The Risks of Hazard

I live in Denver, therefore hail is the natural peril that is most familiar to me. The Front Range urban area (extending from Colorado Springs in the south, through Denver and Boulder, up to Fort Collins in the North) is known in some insurance circles as “Hail Alley.” But just because hail is frequent and familiar here doesn’t mean it’s predictable — on the contrary, it’s always full of surprises!

Now that 2014 is far enough in the past, we can read summaries about the natural catastrophes that affected global insurance. Let’s explore some of the more interesting facts from last year regarding insured losses.

First of all, it was a very quiet year for natural catastrophes. There was no major event that will define the year 2014, unlike 2011 (Thailand Floods, Tohuku), 2013 (Sandy), or of course 2005 (Katrina). In fact, no event was close to the Top 40 events of the past 45 years in terms of insured losses. As is usual when there is no major hurricane or earthquake, convective storm was the natural peril that caused the most damage to insured property.

The tragic flooding in Houston over the past few weeks has been well covered by the global media, as one would expect when the 4^th largest city in the United States is submerged under water. Property insurers are obviously concentrating on claims right now, helping their customers through this traumatic time and getting them ready to rebuild their lives. But as the facts and statistics begin to emerge, it is also interesting and instructive to explore how the risk of events like this can be adequately understood for underwriting and accumulation control by insurers.

This final blog post introducing earthquake risk and analytics explores a common accompaniment to earthquake: tsunami. This is an interesting peril because it's actually a combination of two perils — earthquake and flood. Tsunami is the surging flood from the ocean caused by sudden seabed vertical displacement (or, rarely, it can be caused by a huge landslide). The earthquake may or may not cause damage on a nearby coast, but the huge volume of water hitting coastal areas at high velocity causes intense damage — frequently complete destruction.

In my previous post, I explored the two earthquake metrics that help insurers understand the likelihood of an earthquake affecting a specific location. This post is about the two metrics that express the severity of property damage in the event an earthquake does occur.

Unlike the science behind earthquake forecasting, which has limited capabilities, the science behind the civil engineering that enables buildings and structures to withstand earthquakes is well developed. Insurance analytics and earthquake models leverage this engineering know-how to estimate potential damage (or vulnerability, to use the modeling term) for a given building.