Re/insurers should consider cycles of earthquake clustering when underwriting quake risk: research

The occurrence of “giant” earthquakes is cyclical, not random, and therefore should cause reinsurers and insurers to reconsider their strategies for underwriting and pricing this risk, an EQECAT report suggests.

Kate Stillwell authored EQECAT Inc.’s recent report Global Clustering of Giant Earthquakes: A Revolution in Earthquake Risk Management? In it, she cites a recent EQECAT white paper in support of her observation that the earth is currently experiencing a global cluster of earthquakes exceeding a Magnitude of 8.5.

Since 2004, four such quakes have struck. The previous cluster, from 1950 to 1965, saw six events ranging in size from Magnitude 8.6 to Magnitude 9.5. Between the two clusters, no earthquake exceeding Magnitude 8.5 occurred anywhere. “The random chance of such clustering is less than 1%,” Stillwell wrote.

If the current cycle resembles that of the 1950-65 cycle, then we may be halfway through the cycle, with the largest quake yet to occur, she continued.

“The multi-decadal time span of clusters makes it possible to optimize capital accordingly,” Stillwell wrote. “Presuming that capital adequacy reserves are maintained to a specific recurrence probability, the chosen strategy would depend on our current position within the cluster.”

For example, at the beginning of a cluster, re/insurers may decide to maintain significantly more capital than long-term average earthquake rates, especially if the averages are dominated by the “quiet” periods between clusters.

Over the course of the cluster, capital requirements could be reduced from their peak early in the cluster. Finally, at the end of and between clusters, re/insurers could return to a baseline level of capital, Stillwell suggests.