from NZ$100,000 to NZ$150,000 and remove the NZ$20,000 contents cover, only had a small effect on the gross average annual loss for both EQC and the private market. Swapping the first layer of contents exposure for a larger, higher layer of building exposure produced a result that was close to neutral.

Examining the Exceedance Probability (EP) curve (see figure 1 below), the changes are small across all return periods. There are small increases in loss for the private market at short return periods (which produce the small increase in average annual loss reported earlier) but very little change at long return periods.

Critically, the modeled gross 1000-year loss to the private market is essentially unchanged, meaning there are no implications with regards to the Reserve Bank of New Zealand (RBNZ) solvency requirements. Further, these EQC coverage changes are not expected to affect the peril balance driving trans-Tasman solvency considerations where both the RBNZ and Australian Prudential Regulation Authority (APRA) standards must be met.

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New Zealand Earthquake Risk: It’s All in the Details

Across the global risk management community, we are bombarded by new information every day. As risk professionals we have to prioritize how we give our attention to new information. From an RMS perspective, when we release new model insights, we know there is a need to be concise and boil down huge research projects into just the important details. But there is a concern that the top-level results get taken as a uniform value that can be applied across the board, losing vital nuance.

When RMS released its New Zealand Earthquake High-Definition (HD) model in mid-2016, an important message was that the annual average loss (AAL) had increased by 30 percent. The ground-up, all-lines, countrywide AAL increased 30 percent relative to the previous version of the model released in 2007. An increase in loss came as no surprise after the Canterbury Earthquake Sequence of 2010/11 – see our New Zealand earthquake blogs.

The HD model was launched at two industry seminars in Wellington and Auckland and came with online documentation: some 44 pages of Understanding Changes in Results and 114 pages of model methodology, supplementary materials on our RMS OWL client portal and a team of modelers happy to talk about their work.

Faced with this information, one approach is to note that the New Zealand market is very consolidated so industry figures should be useful guides for actual portfolios. Let’s just use the old model and scale it by 30 percent. “She’ll be right”, as they like to say in New Zealand. But with two models being so different, this scaling-up would not make sense. Why are they so different?

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How Will Insurers Be Affected by Changes in New Zealand EQC Coverage Layers?

Around 98 percent of residential homes in New Zealand have earthquake insurance. This remarkable achievement is due to a unique partnership between the New Zealand government Earthquake Commission (EQC) working together with the insurance industry. From its origins in 1945 as the Earthquake and War Damage Commission – renamed as the EQC in 1993, the Commission is supported by an Act of Parliament which sees the Crown as the insurer of first resort for earthquakes in New Zealand. The EQC provides the first layer of coverage for 1.84 million residential properties across the country, with the private market delivering cover over this initial layer.

The EQC administers the New Zealand Natural Disaster Fund (NDF) which receives monies directly passed on by private insurers, from a flat rate levy imposed on all households who purchase a homeowner insurance policy. The EQC is also responsible for investing the fund and ensuring there is adequate reinsurance cover available.

The NDF has supported the country’s homeowners through a series of damaging events since the start of this decade, providing NZ$100,000 (US$67,332) of buildings and NZ$20,000 (US$13,466) of contents cover for each event. Before the Canterbury earthquakes in 2011-12, the NDF had NZ$6.4 billion (US$4.27 billion). By 2018, including payments for the Kaikoura earthquake in 2016, the NDF had just NZ$287 million (US$195 million) left and was perilously close to the NZ$200 million limit where the government is mandated to top up the fund.

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Ultra-liquefaction Changes Everything

It turns out the biggest killer in the Palu earthquake on the island of Sulawesi, Indonesia, may not have been the tsunami after all — but liquefaction. Two thousand victims of the earthquake and tsunami are confirmed but 5,000 people remain missing, many of them presumed swallowed up in extraordinary ground deformation and mudflows, which took off when the underlying solid ground liquefied. Some buildings were transported hundreds of meters, others were ripped apart, many collapsed into fragments that then became absorbed into the mud. Media reports state that in Balaroa, just a few kilometers from Palu City, many of the 1,747 houses in the village appear to have sunk into the earth. In Petobo, a village to the east of Palu, many of the village’s 744 houses have disappeared.

What we have witnessed at Palu merits the term “ultra-liquefaction”, as witnessed in the 2011 Christchurch, New Zealand earthquake when perhaps half the total insurance loss costs were a consequence of liquefaction. For Christchurch, in the eastern suburbs it was single storey houses, ripped apart by the ground movements. In the Central Business District (CBD), many mid-rise buildings had to be demolished because underlying liquefaction had led to one corner of the structure sinking by ten or twenty centimeters (four to eight inches).

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Starting the Trend Toward More Differentiated Risk Selection and Pricing

There has always been a balance between cross-subsidy and property-specific, risk-based underwriting and pricing in insurance, particularly for homeowners’ policies. While an actuary can easily quantify differences in fire risk for houses constructed from wood versus concrete based on claims, this becomes much more difficult when the peril concerned is infrequent, such as for earthquake or flood. Clearly risk models help to bridge this gap, but facilitating a move from cross-subsidy to risk-based pricing is more complex than simply using risk analytics. Factors such as regulation, market conditions, distribution channels and insurer IT systems all determine whether individual insurers and markets will move towards greater differentiation of risk. This is not to mention the political dimension of insurance affordability and social equity.

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It’s What’s On The Inside That Counts

Most people use this phrase when it comes to judging a person’s character, but few would think to use it when assessing a building’s preparedness against damage from seismic activity. Cracked foundations, toppled walls, and collapsed buildings are normally what comes to mind when envisioning a building damaged from an earthquake; and while they are of course costly to repair, surprisingly this type of damage is not the main cause of loss to insurers.

Over 70 percent of a building’s value comes from non-structural elements such as internal and external cladding, interior walls, glazing and the internal fit-out, such as heating and air conditioning systems, pipes, ceiling support systems, and lighting. Building codes dictate how these internal systems should be installed and detail the necessary seismic restraints to keep them in place in the event of intense ground shaking. Failure to properly implement these measures can result in significant damage and expensive payouts, even if the structural integrity and exterior of the building remains intact. Recent global earthquake events such as Kaikoura in 2016 reflect this and have shown that non-structural damage drives claims.

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Earthquake Hazard: What Has New Zealand’s Kaikoura Earthquake Taught Us So Far?

The northeastern end of the South Island is a tectonically complex region with the plate motion primarily accommodated through a series of crustal faults. On November 14, as the Kaikoura earthquake shaking began, multiple faults ruptured at the same time culminating in a Mw 7.8 event (as reported by GNS Science).

The last two weeks have been busy for earthquake modelers. The paradox of our trade is that while we exist to help avoid the damage this natural phenomenon causes, the only way we can fully understand this hazard is to see it in action so that we can refine our understanding and check that our science provides the best view of risk. Since November 14 we have been looking at what Kaikoura tells us about our latest, high-definition New Zealand Earthquake model, which was designed to handle such complex events.

Multiple-Segment Ruptures

With the Kaikoura earthquake’s epicenter at the southern end of the faults identified, the rupture process moved from south to north along this series of interlinked faults (see graphic below). Multi-fault rupture is not unique to this event as the same process occurred during the 2010 Mw 7.2 Darfield Earthquake. Such ruptures are important to consider in risk modeling as they produce events of larger magnitude, and therefore affect a larger area, than individual faults would on their own.

Map showing the faults identified by GNS Sciences as experiencing surface fault rupture in the Kaikoura Earthquake.
Source: http://info.geonet.org.nz/display/quake/2016/11/16/Ruptured +land%3A+observations+from+the+air

In keeping with the latest scientific thinking, the New Zealand Earthquake HD Model provides an expanded suite of events that represent complex ruptures along multiple faults. For now, these are included only for areas of high slip fault segments in regions with exposure concentrations, but their addition increases the robustness of the tail of the Exceedance Probability curve, meaning clients get a better view of the risk of the most damaging, but lower probability events.

Landsliding and Liquefaction

While most property damage has been caused directly by shaking, infrastructure has been heavily impacted by landsliding and, to a lesser extent, liquefaction. Landslides and slumps have occurred across the region, most notably over Highway 1, an arterial route. The infrastructure impacts of the Kaikoura earthquake are a likely dress rehearsal for the expected event on the Alpine Fault. This major fault runs 600 km along the western coast of the South Island and is expected to produce an Mw 8+ event with a probability of 30% in the next 50 years, according to GNS Science.

As many as 80 – 100,000 landslides have been reported in the upper South Island, with some creating temporary dams over rivers and in some cases temporary lakes (see below). These dams can fail catastrophically, sending a sudden increase of water flow down the river.

 

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Examples of rivers blocked by landslides photographed by GNS Science researchers.

Source: http://info.geonet.org.nz/display/quake/2016/11/18/ Landslides+and+Landslide+dams+caused +by+the+Kaikoura+Earthquake

 

 

 

 

 

 

 

 

Liquefaction occurred in discrete areas across the region impacted by the Kaikoura earthquake. The Port of Wellington experienced both lateral and vertical deformation likely due to liquefaction processes in reclaimed land. There have been reports of liquefaction near the upper South Island towns (Blenheim, Seddon, Ward), but liquefaction will not be a driver of loss in the Kaikoura event to the extent it was in the Christchurch earthquake sequence.

RMS’ New Zealand Earthquake HD Model includes a new liquefaction component that was derived using the immense amount of new borehole data collected after the Canterbury Earthquake Sequence in 2010-2011. This new methodology considers additional parameters, such as depth to the groundwater table and soil-strength characteristics, that lead to better estimates of lateral and vertical displacement. The HD model is the first probabilistic model with a landslide susceptibility component for New Zealand.

Tsunami

The Kaikoura Earthquake generated tsunami waves that were observed in Kaikoura at 2.5m, Christchurch at 1m, and Wellington at 0.5m. The tsunami waves arrived in Kaikoura significantly earlier than in Christchurch and Wellington indicating that the tsunami was generated near Kaikoura. The waves were likely generated by offshore faulting, but also may be associated with submarine landsliding. Fortunately, the scale of the tsunami waves did not produce significant damage. RMS’ latest New Zealand Earthquake HD Model captures tsunami risk due to local ocean bottom deformation caused by fault rupture, and is the first model in the New Zealand market to do this, that is built from a fully hydrodynamic model.

Next Generation Earthquake Modeling at RMS

Thankfully the Kaikoura earthquake seems to have produced damage that is lower than we might have seen had it hit a more heavily populated area of New Zealand with greater exposures – for detail on damage please see my other blog on this event.

But what Kaikoura has told us is that our latest HD model offers an advanced view of risk. Released only in September 2016, it was designed to handle such a complex event as the Kaikoura earthquake, featuring multiple-segment ruptures, a new liquefaction model at very high resolution, and the first landslide susceptibility model for New Zealand.

New Zealand’s Kaikoura Earthquake: What Have We Learned So Far About Damage?

The Kaikoura Earthquake of November 14 occurred in a relatively low population region of New Zealand, situated between Christchurch and Wellington. The largest town close to the epicentral region is Blenheim, with a population near 30,000.

Early damage reports indicate there has been structural damage in the northern part of the South Island as well as to numerous buildings in Wellington. While most of this has been caused directly by shaking, infrastructure and ports across the affected region have been heavily impacted by landsliding and, to a lesser extent, liquefaction. Landslides and slumps have occurred across the northeastern area of the South Island, most notably over Highway 1, severing land routes to Kaikoura – a popular tourist destination.

The picture of damage is still unfolding as access to badly affected areas improves. At RMS we have been comparing what we have learned from this earthquake to the view of risk provided by our new, high-definition New Zealand Earthquake model, which is designed to improve damage assessment and loss quantification at location-level resolution.

No Damage to Full Damage

The earthquake shook a relatively low population area of the South Island and, while it was felt keenly in Christchurch, there have been no reports of significant damage in the city. The earthquake ruptured approximately 150 km along the coast, propagating north towards Wellington. The capital experienced ground shaking intensities at the threshold for damage, producing façade and internal, non-structural damage in the central business district. Although the shaking intensities were close to those experienced during the Cook Strait sequence in 2013, which mostly affected short and mid-rise structures, the longer duration and frequency content of the larger magnitude Kaikoura event has caused more damage to taller structures which have longer natural periods.

From: Wellington City Council

Within Wellington, cordons are currently in place around a few buildings in the CBD (see above) as engineers carry out more detailed inspections. Some are being demolished or are set to be, including a nine-story structure on Molesworth Street and three city council buildings. It should be noted that most of the damage has been to buildings on reclaimed land close to the harbor where ground motions were likely amplified by the underlying sediments.

From: http://www.stuff.co.nz/national/86505695/quakehit-wellington-building-at-risk-of-collapse-holds-up-overnight; The building on Molesworth street before the earthquake (L) and on Tuesday (R).

From: http://www.stuff.co.nz/national/86505695/quakehit-wellington-building-at-risk-of-collapse-holds-up-overnight; The building on Molesworth street before the earthquake (L) and after on November 16 (R).

Isolated incidences of total damage in an area of otherwise minor damage demonstrate why RMS is moving to the new HD financial modeling framework. The RMS RiskLink approach applies a low mean damage ratio across the area, whereas RMS HD damage functions allow for zero or total loss – as well as a distribution in between which is sampled for each event for each location. The HD financial modeling framework is able to capture a more realistic pattern of gross losses.

Business Interruption

The Kaikoura Earthquake will produce business interruption losses from a variety of causes such as direct property or content damages, relocation costs, or loss of access to essential services (i.e. power and water utilities, information technology) that cripple operations in otherwise structurally sound buildings. How quickly businesses are able to recover depends on how quickly these utilities are restored. Extensive landslide damage to roads means access to Kaikoura itself will be restricted for months. The New Zealand government has announced financial assistance packages for small business to help them through the critical period immediately after the earthquake. Similar assistance was provided to businesses in Christchurch after the Canterbury Earthquake Sequence in 2010-2011.

That earthquake sequence and others around the world have provided valuable insights on business interruption, allowing our New Zealand Earthquake HD model to better capture these impacts. For example, during the Canterbury events, lifelines were found to be repaired much more quickly in urban areas than in rural areas, and areas susceptible to liquefaction were associated with longer down times due to greater damage to underground services. The new business interruption model provides a more accurate assessment of these risks by accounting for the influence of both property and contents damage as well as lifeline downtime.

It remains to be seen how significant any supply chain or contingent business interruption losses will be. Landslide damage to the main road and rail route from Christchurch to the inter-island ferry terminal at Picton has disrupted supply routes across the South Island. Alternative, longer routes with less capacity are available.

Next Generation Earthquake Modeling at RMS

RMS designed the update to its New Zealand Earthquake High Definition (HD) model, released in September 2016, to enhance location-level damage assessment and improve the gross loss quantification with a more realistic HD financial methodology. The model update was validated with billions of dollars of claims data from the 2010-11 Canterbury Earthquake Sequence.

Scientific and industry lessons learned following damaging earthquakes such as last month’s in Kaikoura and the earlier event in Christchurch increase the sophistication and realism of our understanding of earthquake risk, allowing communities and businesses to shift and adapt – so becoming more resilient to future catastrophic events.

New Zealand Earthquake – Early Perspectives

On Monday 14 November 2016 Dr Robert Muir-Wood, RMS chief research officer who is an earthquake expert and specialist in catastrophe risk management, made the following observations about the earthquake in Amberley:

SCALE
“The November 13 earthquake was assigned a magnitude 7.8 by the United States Geological Service. That makes it more than fifty times bigger than the February 2011 earthquake which occurred directly beneath Christchurch. However, it was still around forty times smaller than the Great Tohoku earthquake off the northeast coast of Japan in March 2011.”

CASUALTIES, PROPERTY DAMAGE & BUSINESS INTERRUPTION
“Although it was significantly bigger than the Christchurch earthquake, the source of the earthquake was further from major exposure concentrations. The northeast coast of South Island has a very low population and the earthquake occurred in the middle of the night when there was little traffic on the coast road. Characteristic of such an earthquake in steep mountainous terrain, there have been thousands of landslides, some of which have blocked streams and rivers – there is now a risk of flooding downstream when these “dams” break.

In the capital city, Wellington, liquefaction and slumping on man-made ground around the port has damaged some quays and made it impossible for the ferry that runs between North and South Island to dock. The most spectacular damage has come from massive landslides blocking the main coast road Highway 1 that is the overland connection from the ferryport opposite Wellington down to Christchurch. This will take months or even years to repair. Therefore it appears the biggest consequences of the earthquake can be expected to be logistical, with particular implications for any commercial activity in Christchurch that is dependent on overland supplies from the north. As long as the main highway remains closed, ferries may have to ship supplies down to Lyttelton, the main port of Christchurch.”

SEISMOLOGY
“The earthquake appears to have occurred principally along the complex fault system in the north-eastern part of the South Island, where the plate tectonic motion between the Pacific and Australian plates transfers from subduction along the Hikurangi Subduction Zone to strike-slip along the Alpine Fault System. Faults in this area strike predominantly northeast-southwest and show a combination of thrust and strike-slip motion. From its epicenter the rupture unzipped towards the northeast, for about 100-140km reaching to about 200 km to the capital city Wellington.”

WHAT NOW?
“Given the way the rupture spread to the northeast there is some potential for a follow-on major earthquake on one of the faults running beneath Wellington. The chances of a follow-on major earthquake are highest in the first few days after a big earthquake, and tail off exponentially. Aftershocks are expected to continue to be felt for months.”

MODELING
“These events occurred on multiple fault segments in close proximity to one another. The technology to model this type of complex rupture is now available in the latest RMS high-definition New Zealand Earthquake Model (2016) where fault segments may now interconnect under certain considerations.”

Liquefaction: A Wider-spread Problem Than Might Be Appreciated

Everyone has known for decades that New Zealand is at serious risk of earthquakes. In his famous Earthquake Book, Cuthbert Heath, the pioneering Lloyd’s non-marine underwriter, set the rate for Christchurch higher than for almost any other place, back in 1914. Still, underwriters were fairly blasé about the risk until the succession of events in 2010-11 known as the Canterbury Earthquake Sequence (CES).

New Zealand earthquake risk had been written by reinsurers usefully for diversification; it was seen as uncorrelated with much else, and no major loss event had occurred since the Edgecumbe earthquake in 1987. Post-CES, however, the market is unrecognizable. More importantly, perhaps, it taught us a great deal about liquefaction, a soil phenomenon which can multiply the physical damage caused by moderate to large earthquakes, and is a serious hazard in many earthquake zones around the world, particularly those with near water bodies, water courses, and the ocean.

The unprecedented liquefaction observation data collected during the CES made a significant contribution to our understanding of the phenomenon, and the damage it may cause. Important to know is that the risk is not limited to New Zealand. Liquefaction has been a significant cause of damage during recent earthquakes in the United States, such as the 1989 Loma Prieta earthquake in the San Francisco Bay area and the devastating 1964 earthquake in Alaska which produced very serious liquefaction around Anchorage. Unsurprisingly, other parts of the world are also at risk, including the coastal regions of Japan, as seen in the 1995 Kobe and 1964 Niigata earthquakes, and Turkey. The 1999 Izmit earthquake produced liquefaction along the shorelines of Izmit Bay and also in the inland city of Adapazari situated along the Sakarya River. The risk is as high in regions that have not experienced modern earthquakes, such as the Seattle area, and in the New Madrid seismic zone along the Mississippi River.

2011 Lyttelton: observed and learned

Five years ago this week, the magnitude 6.3 Lyttelton (or Christchurch) Earthquake, the most damaging of the sequence, dealt insured losses of more than US $10 billion. It was a complex event both from scientific and industry perspectives. A rupture of approximately 14 kilometers occurred on a previously unmapped, dipping blind fault that trends east to northeast.[1] Although its magnitude was moderate, the rupture generated the strongest ground motions ever recorded in New Zealand. Intensities ranged between 0.6 and 1.0 g in Christchurch’s central business district, where for periods between 0.3 and 5 seconds the shaking exceeded New Zealand’s 500-year design standard.

The havoc wrought by the shaking was magnified by extreme liquefaction, particularly around the eastern suburbs of Christchurch. Liquefaction occurs when saturated, cohesion-less soil loses strength and stiffness in response to a rapidly applied load, and behaves like a liquid. Existing predictive models did not capture well the significant contribution of extreme liquefaction to land and building damage.

Figure 1: The photo on the left shows foundation failure due to liquefaction which caused the columns on the left side of the building to sink. The photo on the right shows a different location with evident liquefaction (note the silt around columns) and foundation settlement.

Structural damage due to liquefaction and landslide accounted for a third of the insured loss to residential dwellings caused by the CES. Lateral spreading and differential settlement of the ground caused otherwise intact structures to tilt beyond repair. New Zealand’s government bought over 7,000 affected residential properties, even though some suffered very little physical damage, and red-zoned entire neighborhoods as too hazardous to build on.

Figure 2: Christchurch Area Residential Red-Zones And Commercial Building Demolitions (Source: Canterbury Earthquake Recovery Authority (CERA), March 5, 2015).

Incorporating the learnings from Christchurch into the next model update

A wealth of new borehole data, ground motion recordings, damage statistics, and building forensics reports has contributed to a much greater understanding of earthquake hazard and local vulnerability in New Zealand. RMS, supported by local geotechnical expertise, has used the data to redesign completely how liquefaction is modeled. The RMS liquefaction module now considers more parameters, such as depth to groundwater table and certain soil-strength characteristics, all leading to better predictive capabilities for the estimate of lateral and vertical displacement at specific locations. The module now more accurately assesses potential damage to buildings based on two potential failure modes.

The forthcoming RMS New Zealand Earthquake HD Model includes pre-compiled events that consider the full definition of fault rupture geometry and magnitude. An improved distance-calculation approach enhances near-source ground motion intensity predictions. This new science, and other advances in RMS models, serve a vital role in post-CES best practice for the industry, as it faces more regulatory scrutiny than ever before.

Liquefaction risk around the world

Insurers in New Zealand and around the world are doing more than ever to understand their earthquake exposures, and to improve the quality of their data both for the buildings and the soils underneath them. In tandem, greater market emphasis is being placed on understanding the catastrophe models. Key, is the examination of the scientific basis for different views of risk, characterized by a deep questioning of the assumptions embedded within models. In the spotlight of ever-increasing scrutiny from regulators and stakeholders, businesses must now be able to articulate the drivers of their risk, and demonstrate that they are in compliance with solvency requirements. Reference to Cuthbert Heath’s rate—or the hazard as assessed last year—is no longer enough.

[1] Bradley BA, Cubrinovski M.  Near-source strong ground motions observed in the 22 February 2011 Christchurch Earthquake.  Seismological Research Letters 2011. Vol. 82 No. 6, pp 853-865.