There used to be several ways to ensure risk diversification in a California earthquake insurance portfolio. You could select risks on the Peninsula and risks in the East Bay; or select risks in Ventura and Orange counties; or risks in Santa Barbara and Los Angeles counties. Better yet, it was considered that selecting risks in the San Francisco Bay Area and in the Los Angeles region was a perfectly good way of achieving risk diversification. This practice was largely based on an understanding of the spatial correlation of expected loss between counties in California and selecting risks for counties which decreased loss correlations in the insured portfolio.
While California and the large-scale plate motions that it is subjected to have not changed in recent years, the way earthquake sources are modeled has. The two main areas scientists are trying to explore are: first, whether there are preferential locations in a fault network where ruptures are likely to start or stop. The second area examines what the relationship is, if any, between the timing of the latest events on a fault network and the timing of the next event that will overlap with those events. A third avenue of research that is relevant for California is the behavior of aseismic faults — faults that deform without making felt earthquakes, and what happens to them when large ruptures propagate in their direction.
RMS led a study to quantify the impact of these three major modeling assumptions on spatial loss correlations. The study used sixteen county portfolios made using the RMS Industry Exposure Database (2017), and two vintages of source model: the Uniform California Earthquake Rupture Forecast 2 and 3 (UCERF2 and UCERF3). One major conclusion was that new and different risk selection strategies would be required by the spatial loss correlation study to ensure portfolio diversification with the most recent United States Geological Survey (USGS) model (UCERF3) as compared to the previous versions of the model (i.e. UCERF1 or 2).