Seismic risk analysis and management of civil infrastructure systems: an overview - Seismic Risk Analysis and Management of Civil Infrastructure Systems - page 152

contingencies. A stakeholder pays premium to an insurer, while he/she
receives compensation, according to a pre-agreed contract, upon the occur-
rence of specifi c loss events. In the context of earthquake insurance, the
occurrence of seismic damage cost, exceeding a specifi ed deductible, trig-
gers the pay-out from an insurer. A typical pay-out function includes
deductible, cap, and co-insurance factor. The earthquake insurance premium
consists of pure premium, which is equivalent to the expected damage cost,
and risk premium (plus transaction cost). The risk premium is an over-
charge requested by an insurer for undertaking low-probability and high-
consequence events, and can be much greater than pure premium. The
appreciation of benefi t from purchasing earthquake insurance coverage
varies signifi cantly, depending on risk attitudes, fi nancial status, personal
experience, and many other factors (Palm 1995). Therefore, even when the
overall premium is reasonably priced, not so many stakeholders voluntarily
purchase earthquake risk coverage.
In earthquake risk management, besides enhancing seismic provisions for
new construction and retrofi tting existing structures and infrastructure (i.e.
hard measures for seismic risk mitigation), insurance serves as a valuable
vehicle to mitigate fi nancial risk (i.e. soft measure for seismic risk mitiga-
tion). This is particularly important for facilitating post-disaster recovery,
because a negative impact is often too grave and drastic; it would take a
long time to return to the original state of wealth/asset due to stagnant
economic situations in the affected area. Fig. 6.4 illustrates the wealth/asset
fl uctuation due to a catastrophic seismic risk and potential benefi t of
insurance.
In the actuarial literature, strengthening/retrofi tting of structures and
purchase of insurance to mitigate natural hazard risks have been discussed
as an optimal strategy combining self-insurance, self-protection, and market

Wealth process of a household/company

Earthquake

Asset

With
insurance

Initial
asset

Time

Without
insurance

6.4 Fluctuation of wealth process subject to catastrophic earthquake
risk.