CALIFORNIA EARTHQUAKE RISK ASSESSMENT June 14 th, 2018 1
Notice The information provided in this Presentation was developed by the Workers Compensation Insurance Rating Bureau of California (WCIRB) and Risk Management Solutions, Inc. (RMS) solely for the purpose of discussion during this Presentation. The WCIRB and RMS shall not be liable for any damages, of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this Presentation. 2
AGENDA How do cat models work? More specifically, how do workers compensation cat models work? Results of the analysis New science underlying the recent (major) model update Q & A 3
Probability of Exceedance Probability of Exceedance Probability of Exceedance Probability of Exceedance Probability of Exceedance Probability of Exceedance Probability of Exceedance Probability of Excee 0.02 0.00 0 250 500 750 1000 Loss ($M) HOW A WORKERS COMP CAT MODEL WORKS (SIMPLIFIED) Exposure Module (building, contents, BI) Hazard Module Property Vulnerability Module 0.06 0.04 Financial Module re Module contents, BI) Input # of Employees Simulate Earthquake Events Exposure Module (building, contents, BI) Hazard Module Exposure Module (building, employees) Hazard Module Property Vulnerability Module Hazard Module 0.10 0.08 EP Curve 0.06 0.04 0.02 0.00 0 250 500 750 1000 Property Loss ($M) Vulnerability Module Financial Module Casualty Financial Module Geographic distribution of people, building type, time of day Vulnerability Module 0.10 0.08 EP Curve 0.06 0.04 0.02 0.00 0 250 500 750 1000 Loss ($M) Building damage and collapse distributions by building type Financial Module 0.10 0.10 0.08 EP Curve 0.06 0.04 0.02 0.00 0 250 500 750 1000 Loss ($M) re Module, ard employees) Module Calculate Injuries and Fatalities Exposure Module (building, Hazard employees) Module Property Vulnerability Module 0.10 0.08 EP Curve 0.06 0.04 0.02 Hazard Module 0.00 0 250 500 750 1000 Casualty Loss ($M) Vulnerability Financial Module Module 0.10 0.08 EP Curve 0.06 0.04 0.02 0.00 0 250 500 750 1000 Casualty Loss ($M) Vulnerability Financial Module Module 0.08 0.06 0.04 0.02 0.00 0 250 500 750 1000 Loss ($M) Financial Module Fatal EP Curve Permanent Total Permanent Partial Temporary Total Medical Only Insurance Coverage Rules & Payouts 0.10 0.08 0.06 0.04 0.02 EP Curve 0.00 0 250 500 750 1000 Loss ($M) ard Module Casualty Financial Module Copyright 2017 Vulnerability Risk Management Module Solutions, Inc. All Rights Reserved. June 19, 2018 Total Medical and Indemnity $ Losses and # of Casualties By Injury Type 4
Annual Probability of Exceedance MODEL OUTPUT Event Loss Table (ELT) Event Loss (l) Annual Rate (r) Std. Deviation Return Period Rate * Loss 1 $5 M 0.04 $1M 25 0.2 2 $3 M 0.08 $2M 13 0.24 3 $25 M 0.005 $18M 200 0.125 4 $12 MM 0.008 $9M 125 0.096 5 $50 MM 0.001 $29M 1000 0.05 n 1% Return Period Loss (RPL p ) All Events Sum(r*l) Loss $1M Average Annual Loss (AAL) a.k.a Pure Premium EP (Exceedance Probability) curve Used by insurers for reinsurance purchasing; tail VaR analysis; solvency considerations. 5
CAT MODELING IS A BIG DATA EXERCISE Model # of Simulated Events Japan Earthquake 30,000 Australia Convective Storm 32,000 Europe Windstorm 40,000 North Atlantic Hurricane 50,000 California Earthquake 55,000 North America Severe Convective Storm 83,000 China Earthquake 85,000 Example: for a portfolio of 350,000 locations in a terrorism analysis: 350,000 locations x 35,000 events x 5 financial terms (limits, deductibles, exclusions, etc.) x 5 geocoding calculations x 2 hazard retrievals x 4 vulnerability calculations = 2.5 trillion calculations. And a lot of data produced. Copyright 2016 2017 Risk Management Solutions, Inc.. All Rights Reserved. June 19, 2018 6
Mean Casualty Rate (%) VULNERABILITY Given that a building is subject to a certain ground shaking, what will be its damage? And for workers comp: what are the resulting collapse probabilities and injury rates? Vulnerability functions are defined by key building features: Construction materials Building height Year of construction Occupancy type Example Vulnerability Module Low-rise unreinforced masonry Mid-rise steel Ground Shaking Intensity 7
CALIFORNIA EARTHQUAKE MODELED LOSS 8
WCIRB PORTFOLIO: 11.4 MILLION EMPLOYEES (FTE) $544 BILLION PAYROLL County Name Total Employees Total Payroll (in Millions USD) Number of Locations % Total Employees % Total Payroll Los Angeles 2,806,566 $130,764 139,645 25% 24% Santa Clara 1,254,441 $75,402 29,481 11% 14% Orange 1,172,837 $55,473 52,377 10% 10% San Diego 1,013,942 $47,115 46,702 9% 9% San Francisco 602,619 $36,964 20,838 5% 7% Alameda 559,161 $28,481 24,593 5% 5% San Bernardino 397,432 $16,040 20,679 3% 3% San Mateo 394,170 $23,633 13,152 3% 4% Riverside 364,566 $14,425 22,368 3% 3% Sacramento 311,301 $14,025 18,033 3% 3% All Other 2,478,816 $101,262 155,634 22% 19% Total 11,355,852 $543,589 543,502 100% 100% RMS Workers Compensation Occupation Classification (WCOCC Scheme) Total Employees Total Payroll (in Millions USD) % Total Employees % Total Payroll Time of Day Adjustment Temporal / 11 A.M 1 - Office 6,157,080 $362,477 54% 67% 23% / 75% 14 - Medical 348,028 $15,043 3% 3% 26% / 70% 8 - Hotel/Motel 72,403 $2,869 1% 1% 28% / 53% 5 - Retail Trade 1,365,352 $46,049 12% 8% 25% / 62% 4 - Wholesale Trade 365,066 $12,719 3% 2% 25% / 75% 13 - Construction 348,623 $13,637 3% 3% 23% / 82% 3 - Heavy and Other Manufacturing 1,356,548 $55,647 12% 10% 26% / 73% 2 - Light Manufacturing 633,819 $17,670 6% 3% 26% / 70% 6 - Restaurant 708,933 $17,475 6% 3% 30% / 52% Total 11,355,852 $543,589 100% 100% 9
EXECUTIVE SUMMARY Key Results 1-in-100 year loss: $300 million 1-in-250 year loss: $1.4 billion Average Annual Loss (Pure Premium): $29 million Average Loss per $100 payroll of $0.005 Exposure data: 11.4 million employees in 58 California counties. 76,993 simulated events ranging from magnitude 5 to over 9.0. Occupational time of day distributions to approximate building occupancy rates The tail risk (i.e. long return period loss) is high. The 500 year portfolio loss is at least $3.5 billion; the 1,000 year loss is at least $6.4 billion. On a payroll adjusted basis (per $100), the most expensive county was San Benito, a low population area where the Hayward and San Andreas faults intersect. 10
AVERAGE LOSS RATE PER $100 PAYROLL CALIFORNIA EARTHQUAKE Temporal Exposure Adjustment Scenario Rank County Name Average Loss Rate Per $100 Payroll Average Loss Rate Per Employee 1 San Benito $0.042 $16.160 2 Imperial $0.034 $12.023 3 Humboldt $0.021 $7.577 4 Alameda $0.015 $7.563 5 Mendocino $0.013 $4.741 6 Del Norte $0.009 $3.457 7 Sonoma $0.009 $3.989 8 Contra Costa $0.009 $4.309 9 Napa $0.008 $3.187 10 Riverside $0.008 $3.059 11 San Bernardino $0.007 $2.997 12 Santa Clara $0.007 $4.324 13 Santa Cruz $0.007 $2.748 14 Solano $0.007 $2.833 15 Monterey $0.006 $2.176 16 Santa Barbara $0.006 $2.565 17 San Francisco $0.005 $3.298 18 Los Angeles $0.005 $2.439 19 Ventura $0.005 $1.967 20 Trinity $0.004 $1.563 11
AGGREGATE EXCEEDANCE PROBABILITY ANALYSIS: CALIFORNIA EARTHQUAKE Probability of Ground-up Loss and Number of Casualties from California Earthquake Temporal Distribution Scenario Peak Exposure Time (11 A.M.) Critical Probability Return Period Total Loss (in Millions USD) Fatalities Total Casualties Total Loss (in Millions USD) Fatalities Total Casualties 2.00% 50 $62 84 1,583 $409 404 6,691 1.00% 100 $301 306 4,758 $1,463 1,201 16,270 0.40% 250 $1,432 1,085 13,365 $5,105 3,255 36,387 0.20% 500 $3,407 2,102 23,104 $9,862 5.429 55,903 0.10% 1,000 $6,489 3,427 35,108 $16,125 7.979 78,060 0.02% 5,000 $17,292 7,382 69,558 $35,082 14,888 136,910 Average Loss Per Year * $29 220 $84 650 Average Loss Rate Per $100 Payroll Average Loss Rate Per Employee $0.005 $0.016 $2.516 $7.433 * Average Loss Per Year represents the loss averaged over all AEP levels 12
SELECT EARTHQUAKE SCENARIOS : TEMPORAL DISTRIBUTION Key historical events Stochastic events driving overall loss in select counties. Stochastic Event Description San Andreas South Carrizo Segment to Hayward N 009 San Andreas South Southern Mojave Segment to San Gregorio N 023 Magnitude Total Loss (Millions USD) Total Number of Casualties % Share of $ Loss Permanent Total Fatality 7.6 $1,016 7,043 1% 10% 7.9 $515 4,332 1% 7% Chino1 and Elsinore GI 001 6.6 1,064 $122 35% 26% Imperial and Brawley Zone1 002 6.7 89 $13 35% 23% San Diego Trough North 1 007 6.5 18 $2 37% 16% Historical Event Description Magnitude Total Loss (in Millions USD) Total Number of Casualties % Share of $ Loss Permanent Total Fatality NW 1700 Cascadia 9 202 $24 35% 26% 1906 San Francisco 7.8 $1,043 7,261 1% 9% 1989 Loma Prieta 6.9 $84 766 1% 6% 13
WHAT IF THE 1906 SAN FRANCISCO EARTHQUAKE HAPPENED TODAY DURING PEAK WORKING HOURS? Magnitude 7.8 San Andreas Fault 100% Contribution to Loss by Injury Level 4.7 million workers, $243 billion in payroll, 149,000 employers, and 187,000 buildings are exposed to the earthquake resulting in a $3.7 billion loss. 80% 9% 1% 7% 12% 26% Fatality Injury State Total Loss (in Millions USD) Number of Casualties Fatality $965 2,407 Permanent Total $1,286 320 Permanent Partial - Major $969 1,688 60% 40% 22% 35% Permanent Total Permanent Partial - Major Permanent Partial - Minor Temporary Total Permanent Partial - Minor $363 2,972 Temporary Total $102 5,724 Medical Only $18 12,401 Total $3,702 25,767 20% 48% 26% Medical Only 10% 0% Casualties 3% 0% Loss 14
HOW DO YOU CALCULATE A CAT INJURY LOSS? 15
TYPICAL WORKERS COMP INJURIES VERSUS THOSE CAUSED BY AN EARTHQUAKE Injuries from a catastrophic earthquake are: More severe than typical workers comp claims. Fewer long term rehabilitation issues (i.e. repetitive stress injuries) Multiple body parts/injuries are common. Transportation disruption, overextended medical facilities lead to treatment delay and higher cost. Affected population does not necessarily skew toward older or unhealthy workers. If younger workers sustain long-term disability, the costs over time will be higher. Conclusion: Using aggregate claims data could result in an inaccurate representation of earthquake WC claim cost. 16
RMS COST SEVERITY SIMULATION PROCESS Inputs Census and Mortality Data Generate Population Create a group of 100,000 working age individuals per state. Hospital diagnosis codes (ICD-9) Hospital charged costs, medical claim data Medical Cost Time Series State Statutes Assign Injuries Calculate Medical Costs Calculate Indemnity Costs Assign them injuries typical of a cat event. Tally the medical costs billed and charged. Calculate the wage loss, disability awards, and other costs. Analyze Costs Combine the data and provide average costs + coefficients of variation Copyright 2016 2017 Risk Management Solutions, Inc. All Rights Reserved. June 19, 2018 17
Cost severities used by RMS in this analysis Cost Component Medical Only Temporary Total Permanent Partial - Minor Permanent Partial - Major Permanent Total Fatal Medical $1,440 $10,300 $73,000 $365,000 $2,000,000 $120,000 Indemnity $0 $7,300 $47,200 $194,000 $1,658,000 $274,000 Total $1,440 $17,600 $120,200 $559,000 $3,658,000 $394,000 18
2017 MODEL UPDATE 19
A C L O S E R L O O K HAZARD MODEL UPDATES (BASED ON NEW DATA FROM THE US GEOLOGICAL SURVEY) GROUND MOTIONS SOIL & BASIN AMPLIFICATION LIQUEFACTION & LANDSLIDE Leveraged new geotechnical and ground shaking data 20
UPDATES TO WORKERS COMPENSATION TIME OF DAY DISTRIBUTIONS IN 2017 Updated time of day distributions by occupation for weekday and weekend Based on the most recent available data provided by the U.S. Bureau of Labor Statistics and U.S. Census Bureau and o Census of Employment and Wages (CEW) o Local Area Unemployment Statistics (LAUS) o Employment Cost Index (ECI) o ZIP Business Pattern Data Industry average occupancy levels by Time of Day - Weekday 21
2010-11 Canterbury Earthquakes 2011 Tohoku Earthquake 2014 South Napa Earthquake 2011 Virginia Earthquake Sources: Google Images Copyright 2016 2017 Risk Management Solutions, Inc. All Rights Reserved. June 19, 2018 22
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CONCLUSIONS AND TAKEAWAYS California cat conundrum: areas of high exposure tend to have high earthquake risk. Workers compensation cat analysis: uncertainty is high given the required conditions for injury (usually, severe damage or collapse of building). This fattens the tail of the exceedance probability curve (higher losses at long return periods). Although technical price of earthquake risk is low (0.5 cents per $100), 100 year and 250 year losses are high - $300 million and $1.4 billion, respectively. Better exposure data better model results, less uncertainty. 24
THANKS. 25