The Client and Its Challenge
Earthquake modeling is often used to identify the base for establishing insurance limits for a portfolio of facilities. This client, a privately owned investment business specializing in maritime transportation, was currently carrying $15 million in earthquake coverage within their property insurance program and an additional $15 million in extra coverage. An earthquake study — at a cost of $20,000 — was proposed to confirm whether the $30 million constituted excess coverage.

The Risk Consulting Solution
Because this client had 175 buildings within the states of Washington, Oregon, and Alaska, Marsh consultants proposed using the Risk Link modeling tool from RMS to determine its realistic loss exposure. Included in the computer software is a seismic model, a soils database, and a building construction damagability database. This tool, which can run hundreds of scenarios, calculates estimated return-period (500-year, 1,000-year, 10,000-year, etc.) loss levels, which can be used as a guide to establish the required coverage limit.

Two studies were conducted — one with all of the Alaskan facilities and one with the Washington and Oregon buildings. Marsh consultants entered the exact address of each of the buildings along with construction class information and data elements pertaining to the exposed value. Marsh also completed site visits at some of the higher-value locations to ascertain the appropriate secondary construction modifiers. The inclusion of the additional site-specific detail helped fine-tune the model, thereby increasing the reliability of the results.

Results
After the model had churned through all of the appropriate scenarios, the 500-year loss level (after deductibles) was $4.4 million. The 1,000-year loss level was $6.7 million and the 10,000-year loss level was still under the initial $15 million in coverage. Based on the information provided by the study, the client will likely forego the additional $15 million in coverage, thereby saving more than $100,000 annually in premiums.