Simulation-based Earthquake Insurance Risk Calclulation
Insurance risk arising from catastrophes such as earthquakes is one of the components of the Minimum Capital Test for federally regulated property and casualty insurance companies. The Office of the Superintendent of Financial Institutions (OSFI) in Canada currently determines capital adequacy based on the 500-year return period of the country-wide earthquake risk, which is computed using a simple function of the probable maximum loss of Eastern and Western Canada. In this paper, a simulation-based approach is used in which losses and insurance claim payments are calculated by relying on earthquake hazard maps of Canada. Building occupancy classifications and their respective damage probability matrices are combined with the earthquake insurance market penetration and policy terms to calculate the earthquake risk for each Canadian municipality.