USGS National Seismic Hazard Model updates will have material impacts on insurance portfolios
The United States Geological Survey (USGS) just released a major update to the U.S. national seismic risk map. CoreLogic’s initial implementation of the new model shows that the impact to earthquake insurance writers’ risk assessment decisions may be monumental. Changes from this update vary and can be spatially nuanced, but to exemplify the magnitude of this shift in risk, this article focuses on a sample market portfolio in the state of California.[1]
Exposure and risk management decision-making constantly evolve since both external and internal pressures heavily influence these determinations. When the underlying science used to calculate peak peril risk increases or decreases, it is of the utmost importance to ensure that risk management strategies react accordingly.
CoreLogic Implements New USGS Hazard Model
The USGS released a nationwide update to its National Seismic Hazard Model (NSHM) in January 2024 (USGS NSHM 2023), which built upon the previous version released in 2020 (USGS NSHM 2018). The NSHM is a primary seismic hazard data source for fully probabilistic, catastrophe models (CAT models) used in the (re)insurance industry to quantify portfolio-level earthquake risk.
CoreLogic, in partnership with the California Earthquake Authority (CEA), incorporated this updated hazard model into CoreLogic’s Catastrophe Risk Platform, Risk Quantification and Engineering (RQE™), to understand how the updated NSHM would change modeled earthquake risk in California, referred to here as RQE v25.
The results were compared to the current version of the CoreLogic U.S. Earthquake model, RQE v22, which is based on NSHM 2018 release, and incorporates the most current versions of the EQ seismic risk and USGS hazard models not used in other CAT model vendor solutions.
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At this time, the only variable change analyzed in this study is the seismic hazard. There were no alterations to the vulnerability or financial components of the model.
Study results showed both material changes to key modeling metrics, including portfolio-level average annual and return period (RP) losses, as well as a high degree of spatial variability. Within a single ZIP code, there were material increases and decreases to damages and losses depending on the distance from a fault. The difference of only a few kilometers can make a difference.
The implication of these findings is that the new hazard model will impact risk assessments and have material impact at the individual property level.
How the Updated NSHM Could Change Insurance Workflows
CoreLogic conducted a similar analysis using its proprietary property dataset. As displayed in Figure 1, two regions of California were chosen to visualize the damage and loss changes:
- A group of ZIP Codes comprising the Bay Area (NorCal)
- The greater Los Angeles area (SoCal)
The geographic distribution of modeled insured values is presented in Figure 2.
The modeled ground-up damage and gross loss changes from RQE v22 and RQE v25 are material in each region (Figure 3). This clearly demonstrates how significant an impact the updated hazard may have on any carrier’s individual portfolio, depending on the spatial distribution of exposure.
The only change between the two versions is the seismic hazard update included in the NSHM 2023 release.
In the NorCal study region, the occurrence 50- and 100-year RP ground up damages and gross losses decreased significantly with the new hazard update. The occurrence 250-year RP changes were largely similar. The higher RP damages and losses increase into the tail. The average annual loss exhibits a decrease -13% and -16% for ground-up damage and gross loss, respectively.
In the SoCal study region, the hazard update resulted in similar, albeit less severe, changes. CoreLogic observed smaller decreases in the shorter RP damages and losses. Both damage and gross loss increased from the 250- year RP (+20% and +15% in the ground up damage and gross loss, respectively), through the tail.
CoreLogic reviewed the update and determined the root of the results changes. At a high level, there is a reduction in both frequency and severity of smaller earthquake events along fault lines in the NorCal study area. At the same time, there is also an increase in frequency and severity of larger earthquakes. The loss-point percent changes align with reasoning from the USGS regarding the nature of the seismic hazard update.
Determining the Granularity of Change
A crucial aspect of this hazard update is the modeled loss change on a local scale. Seismic risk is often incorrectly considered a low-resolution peril with little differentiation in hazard risk over large distances.
A great example of how this is not the case is illustrated with a higher resolution analysis (Figure 4), that shows both increases and decreases in loss over ZIP codes within close proximity. The images show the location of major fault lines. When using the latest hazard model, there are changes in the treatment of how these fault lines are captured, resulting in very granular changes in loss.
Figure 4: ZIP code-level percent change in ground-up damage in the NorCal (top) study area between RQE v22 (NSHM 2018) and RQE v25 (NSHM 2023)
It is important to note that exposure distribution will play a major role in any California portfolios loss changes. For example, Figure 4 shows that portfolios with high exposures in San Francisco may see large increases whereas exposures just a few miles away in Oakland may see substantial decreases.
The updated USGS hazard map could have significant implications for earthquake insurance underwriting, portfolio optimization, and reinsurance due to the granularity of the changes. A personalized look at what the changing risk is doing to modeled portfolio losses may open up the potential optimizing and rebalancing portfolios both at the insurance and reinsurance level.
Guiding You Through These Modeling Updates
CoreLogic intends to implement the updated NSHM in the U.S. Earthquake Model with the formal release of RQE v25 (June 2025) and when the USGS finalizes all necessary data.
CoreLogic is here to support any clients seeking to understand why and by how much this hazard update will affect their individual portfolio on a consulting basis. For more information, please reach out to your CoreLogic Client Success Manager or email [email protected].
[1] Loss change magnitudes are portfolio dependent. Results may vary for different portfolios.
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