Earthquake insurance portfolio analysis of wood-frame

Abstract Earthquake disasters affect many structures and infrastructure simultaneously and collectively, and cause tremendous tangible and intangible loss. In particular, catastrophic earthquakes impose tremendous financial stress on insurers who underwrite earthquake insur-ance policies in a seismic region, resulting in possible insolvency. This study develops a stochastic net worth model of an insurer undertaking both ordinary risk and catastrophic earthquake risk, and evaluates its solvency and operability under catastrophic seismic risk. The ordinary risk is represented by a geometric Brownian motion process, whereas the catastrophic earthquake risk is characterized by an earthquake-engineering-based seismic loss model. The developed model is applied to hypothetical 4000 wood-frame houses in south-western British Columbia, Canada, to investigate the impact of key insurance port-folio parameters to insurer’s ruin probability and business operability. The analysis results indicate: (i) the physical effects of spatially correlated ground motions and local soil condi-tions at insured properties are significant; (ii) the insurer’s earthquake risk exposure depends greatly on insurance arrangement (e.g. deductible and cap); and (iii) the maintenance of suffi-cient initial surplus is critical in keeping insurer’s insolvency potential reasonably low, whil