In-depth review of earthquake insurance solutions

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Earthquake insurance market in California

Historical background

Earthquake insurance in California started in the aftermath of the 1906 San Francisco earthquake but was initially unpopular (Buffinton 1961; Meltsner 1978; Goltz 1985; Muir-Wood 2016a). Indeed, most of loss related to this event was due to consecutive fires and, therefore, damage was already covered by the fire insurance cover (Goltz 1985; Yeats 2004; Gioncu and Mazzolani 2011). At the opposite, loss caused by the 1925 Santa Barbara earthquake was due to ground shaking, and therefore not insured (Goltz 1985; Alquist et al. 2009). This event boosted drastically the demand for earthquake insurance, as illustrated in Figure 2.3 by the total amount of premium collected by insurance companies.
After the 1925 Santa Barbara earthquake, Great Depression started, stopping the appeal. The occurrence of two other damaging earthquakes in 1933 (Long Beach) and 1940 (Imperial Valley) triggered the attractiveness of earthquake insurance cover, until 1957 (Muir-Wood 2016a; Meltsner 1978). Indeed, is observed (Fig. 2.3) a decreasing trend in the premium amount collected between 1957 and 1970. This evolution is surprising considering solid economic US growth during that period (2.5% average annual growth rate of the GDP per capita between 1950 and 1973, against 2% between 1870 and 2007, according to Jones 2016) and the significant earthquakes occurred the six previous years: 1) the 1952 Kern County earthquake (M7.3): the epicentre was located at 40km of Bakersfield and 90km of Santa Barbara, and it caused $2.8bn (USD 2005) (Alquist et al. 2009) damage (i.e. similar to the 1925 Santa Barbara event); 2) the 1955 Terminal island earthquake (M3.5): occurred in Los Angeles and caused $3m (USD 1955) (Vranes and Pielke 2009) despite the very low magnitude; 3) the 1957 San Francisco earthquake (M5.7): the biggest in this area since the 1906 event, despite a very limited damage estimated at $27m in USD 2005 (Alquist et al. 2009). According to Buffinton (1961) and Meltsner (1978), insurance companies did not record significant losses from these events (the global insured loss ratio is below 20%). Furthermore, the earthquake engineers’ community and public officials congratulated themselves about the efficiency of the seismic retrofitting codes settled during the 1940’s (Geschwind 2001). Except the damage, they even communicated that there was « no cause to fear an earthquake like 1906 » (Geschwind 2001), despite objections raised by earthquake researchers led by Charles Richter. As a likely consequence, people ignored the risk and cancelled their earthquake insurance policy.
The 1971 San Fernando earthquake caused a $6.6bn (USD 2005) damage but less than 10% were covered by insurance companies (Meltsner 1978; Alquist et al. 2009). This event stands out from the previous ones because the commercial and industrial sectors were heavily affected (almost equal to the residential losses in Los Angeles City), and a large share (62%) of buildings affected collapsed or was heavily damaged (Meltsner 1978; Alquist et al. 2009). As a consequence, Goltz (1985) mentions that professionals bought earthquake insurance products, boosting the sector at an unprecedented level (Fig. 2.3). The demand for earthquake insurance was even more triggered by the devastating 1983 Coalinga earthquake ($120m. in USD 2005) and the consecutive Assembly Bill AB2865 (McAlister 1984; Fig. 2.4).
This legislative act mandated insurance companies to offer an optional earthquake coverage complementary to the dwelling insurance. Consequently, after the 1994 Northridge earthquake, the consecutive loss for insurance companies reached $11.4bn (USD 1995), i.e. three times higher than the $3.4bn (USD 1995) earthquake insurance market premiums collected since 1970 (Snyder 1995). Even if no company was declared bankrupt, claims overpassed the maximum loss assessed by the contemporary actuarial models (RMS 2004; Insurance Information Institute 2016). Forced at that time by the Assembly Bill AB2865 (McAlister 1984) to propose an earthquake coverage in residential insurance policies, most of the insurance companies (≈ 90%) decided to restrict or even to stop selling new residential insurance cover in California (California Earthquake Authority 2016a).
The Fair Access to Insurance Requirements (FAIR) is a state-managed insurance syndicate gathering all California insurance companies. Since 1968, it provides in last resort a basic insurance cover to households that insurance companies do not want to cover. Thus, to limit the threat of a shortage in property insurance products, the FAIR plan launched in 1994 a basic earthquake insurance cover (Mulligan 1994). Constrained by the sharp decrease of new insurance policies offer, customers rushed to subscribe the FAIR plan product (Sanchez 1996). This unforeseen popularity generated fears among the authorities about the capacity to face a major earthquake loss. It resulted in a strict limitation of the FAIR plan house insurance subscription on June 1st, 1996 to very poor zones and highly exposed to brush fire risk (Sanchez 1996; Reich 1996a; Reich 1996b). The FAIR plan reopened 5 months later while the California Earthquake Authority (CEA) was created as a response to the earthquake insurance crisis (Reich 1996a; Reich 1996b).
Initiated by law in 1995, the CEA aims at providing an earthquake insurance for households (Consumers Union 1997; Knowles 1997), called the Mini-policy because of the low guarantees provided. After the commitment of more than 75% insurance companies to sell it (later referred as CEA insurance company members) and the purchase of the reinsurance cover imposed by such risk, the CEA was officially launched on December 2nd, 1996 (Consumers Union 1997; Knowles 1997). The new insurance conditions of the Mini-policy were less attractive than the FAIR plan cover because more expensive and more restrictive as summarized in Table 2.1.
Consequently, many people were no longer insured against earthquake risk and, despite a significant premium amount increase (Tab. 2.1; Fig. 2.4, Significant EQ premiums increase) it resulted in a drop of the total written premium amount (Fig. 2.4). From 31% in 1996, the share of people covered against earthquake falls to 19.5% in 1997 as illustrated in Figure 2.5 (California Department of Insurance database).
After 1997, the number of earthquake insurance policies decreased slightly until 2003 (the year of the San Simeon earthquake) and then has been increasing until now (Fig. 2.5a). However, this increase is slower than for the number of housing insurance policies, resulting in a slight decrease of the ratio between earthquake and housing insurance policies (Fig. 2.5b). Nowadays, the CEA has some competitors representing 25% of the policies and 35% of the premium amount related to the earthquake dwelling insurance market (California Department of Insurance database). The difference between these two values reflects that the CEA protects more low-value houses than its competitors (assuming that all insurance companies use similar pricing models and policies).
Figure 2.5: CEA Earthquake insurance policy evolution from 1996 to 2015 in terms of: a) number of insurance policies and b) the ratio between the numbers of households covered against earthquake and households with a housing insurance. Source: after California Department of Insurance database.

Focus on the California Earthquake Authority

Until now, the CEA has faced only small losses despite the occurrence of several moderate earthquakes (Fig. 2.6). Indeed, only the 2003 San Simeon and the 2014 Napa earthquakes caused claims above $2m. (USD 2015). The total claim amount paid during the period 1997-2015 is equal to $19m. (USD 2015), which corresponds to only 2‰ of the total premium amount for the same period. Although the period is too short to draw any conclusions on the premium amount adequacy, the issue of the collected premium allocation is raised: does it increase the CEA claim-paying capacity to face more and more devastating earthquakes?
The claim-paying capacity is the maximum amount that an insurance company can pay. This amount is equal to the sum of the company’s reserves and the cash-flow that it can benefit from all the risk-transfer mechanisms subscribed. Figure 2.7 shows the CEA’s claim-paying capacity between 1997 and 2016.
Figure 2.7: CEA’s claim-paying capacity according to the source of funds: the CEA’s capital, the CEA reinsurance cover, and the Industry Assessment Layer (IAL) corresponding to the funds provided by the CEA’s insurance company members. The lines correspond to the loss incurred by the CEA if the 1906 San Francisco, the 1989 Loma Prieta or the 1994 Northridge earthquakes occur today. The ‘1994 Northridge x2’ corresponds to a hypothetical earthquake causing a direct economic loss twice higher than the 1994 Northridge earthquake. Source: after CEA Financial Statements.
According to the California Earthquake Authority (2014), the company has a claim-paying capacity large enough to face the loss of some largest historical earthquakes (1989 Loma Prieta, 1994 Northridge and 1906 San Francisco) if they occur again. The largest event sustainable by the CEA is a two Northridge-size event (Roth 1997), estimated at a 400y return period (California Earthquake Authority 2018a). Figure 2.7 shows also that the CEA’s claim-paying capacity is made of its own reserves (dark grey), the reinsurance capacity bought on financial markets (grey) and the Industry Assessment Layer (IAL) which is an additional reinsurance coverage provided by the CEA insurance company members (light grey). While the capital increases as a consequence of the premium collected and the losses recorded (Fig. 2.6), the IAL is decreasing. It results in a constant claim-paying capacity since 1997 when calculated in $2015. Consequently, Figure 2.7 highlights that part of the premiums collected since 1997 and not used to pay claims (Fig. 2.6) is used to decrease the contribution of the participating insurers in the earthquake coverage. As the IAL is a reinsurance cover free of charge for the CEA (Marshall 2018), this decrease has no impact on the premium amount. However, the excess of premium collected allowed also the CEA to apply several premium discounts since 1997: -11% in 1997, -23% in 2006, -12.5% in 2012 and -10% expected in 2016 (California Earthquake Authority 2015a).
The earthquake premium calculated by the CEA considers several building characteristics, as a proxy of the earthquake vulnerability. For instance, the online CEA premium calculator indicates that the premium amount for a one-story modern house is between 3 and 4 times less expensive than an old one-story house built in earthquake vulnerable materials (for instance unreinforced masonry). In addition to the premium scale, the CEA and the California Governor’s Office of Emergency Services launched in September 2013 the prevention plan called Earthquake Brace+Bolt (California Department of Insurance 2015). This initiative aims at promoting earthquake retrofit for houses and mobile homes of CEA’s clients by financing the work up to $3,000. Table 2.2 draws a global picture of the initiative through different figures.
First, the need for retrofitting in California is huge: among the 13,987,625 housing units in 2015 (US Census), 1,200,000 are particularly at risk and would benefit from this initiative (Lin II 2015; Xia and Lin II 2016). The Earthquake Brace+Bolt initiative has been launched cautiously with a budget of $1.8m., with 600 houses retrofitted by the end of year 2015 as objective. Between 2015 and 2017, the funds increased from $1.8m to $6m driving the Earthquake Brace+Bolt initiative growth. In 2017, 2,000 houses are targeted to be retrofitted over 140 postal codes mostly in big urban areas (Los Angeles, San Francisco, Eureka and Riverside). Despite the two years-old initiative Earthquake Brace + Bolt is expanding quickly, it is still in its infancy. Only 3.5‰ of the highly vulnerable houses have been retrofitted after 3 years of existence. However, the public authorities and the CEA rely on the Earthquake Brace+Bolt initiative to increase the public awareness of the risk and to urge households to retrofit their house by themselves (Lin II 2015).

Main differences with earthquake insurance models in France, India and Indonesia from an economic perspective

In this section, the earthquake insurance models in force in California, France, India and Indonesia are compared based on several economic metrics: the premium amount, the loss allocation between the insured, the insurance companies and public funds and the solvency of insurance companies.

The insurance premium

Comparing the premium rate (equal to the premium amount divided by the insured value of the house) aims at highlighting the affordability of earthquake insurance considering both the insurance development and the seismic hazard level. Figure 2.8 shows the spatialized premium rate for each studied area.
The building characteristics considered for calculating the premium amount (i.e. modern one-storey house built in unreinforced masonry) have been chosen because it is assumed to be the most similar from one country to another. Consequently, for a given area, the premium rate illustrated in Figure 2.8 is not representative of the market when the selected conditions are not characterizing the buildings taxonomy.
Figure 2.8 shows first that for each country the premium rate depends on the location. The premium is the lowest in India (shiny pink colour) excluding the Himalayan area, the Gujarat state and the west of Maharashtra state, exposed to induced seismicity after the Koyna dam construction, according to Phadnis (2016). In France, the premium rate appears to be low (below 0.25‰) especially because the premium covers flood and subsidence risks in addition to earthquake risk (Caisse Centrale de Réassurance 2011). In France, this premium rate is established by law (as part of the CAT-NAT plan) and consequently, does not necessarily reflects the risk level. Furthermore, the French State offers under the CAT-NAT plan an unlimited reinsurance cover. It means that in case of extreme loss, the French State will pay part of insurance claims. Hence, the State budget dedicated to the CAT-NAT plan can be assimilated to an additional premium. Nevertheless, the premium rate is regularly increased (Caisse Centrale de Réassurance 2019a): +64% in 1985 and +33% in 1999. Furthermore, the ongoing revision of the CAT-NAT plan could also include a new premium increase (Bonnefoy 2019). California is the country with the highest premium rate, especially along the San Andreas Fault and in the vicinity of big cities like Los Angeles or San Francisco. It is also the country where the location has the highest impact on the premium amount. Indonesia shows spatial variation in premium rate that can be explained by the different levels of seismic hazard.
To go further in the analysis of the premium amount, Figure 2.9 plots the premium rate against the hazard level extracted from the GSHAP hazard map and corresponding to the return period 475y (Giardini et al. 1999).
Figure 2.9: Average premium as a function of the hazard level as defined by the GSHAP 475y-PGA hazard map.
When several hazard values refer to the same premium rate, the scatter is represented by a boxplot. This figure highlights the fact that low to moderate seismic countries (France and India excluding Himalaya) have a similar profile. Also, they have a very low premium rate for a given hazard level, when compared to Indonesia or California. Indeed, for a hazard at 2m.s-2, the premium rate in India is around 0.5‰ while it reaches 1.6‰ and 1.2‰ in Indonesia and California, respectively. Last, with a curve lying below all the others, Indonesia is the costliest country in terms of earthquake insurance.
The variability in the hazard for the same premium amount is the most important for California. One explanation could be the difference in geographical resolution between the premium amount and the GSHAP hazard map, as illustrated in Figure 2.10.
Figure 2.10: Hazard levels from the GSHAP hazard map (in m.s-2) for the city of Palmdale, California. For this postcode area, the CEA premium amount is uniform and equal to 7.073‰ for a no-frame house built in 2017 and with one story.
Even if the premium is more location-dependent than for the other studied countries (Fig. 2.8), there is always some mutualisation of the hazard risks within a certain geographical resolution, here the city.
Finally, Figures 2.8, 2.9 and 2.10 show a wide range of premium amount for one area to another that depends on both the hazard level, and the method used to calculate the premium amount.

The loss allocation

After analysing the difference in premium amount, this section aims at assessing the efficiency of the risk transfer mechanism. The theoretical loss share of each insurance scheme stakeholder is compared on the basis of a wide range of direct economic loss. This analysis considers only the insurance and reinsurance conditions currently subscribed even if past natural hazard showed that additional funds can be dedicated to affected people, like in France after the 2016 Seine floods (République Française 2016). Moreover, the loss allocation is performed in order to minimize the loss share for the policyholder. Thus, the following assumptions are made:
all the damaged buildings are dwellings;
buildings are destroyed at 100% and contents at 0%;
underinsurance is neglected, i.e. the building price is equal to the sum insured; all the buildings are insured by the CEA with a deductible amount at 5%;
all insurance companies in France are reinsured by the CCR;
California households affected receive a $30,000 grant from the Federal Emergency Management Agency (FEMA).
Under these assumptions, the theoretical loss shares between the policyholders, the insurance companies, the CEA/CCR and the public funds can be calculated (Fig. 2.11).
For earthquakes causing low to moderate damage (i.e. up to 7bn loss, Fig. 2.11), the two insurance schemes allocate most of the loss to the insurance market (i.e. insurance company, CEA and CCR). However, for extensive damage (between $7bn and $27bn), the California insurance scheme still manages to allocate more than 50% of loss to the CEA, while the French State is expected to pay more than 85% of the loss. Last, for very extreme earthquake causing a loss above $27bn, whatever the insurance scheme most of the loss is supported by the community (public funds in France and policyholders’ own funds in California). Thus, CEA and CCR play a different role: when the first provides a cover for small events, the second protects insured people up to a maximum loss amount, corresponding to the claim-paying capacity. In the USA, the public intervention after a natural disaster is limited to a possible grant up to $30,000 allocated by the FEMA to affected people as part of the Major Declaration program (Gustin 2008). Since 2010 the California Earthquake Authority (2015a) asks for a higher participation of the State with a public borrow facility for paying the claims in case of an extreme earthquake. However, in case of a devastating earthquake, the two insurance mechanisms are less efficient, since most of the loss is at the charge of the State and the policyholders in France and California, respectively.

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Insurance companies’ solvency

One of the key principles of the insurance theory is the risk mutualisation, which stipulates that for a large portfolio of insured goods (e.g. houses), only a small part can experience a loss at the same time. Consequently, insurance companies can sustain insured losses even with a claim-paying capacity lower than the total sum insured. Then, until the next claim the premium amount collected is used to strengthen the reserves. Insurance companies are interested in a low claim-paying capacity since the lower the claim-paying capacity, the lower the premium amount. Nevertheless, disasters like earthquakes can affect simultaneously a wide area, and potentially a large part of an insured portfolio. To guarantee that insurance companies have a claim-paying capacity large enough to face such risks, in most countries a minimum level is required by the insurance market authorities. For instance, European insurance companies (i.e. located in a country member of the European Union), are controlled by the European Insurance and Occupational Pensions Authority (EIOPA). One of the most important directives from the EIOPA is Solvency II which requires from insurance companies a claim-paying capacity at least equal to the total loss that they could incur, with a probability of exceedance of 0.5% in one year – so-called Solvency Capital Requirement (SCR). To assess this amount, insurance companies can use the framework included in Solvency II (called the Standard Formula) or developed their own model (called Internal model) as long as their supervisor has validated it. Figure 2.12 illustrates the claim-paying capacity for earthquake risk calculated with the Standard Formula in each French administrative division.
At the country level, the capital requirement associated to the earthquake risk given by the Standard Formula is about 0.6% (€0.6 for €100 insured). As a comparison, in 2015 the CEA’s claim-paying capacity is able to stand for a 3.5% loss, i.e. almost 60 times more than the EIOPA solvency requirements for metropolitan France. The reason is twofold: on one hand destructive earthquakes are more likely to occur in California than in metropolitan France and, on the other hand the CEA’s claim-paying capacity is designed to sustain a loss with a return period at 400y against 200y in the Standard Formula.
Because claim-paying capacity of insurance companies is related to the risk of bankruptcy, it drives their solvency ratio and their financial ratings. For this reason, large insurance companies in Europe tend to have a claim-paying capacity above the threshold of the 200y return period required by Solvency II. Table 2.3 shows the ratings for the largest earthquake insurance provider in each country studied (California, France, India and Indonesia).
The CCR and the CEA have an important financial strength. As the CCR benefits from the French state guarantee, its score is the highest, matching the France Sovereign rating. The CCR Re is a subsidiary dedicated to reinsurance operations outside France and without the French state guarantee. Its score (Standard & Poor’s A-) is lower or comparable to the CEA’s one depending on the rating agency considered (AM Best: A-; Reuters Fitch A). Like for the CEA, the CCR’s can face extreme losses, with a claim-paying capacity equal to 1.78 times the 200y return period loss (Cuisse Centrale de Réassurance 2019b). For developing countries, the UIIC (one of the most important insurance company in India) and MAIPARK show a riskier profile, indicating a potential bankruptcy in case of a huge loss.
Aside the solvency regulations applicable to each insurance companies, pool mechanisms are put in place to diversify the risk between insurance companies and consequently reduce the individual risk of bankruptcy. In California, the CEA gathers 24 insurance companies, meaning that if one of these companies goes to bankruptcy, policyholders are still covered against the earthquake risk by the CEA. In France also the CAT-NAT plan is centralized and the CCR reinsures most of the insurance companies. About Indonesia, non-life insurance companies must be a shareholder of the national reinsurer MAIPARK (KPMG 2016).
In conclusion, this analysis shows that none of the earthquake insurance model reviewed manages to provide both a large cover and sustain extreme losses. This is one of the fundamental reasons of the large protection gap observed for earthquake insurance. Improving earthquake insurance solutions, represents both challenges and opportunities for insurance companies.

Challenges and opportunities in earthquake insurance market development

A long-term profitable market with extreme loss

The 1994 Northridge earthquake damage putted the property insurance market into a crisis which ended by the creation of the CEA. The loss was higher than all the premiums collected and most of insurance companies stopped or restricted sales of new homeowners’ policies (Roth 1997; Patton 2014; California Earthquake Authority 2016a). Nevertheless, during most of previous years, the premium amount was collected while no damaging earthquake occurred. Figure 2.13 illustrates the evolution since 1926 of both the premium and the claims amount for the earthquake insurance market in California.
The loss ratio is calculated as the ratio between the claims and the premium amount for a given time step (often one year). A loss ratio below 100% means that the loss amount is lower than the premium amount. Nevertheless, for being sustainable, an insurance solution must have a loss ratio below 100% since part of the premium is necessary to pay the insurance company’s overhead costs. In the case of the CEA, the overhead costs represent 17% of the annual premium amount (California Earthquake Authority 2017b) and therefore, the company is cost-effective when the loss ratio is below 83%. Figure 2.13 shows that earthquake insurance in California is profitable over the whole period 1920-2015, despite extreme losses consecutive to the 1994 Northridge, the 1925 Santa Barbara, the 1933 Long Beach, the 1971 San Fernando, or the 1989 Loma Prieta earthquakes. Two earthquakes caused loss above the premium amount collected over the year: the 1989 Loma Prieta earthquake (Yeats 2004; Garamendi 2003) and the 1994 Northridge earthquake (Snyder 1995) and only the latter jeopardized the empirical profitability of the insurance cover (California Earthquake Authority 2016a). Nevertheless, the probable occurrence of extreme events imposes an important need of claim-paying capacity for the insurance companies. Beyond the quantification issue, to raise and hold such a capital is a difficult and costly task.
In conclusion, providing an earthquake cover is more a matter of claim-paying capacity than profitability. Consequently, premium amount is high to capitalize a claim-paying capacity large enough for sustaining extreme losses and to pay the reinsurance premium. The claim-paying capacity also controls the maximum number of earthquake insurance policies (California Earthquake Authority 2018a). Indeed, increasing the earthquake insurance portfolio requires to increase simultaneously the claim-paying capacity. Since raising CEA’s capital can take time, increasing the claim-paying capacity means to buy more reinsurance cover which lead to increase the premium amount (California Earthquake Authority 2018a). Thus, the California insurance market is not immune from a new crisis in the case of a sudden increase in earthquake insurance underwriting (10% of California households are insured against earthquake risk in 2015 according to the CDI).

 A need for being full-covered

The importance for earthquake insurance policyholders to be fully covered can be perceived through the recent development of the earthquake insurance market in New-Zealand. Following the 2010 and 2011 Canterbury earthquakes, most of insurance companies changed their earthquake residential insurance policy conditions (Sergeant 2016). Initially, the earthquake insurance compensation corresponded to the loss incurred by the policyholder above the deductible amount with no declared insured limit. After these earthquakes, earthquake insurance compensations are capped to a declared amount. Therefore, any additional cost above the declared amount for repairing the insured house is now at the charge of the policyholder. This major insurance policies modification forced the government to publish a report on the forecasted consequences (Sergeant et al. 2015). The main conclusions were: 1) between 40% and 85% of households are exposed to a risk of underinsurance by 10% to 50%; 2) for at least 95% of households no significant insurance shortfall is expected, even after a large earthquake.
However, underinsurance is a real issue in the light of the recent earthquakes. Marquis et al. (2017) show on commercial buildings insured with a declared amount cover in the aftermath of the 2010-2011 Canterbury earthquakes that most of buildings (87%) were underinsured by 12% to 51%. This was the main reason for post-earthquake buildings demolition instead of reconstruction. Similarly, following the 2016 Kaikoura earthquake some homeowners faced rebuilding costs higher than the insurance refund, making the rebuilding process uncertain (MacDonalds 2017; IFSO 2017). From these two developments, New-Zealand government’s conclusions in terms of underinsurance level have been corroborated by past earthquakes, but the consequences were underestimated.
In California also, CEA’s products are based on a declared amount cover. It means that a claim amount is capped at the declared amount, whatever the repairs cost is above. About the French CAT-NAT plan, there is no direct limit since policies deal with a full replacement cover i.e. the insurance pays for the house rehabilitation whatever the cost.

 A large untapped market despite new insurance solutions

Knowing the overall profitability of earthquake insurance, another key element is the potential size of this market. Figure 2.14 shows the average premium amount for the specific earthquake cover and for the other housing insurance covers (e.g. damage from water damage, theft, etc.).
Figure 2.14: Average premium amount for earthquake and household insurance coverage in California (USD 2015). Source: after California Department of Insurance database.
Since 2008, earthquake premium is higher than the housing insurance premium. According to the California Department of Insurance (CDI), in 2015, around 10% of people having a housing insurance coverage are also covered against earthquake risk. To compare the untapped earthquake insurance market in California, we assume that uninsured households have on average the same risk profile than insured people regarding earthquake risk. Considering that 90% of households are not covered against earthquake risk and the average earthquake insurance premium is equal to 1.19 the average housing insurance premium (Fig. 2.14), the untapped earthquake insurance market in California is bigger than the housing insurance market in terms of premium amount (1.19 × 0.9 = 1.07). At a wider scale, most of households are not covered against earthquake risk in many other countries (Fig. 2.15).
This shows that California is not the only rich country prone to earthquake risk to face insurance gap issue (e.g. Italy or Japan). Moreover, Freire et al. (2015) showed that the population in very exposed areas to earthquake risk experienced the fastest growth between 1900 and 2000 (+350%), while the total population grown by +270%; revealing an increasing insurance protection gap. According to a study from the World Bank (Brecht et al. 2013), between 2000 and 2050, the population in big cities (i.e. more than 100,000 inhabitants) exposed to earthquake risk is expected to move approximatively from 350 to 850 million (Birkmann et al. 2016). In conclusion, the untapped earthquake insurance market represents a huge opportunity for insurance companies to develop their business, if well managed.
Figure 2.15: Estimated share (in percentage of policies) of households with earthquake insurance
coverage. Source: OECD (2018).

Table of contents :

CHAPTER 1: General introduction
1.1. Problématique
1.2. Plan de la thèse
CHAPTER 2: In-depth review of earthquake insurance solutions
2.1. Introduction
2.2. Earthquake insurance market in California
2.2.1. Historical background
2.2.2. Focus on the California Earthquake Authority
2.3. Main differences with earthquake insurance models in France, India and Indonesia from an economic perspective
2.3.1. The insurance premium
2.3.2. The loss allocation
2.3.3. Insurance companies’ solvency
2.4. Challenges and opportunities in earthquake insurance market development
2.4.1. A long-term profitable market with extreme loss
2.4.2. A need for being full-covered
2.4.3. A large untapped market despite new insurance solutions
2.5. Conclusions
CHAPTER 3: Limits of earthquake insurance solutions
3.1. Introduction
3.2. California earthquake insurance unpopularity: the issue is the price, not the risk perception
3.2.1. Introduction
3.2.2. Data collection and processing
3.2.3. Model development for the period 1997-2016
3.2.4. Evolution of the homeowners’ risk perception since 1926
3.2.5. Understanding the current low take-up rate
3.2.6. Conclusions
3.3. Assessing the performance of the French « CAT-NAT » insurance plan
3.3.1. Introduction
3.3.2. Review of past CAT-NAT declarations following an earthquake
3.3.3. The CAT-NAT procedure following the 2003 heatwave
3.3.4. An empirical model for the declaration of municipalities in CAT-NAT situation
3.3.5. Modelling the performance of the French CAT-NAT plan in case of extreme earthquakes
3.3.6. Conclusions
3.4. A maturity scale for earthquake insurance development based on the California experience
3.4.1. Introduction
3.4.2. Level “Emerging”: the birth of the earthquake insurance (California 1906 – 1925)
3.4.3. Level “Standard”: An empirical insurance model (California 1926 – 1994)
3.4.4. Level “Advanced”: an insurance model designed to face extreme events (California 1995 – Today)
3.4.5. Level “Sustainable”: current initiatives for a sustainable insurance model (unreached level)
3.4.6. The maturity scale for earthquake insurance
3.4.7. Conclusions
3.5. Summary
CHAPTER 4: Improving the risk modelling
4.1. Introduction
4.2. Comparing probabilistic seismic hazard maps with ShakeMap footprints for Indonesia
4.2.1. Introduction
4.2.2. Dataset
4.2.3. The testing method
4.2.4. Testing PSHA maps for Indonesia
4.2.5. Conclusions
4.3. Assessing the performance of existing repair-cost relationships for buildings
4.3.1. Introduction
4.3.2. The Earthquake Damage Database
4.3.3. Using the Earthquake Damage Database to test existing damage-cost relationships
4.3.4. Example: the Nepal Mw7.8 earthquake
4.3.5. Testing some existing damage-cost relationships
4.3.6. Conclusions
4.4. Summary
CHAPTER 5: A new insurance model
5.1. Abstract
5.2. Introduction
5.3. Example of the CEA insurance model
5.4. A life insurance mechanism to increase affordability
5.5. Case studies on cities of San Francisco and Los Angeles
5.6. Leveraging on building retrofitting works for a risk reduction
5.7. Involving homebuilder companies and public authorities in the insurance scheme
5.8. Conclusions
CHAPTER 6: General conclusions and perspectives
Data and Resources
Bibliography
Appendix
A. The Expected Utility theory
B. Solution of the expected utility maximization equation
C. Expression of the premium amount P1 when considering the date of retrofitting works
D. Calculating the premium amount in case of time independent earthquake model

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