Civil Engineering Reference
In-Depth Information
insurance (Ehrlich and Becker 1972). They distinguished self-insurance and
self-protection: the former refers to risk mitigation activities that only affect
the severity of adverse events, whereas the latter refers to those that only
affect their frequency.
In general, the selection of different seismic design levels affects both
severity and frequency of adverse events (Goda and Hong 2006); therefore,
the strengthening/retrofi tting of structures is interpreted as a mixture of
self-insurance and self-protection. Note that the demand and optimal pur-
chase of market insurance are often analyzed based on the normative deci-
sion theories, such as the expected utility theory (Mossin 1968; Schlesinger
2000), and occasionally based on the descriptive decision theories, such as
the regret theory (Braun and Muermann 2004). The approaches differ in
how to account for risk perception and cognitive limitation of decision
makers in dealing with low-probability high-consequence risks. These theo-
retical investigations provide valuable insights on how decision makers will
behave/make choices in such situations, and are useful in developing an
earthquake risk management strategy/framework.
Another important aspect of earthquake insurance is the risk transfer
capacity of insurers who sell coverage to various households and companies.
Conventionally, the fi nancial risk to an insurer is coped with through risk
pooling/sharing and reinsurance. The former creates a pool of funds from
various insurers; the pay-out is made from the fund, when a large loss event
is triggered, whereas the latter simply transfers a portion of potential insur-
ance claim loss (typically large loss layer) to a reinsurer who often has a
greater capital capability in dealing with a large loss event and does busi-
ness in wider geographical areas (so risk is diversifi ed spatially). A consider-
able diffi culty arises, when a mega-natural disaster happens, generating
spatially correlated and temporally concentrated seismic loss claims. Cata-
strophic earthquakes impose tremendous fi nancial stress on insurers who
underwrite earthquake insurance policies in a seismic region, resulting in
possible insolvency. For example, two major earthquakes in 2010,
M
w
8.8
Chile and
M
w
7.0 Darfi eld (New Zealand) earthquakes, caused insurance
claims of about 8.0 and 4.4 billion U.S. dollars, respectively (Swiss Re 2011),
which rank in the top 20 costly natural catastrophes since 1970. Moreover,
the two most recent devastating events in Christchurch (New Zealand) and
Tohoku (Japan) caused insurance claims of 12 and 20-30 billion U.S. dollars,
respectively.
To reduce the fi nancial risk of insurers, various alternative risk transfer
methods have been developed in recent years, including government/
federal reinsurance and catastrophe bond/security (Kleindorfer and
Kunreuther 1999; Dong and Grossi 2005). The government reinsurance
relies on its capability of borrowing money over time with practically zero
default risk (though current economic crises in Greece and Spain would be
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