Delivering a new view of European earthquake risk for the insurance industry

The insurance industry’s focus across many European countries in recent years has understandably been on weather-related perils and their impact on earnings risk.

However, as the 2023 Kahramanmaraş earthquakes in Türkiye remind us, multiple regions in Europe have high seismic potential due to the continent's diverse geological landscape, which includes tectonic boundaries and fault lines, making them susceptible to earthquakes.

This poses challenges for (re)insurers when it comes to managing earthquake risk across Europe, at a time when the macroeconomic picture adds to costs that are already under pressure.

Over recent years, the region's approach to earthquake insurance has evolved significantly, driven by three themes: notable events, scientific advances, and evolving market dynamics.

The upcoming release of Moody’s RMS™ Europe Earthquake HD Models later this year will incorporate these themes to deliver a new risk view to the market, using the latest science, data, and technology. In addition, the models have been completely rebuilt using the high-definition (HD) framework to support and advance how the market manages earthquake risk across such a diverse region.

Helping to constrain tail risk

With insurers across Europe exposed to multiple perils, they must manage risk across the exceedance probability (EP) curve, from the more frequent perils that drive average annual losses and shorter return periods, to earthquake risk that drives the tail, and in many cases, key regulatory return periods.

For many countries, earthquake risk plays a crucial role in determining an insurer’s solvency requirements and reinsurance purchasing. As companies grapple with rising costs, exacerbated by inflation, the need for insurers to justify their reinsurance expenditure is increasing.

A knock-on effect of this scrutiny around reinsurance purchases is that earthquake models, and their loss results, are understandably examined further to ensure that companies are purchasing the ‘correct’ amount of reinsurance for their portfolio, while also keeping the ‘right’ amount in reserves to comply with regulatory requirements.

The Moody’s RMS Europe Earthquake HD Models help to alleviate the challenge of determining reinsurance purchasing and capital allocation by providing more robust tail-risk modeling with better-constrained uncertainty.

A considerably expanded event set, including hundreds of thousands of simulation periods, ensures that the full range of potential earthquakes is considered, from smaller magnitude events to those that are very infrequent but have high consequences. Such larger events have an important impact on key return periods, including those for Solvency II and other regulatory return periods.

Data-driven models

The very nature of earthquakes being tail events means that data is generally limited in comparison to the more frequent perils, and this presents challenges for building earthquake risk models. However, when earthquakes do occur, they provide us with the opportunity to leverage valuable data and insights that can inform and strengthen our models.

One such example was the 2023 Kahramanmaraş earthquake sequence. Needless to say, these were devastating events, and ones that will take Türkiye many years to recover from. As time has passed and the focus has shifted from the immediate response to rebuilding, a wealth of data has emerged from the earthquakes. The new HD models leverage this data to inform decisions across all model components, from the introduction of complex multi-fault ruptures to ground motion observations, the importance of sedimentary basins, and insights into construction practices and code enforcement.    

While large magnitude events typically generate the most data, we can still learn from more moderate events. The 2009 L’Aquila earthquake in Italy prompted widespread initiatives to understand the country’s local site conditions. As a result, Italy benefits from a wealth of geotechnical and microzonation studies.

We have incorporated this information into the HD models to develop the market’s most sophisticated, high-resolution soil model yet. This data not only enhances the model’s ability to represent potential soil amplification but can also be used to inform underwriting decisions.  

Building on the latest science

In the past decade, national and regional institutions have invested heavily in seismic hazard assessment across Europe with multiple releases of Europe-wide and national hazard maps. This research provides an important starting point for the HD hazard model.

In addition to this new mapping, the Moody’s RMS Europe Earthquake HD Models build beyond the hazard maps to better constrain the hazard and reduce non-modeled loss. These additions not only ensure that losses are no longer underestimated but also provide insurers opportunities to manage accumulations of risk effectively, as well as make more informed location-level risk selection.

By incorporating the latest scientific research and region-specific data, our models provide insurers with the most reliable risk assessments available, enabling them to understand and manage the specific risks they face in different regions and ensure comprehensive and accurate risk management. Combining published hazard maps with these additional features ensures that the HD Models are the most up-to-date and best representation of earthquake risk in Europe.

Learn more about our new models

The European insurance market faces challenges in managing natural catastrophe risk across the EP curve from attritional climate losses to tail risk from earthquakes. The upcoming Europe Earthquake HD Models not only offer insurers the most accurate and up-to-date risk assessment, but they also complete the suite of HD models for the region, providing a streamlined workflow.

To learn more about how Moody’s can help you better manage seismic risk in Europe, contact your Moody's representative, or Moody's clients can access executive briefings on the new models via the Support Center here.