Transfer of Financial Implications of Seismic Risk to Insurance

Abstract

From a point of view of property protection, earthquake insurance is worth being considered in order to transfer financial implications of risk to an insurance company (insurer). If the effect to transfer the financial implications is quantitatively appraised, earthquake insurance can become a supplemental measure to reduce the financial impact of an earthquake disaster on building owners. This study investigates the role of insurance and will propose a methodology on how to determine the optimal premium for the insured, not the insurers, associated with earthquake disasters. First, the role of insurance in risk management is discussed, and a condition required for an acceptable premium for building owners is derived in terms of the expectation of retained losses of insured and the premium, which is the financial implications of losses transferred to insurance companies, plus loading, which is the insurance expense including profit. A methodology is proposed to determine an optimal premium such that the expected annual total cost of the insured is minimized. Finally, a numerical example for an office building is carried out to justify the methodology.