From Earthquake Geophysical Measures to Insurance Premium: A Generalised Method for the Evaluation of Seismic Risk, with Application to Italy’s Housing Stock

Riccardo Cesari; Leandro D’Aurizio

doi:10.1515/apjri-2020-0034

Article

From Earthquake Geophysical Measures to Insurance Premium: A Generalised Method for the Evaluation of Seismic Risk, with Application to Italy’s Housing Stock

Riccardo Cesari and Leandro D’Aurizio

Published/Copyright: August 10, 2021

Published by

Become an author with De Gruyter Brill

Submit Manuscript Author Information Explore this Subject

From the journal Asia-Pacific Journal of Risk and Insurance Volume 16 Issue 2

Abstract

Following the increasing necessity of quantitative measures for the impact of natural catastrophes, this paper proposes a new technique for a probabilistic assessment of seismic risk by using publicly available data on the earthquakes that have occurred in Italy. We implement an insurance-oriented methodology to produce a new map of the seismic risk and to evaluate, under various hypotheses, the costs of insuring all the Italian housing units against it. The model is compared with two main privately developed models, well known in the reinsurance industry, providing fairly similar results.

Keywords: earthquakes; seismic risk; exceedance loss; insurance pricing

JEL codes: G22

Corresponding author: Leandro D’Aurizio, IVASS, Via del Quirinale 21, Rome 00187, Italy, E-mail: leandro.daurizio@ivass.it

Acknowledgements

We wish to thank Marco Leotta (IVASS), Arturo Valerio (IVASS) and Carlo Meletti (Italian Institute for Geophysics and Vulcanology, INGV) for their precious suggestions on data geo-referencing and risk evaluation. We also thank Alessandro Savina and Alex Heidrich who worked with Risk Management Solutions (RMS) when this paper was being written, for the data provided and the stimulating discussions. We are grateful to Daniela D’Andrea and to her staff at the reinsurer Swiss Re, who greatly supported us by providing comparative analytical results. Our paper also benefited from the comments and clarifications on earthquake geophysics by Warner Marzocchi (University of Naples) and Carlo Doglioni (INGV). We are finally indebted to the three anonymous reviewers who carefully read and commented a preliminary version of the paper. The responsibility for any mistakes and omissions left in the paper is the authors’ only.

References

ANIA (Associazione Italiana Imprese Assicuratrici - Association of Italian Insurers). 2011. Danni da Eventi Sismici e Alluvionali al Patrimonio Abitativo Italiano: Studio Quantitativo e Possibili Schemi Assicurativi. Rome: ANIA. https://www.ania.it.Search in Google Scholar

Atreya, A., S. Ferreira, and E. Michel-Kerjan. 2015. “What Drives Households to Buy Flood Insurance? New Evidence from Georgia.” Ecological Economics 117: 153–61. https://doi.org/10.1016/j.ecolecon.2015.06.024.10.1016/j.ecolecon.2015.06.024Search in Google Scholar

Bank of Italy. 2015. Household Wealth in Italy 2014. Supplements to the Statistical Bulletin, Monetary and Financial Indicators, Year XXIV, 16 December 2015. Rome: Bank of Italy. https://www.bancaditalia.it/pubblicazioni/ricchezza-famiglie-italiane/2015-ricchezza- famiglie/en_suppl_69_15.pdf?language_id=1.Search in Google Scholar

Barberio, M. D., M. Barbieri, A. Billi, C. Doglioni, and M. Petitta. 2017. “Hydrogeochemical Changes before and during the 2016 Amatrice-Norcia Seismic Sequence (Central Italy).” Scientific Reports 7: 11735. https://www.nature.com/articles/s41598-017-11990-8.10.1038/s41598-017-11990-8Search in Google Scholar

Boggs, P. T., and J. D. Rogers. 1989. Orthogonal Distance Regression. Gaithersburg: U.S. Department of Commerce (National Institute of Standards and Technologies). https://pdfs.semanticscholar.org/5749/2e2500b031fb19c2986544cbf6dcd4dabe74.pdf.10.6028/NIST.IR.89-4197Search in Google Scholar

Botzen, W., H. C. Kunreuther, and E. Michel-Kerjan. 2015. “Divergence between Individual Perceptions and Objective Indicators of Tail Risks: Evidence from Floodplain Residents in New York City.” Judgment and Decision Making 10 (4): 365–85. http://journal.sjdm.org/15/15415/jdm15415.pdf.10.1017/S1930297500005179Search in Google Scholar

Charpentier, A. 2008. “Insurability of Climate Risks.” The Geneva Papers on Risk and Insurance 33: 91–109. https://doi.org/10.1057/palgrave.gpp.2510155.10.1057/palgrave.gpp.2510155Search in Google Scholar

Crichton, D. 2008. “Role of Insurance in Reducing Flood Risk.” The Geneva Papers on Risk and Insurance 33: 117–32. https://doi.org/10.1057/palgrave.gpp.2510151.10.1057/palgrave.gpp.2510151Search in Google Scholar

European Commission. 2016. Action Plan on the Sendai Framework for Disaster Risk Reduction 2015-2030. A Disaster Risk-Informed Approach for All EU Policies. https://ec.europa.eu/echo/sites/echo-site/files/1_en_document_travail_service_part1_v2.pdf.Search in Google Scholar

Faenza, L., and A. Michelini. 2010. “Regression Analysis of MCS Intensity and Ground Motion Parameters in Italy and its Application in ShakeMap.” Geophysical Journal International 180 (3): 1138–52. https://doi.org/10.1111/j.1365-246X.2011.05125.x.10.1111/j.1365-246X.2009.04467.xSearch in Google Scholar

Friedman, D. G. 1984. “Natural Hazard Risk Assessment for an Insurance Programme.” The Geneva Papers on Risk and Insurance 9 (3): 57–128.10.1057/gpp.1984.4Search in Google Scholar

Gallagher, J. 2014. “Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States.” American Economic Journal: Applied Economics 6 (3): 206–33. http://faculty.weatherhead.case.edu/jpg75/pdfs/flood_insurance_aeja.pdf.10.1257/app.6.3.206Search in Google Scholar

INGV. 2004. Seismic Risk Maps for Italy - Final Report (Only in Italian). Rome: INGV. http://zonesismiche.mi.ingv.it/documenti/rapporto_conclusivo.pdf.Search in Google Scholar

IVASS. 2016. Annual Report for the Year 2015. Rome: IVASS. https://www.ivass.it/ pubblicazioni-e-statistiche/pubblicazioni/relazione-annuale/2016/Report_IVASS_ 2015.pdf?language_id=3.Search in Google Scholar

Kunreuther, H. C., and E. O. Michel-Kerjan. 2007. “Climate Change, Insurability of Large-Scale Disasters and the Emerging Liability Challenge.” In Working Paper n. 12821. National Bureau of Economic Research. http://www.nber.org/papers/w12821.pdf.10.3386/w12821Search in Google Scholar

Kunreuther, H. C., and E. O. Michel-Kerjan. 2013. “Managing Catastrophic Risk through Redesigned Insurance: Challenges and Opportunities.” In Handbook of Insurance, edited by G. Dionne. New York: Springer Science + Business Media.10.1007/978-1-4614-0155-1_19Search in Google Scholar

Kunreuther, H. C., and M. V. Pauly. 2004. “Neglecting Disaster: Why Don’t People Insure against Large Losses?” Journal of Risk and Uncertainty 28 (1): 5–21. https://doi.org/10.1023/B:RISK.0000009433.25126.87.10.1023/B:RISK.0000009433.25126.87Search in Google Scholar

Kunreuther, H. C., M. V. Pauly, and S. McMorrow. 2013. Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry. Cambridge: Cambridge University Press.10.1017/CBO9781139050319Search in Google Scholar

Lovett, R. A. 2011. “Europe Starting to Dive under Africa?” In National Geographic News, April 19. http://news.nationalgeographic.com/.Search in Google Scholar

Meyer, R., and H. C. Kunreuther. 2017. The Ostrich Paradox: Why We Underprepare for Disasters. Philadelphia: Wharton School Press.10.2307/j.ctv2hdrfz6Search in Google Scholar

Mitchell-Wallace, K., M. Jones, J. Hillier, and M. Foote, eds. 2017. Natural Catastrophe Risk Management and Modelling: A Practitioner’s Guide. Hoboken: John Wiley & Sons.Search in Google Scholar

Nguyen, C. N., and I. Noy. 2020. “Comparing Earthquake Insurance Programmes: How Would Japan and California Have Fared after the 2010–11 Earthquakes in New Zealand?” Disasters 44 (2): 367–89. https://doi.org/10.1111/disa.12371.10.1111/disa.12371Search in Google Scholar

Poljanšek, K., M. Marín Ferrer, T. De Groeve, and I. Clark, eds. 2017. Science for Disaster Risk Management 2017: Knowing Better and Losing Less. Luxembourg: Publications Office of the European Union. https://doi.org/10.2788/842809 (ISBN 978-92-79-60679-3, JRC102482).Search in Google Scholar

Roubault, M. 1970. Peut-on prévoir les catastrophes naturelles? Paris: Presses Universitaires de France.Search in Google Scholar

SwissRe. 2015. Underinsurance of Property Risks: Closing the Gap. Issue 5. Zurich: SwissRe. https://www.riskandinsurance.com/wp-content/uploads/2015/10/Swiss-Re_ Underinsurance-of-property-risks.pdf.Search in Google Scholar

SwissRe. 2016. Sigma, Natural Catastrophes and Man-Made Disasters in 2016, vol. 2, 2017. Zurich: SwissRe. http://institute.swissre.com/research/overview/sigma/2_2017.html.Search in Google Scholar

UNISDR. 2015. “Global Assessment Report (GAR) on Disaster Risk Reduction 2013.” In Global Risk Assessment: Data, Sources and Methods. Geneva: UNISDR. https://www.preventionweb.net/files/48588_unisdrannualreport2015evs.pdf.Search in Google Scholar

Verbeek, M. 2008. A Guide to Modern Econometrics. Hoboken: John Wiley & Sons.Search in Google Scholar

Supplementary Material

The online version of this article offers supplementary material (https://doi.org/10.1515/apjri-2020-0034).

Received: 2020-11-23

Revised: 2021-05-24

Accepted: 2021-06-14

Published Online: 2021-08-10

You are currently not able to access this content.

Supplementary Material Details

Articles in the same Issue

https://doi.org/10.1515/apjri-2020-0034

Keywords for this article

earthquakes; seismic risk; exceedance loss; insurance pricing