THE IMPACT OF UNCERTAINTY IN MANAGING SEISMIC RISK: THE CASE OF EARTHQUAKE FREQUENCY AND STRUCTURAL VULNERABILITY

The Wharton Financial Institutions Center provides a multidisciplinary research approach to the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us know of your interest. Mulein were instrumental in creating the tables of results detailed in the paper. ABSTRACT In estimating economic losses from significant earthquake events, there is considerable uncertainty in the earthquake loss estimation (ELE) process. From the likelihood of future earthquake occurrences to the estimation of structural vulnerability in terms of actual dollar loss, many assumptions are made. This paper examines the impact that uncertainty in the frequency of earthquake events and the vulnerability of residential structures has on the estimated economic losses to residential insurers and homeowners from significant earthquake events with and without structural mitigation. A specific residential earthquake mitigation measure is chosen for analysis, which reduces estimated losses from earthquakes and improves the solvency of residential insurers. First, we will discuss these analyses in the context of the Managing Catastrophic Risks project at the Wharton School, focusing on the importance of uncertainty in analyzing catastrophic losses. Next, the model cities being considered in the analysis are redefined and the specific earthquake mitigation technique used in the analysis is reviewed. Third, we will outline how uncertainty is handled within the scope of the investigation. Finally, we will present the results, form some conclusions, and outline some open questions for further analysis.