Impacts on catastrophe risk assessments from multi-segment and multi-fault ruptures in the UCERF3 model

The Uniform California Earthquake Rupture Forecast Version 3 (UCERF3) relaxes fault segmentation, allowing multi-segment and multi-fault ruptures through fault-to-fault “jumps,” with lengths up to ∼1200 km along the San Andreas Fault. Local faults are also highly interconnected, including ruptures on the order of hundreds of kilometers. These prescribed long ruptures did not exist in older models. Longer ruptures produce larger aggregate loss estimates for geographically dispersed assets (portfolios) due to the wider areas that are affected by strong ground shaking. In this study, we model probabilistic earthquake losses of a hypothetical state-wide building portfolio in California. We develop risk deaggregation methods to identify multi-segment and multi-fault ruptures that contribute significantly to high portfolio-wide risks. Three risk measures that are commonly used in risk management decisions are examined: Average Annual Loss (AAL), Return Period Loss (RPLα), and Tail Conditional Expectation (TCEα), for an annual exceedance probability “α,” or corresponding return period “1/α.” Our results show that while the super long ruptures (>500 km) contribute modestly (∼7%) to the portfolio AAL estimate, they contribute more significantly to portfolio catastrophe risk estimates. Specifically, at a 250 year return period, these long ruptures contribute about 26% and 32% to RPL250 and TCE250 estimates, respectively. At a 500-year return period, the corresponding contributions reach about 35% and 39%. Ruptures that connect complex fault systems are also found to be highly influential to estimated portfolio risks. At a 500-year return period, a mere six rupture groups contribute nearly 70% to the RPL500 estimate. Due to the importance of the UCERF3 model to many risk management and public policy decisions, a critical examination of the limit and uncertainty of fault connectivity and rupture lengths of future earthquakes, as well as their impacts on catastrophe risk assessments, is warranted in future model updates.

Fire Risk Sub-Module Assessment under Solvency II. Calculating the Highest Risk Exposure

The European Directive 2009/138 of Solvency II requires adopting a new approach based on risk, applying a standard formula as a market proxy in which the risk profile of insurers is fundamental. This study focuses on the fire risk sub-module, framed within the man-made catastrophe risk module, for which the regulations require the calculation of the highest concentration of risks that make up the portfolio of an insurance company within a radius of 200 m. However, the regulations do not indicate a specific methodology. This study proposes a procedure consisting of calculating the cluster with the highest risk and identifying this on a map. The results can be applied immediately by any insurance company, covered under the Solvency II regulations, to determine their maximum exposure to the catastrophic man-made risk of fire, instantly providing them with the necessary input for calibration of the solvency capital requirement.

A feasibility study of a global risk pool scheme against tropical cyclones

<p>With increasing global economic damages due to weather-related events, insurance has even more become a valuable measure to share risks and increase resilience. Insurance solutions can be designed and implemented in various forms. Among these, cross-country insurance schemes emerged in the last years.</p><p>Natural catastrophe risk pools have the potential benefit of diversifying losses (thus lowering premiums) and of reducing administrative costs (as they are shared among countries). Currently, there are three catastrophe risk pools globally in place: the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC), and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI).</p><p>In the present work we aim to study the feasibility of establishing a global risk pool and, in particular, how countries might best be grouped together to achieve the greatest diversification. As a first step, this requires an assessment of global damages. We do this using the CLIMADA impact modeling platform and estimate worldwide damages from tropical cyclones. Then, we apply extreme value analysis and assess the diversification potential of various hypothetical pools based on measures from the systemic risk literature.</p>

Better Understanding the Catastrophe Risk in Interconnection and Comprehensive Disaster Risk Defense Capability, with Special Reference to China

Catastrophe risk governance has become one of the key issues affecting global sustainable development. As great changes have taken place in the global social ecosystem, the degree of interconnection between different regions in today’s society is much greater than ever before. Various types of contact networks, e.g., the production chain and supply chain, have been created, which provide diversified channels for the spread of catastrophe risk across time and space. In the context of interconnection, this paper first analyzes the drastic changes of the current disaster risk system. Severe catastrophe risk has posed a great threat to the highly growing international trade, and has also tested the capabilities of national comprehensive disaster defense. Thus, this paper analyzes the main characteristics of China’s comprehensive disaster defense capability, including physical, social, and humanistic defense capability. Finally, this paper puts forward the key points to resolve catastrophe risk from the perspective of decision-makers, including improving the decision-makers’ ability to study and judge the catastrophe chain and the impact of catastrophe, and the national resource reserve capacity to cope with the catastrophe.

Global Catastrophe Bond Market and the Prospects of Its Formation in the Russian Federation

The article is devoted to the development of instruments for catastrophe risk financing. The state of the global market for disaster risk financing is analyzed in order to identify the main development trends and the possibilities of using conceptual approaches in the Russian practice of the financial market. It is proven that the development of the catastrophe bond market has prospects in conditions of permanent instability, since catastrophe bonds are unique and highly attractive due to the lack of correlation with macroeconomic events. It is suggested that the instruments of catastrophe risk financing can be considered in the context of the development of sustainable finance. The paper identifies the main problems slowing down the development of the Russian catastrophe bond market, and formulates proposals aimed at developing the market for insurance-linked securities (ILS) in the Russian Federation. Pilot CAT bonds emission prospectuses should be based on structured bonds, with elements of a subordinated bond. There is a need to introduce into the Russian legal field a term defining ILS as a category. It is proposed to register special purpose vehicles (SPVs) and catastrophe funds in Russian offshores. The Russian analogue of catastrophe funds should be a closed-end investment fund with high funding for qualified investors. It is proposed to update the formula for calculating the creation of and the procedure for using reserve funds, in particular with the use of catastrophe risk financing tools. A pilot issue of CAT bonds is proposed to be conducted on behalf of VEB.RF, as bonds sponsoring regions exposed to high natural risks. In the process of developing socially responsible investor practice and tools for socially responsible investments, it is suggested to establish a Russian “Green Index” and to create green ETFs in Russia. Due diligence (DD) approaches are recommended for decisions on issuing catastrophe bonds.