Changing common perceptions about earthquake risk

Lenders, investors and insurers are increasingly interested in building resilience, including resilience to seismic events. While many commercial real estate (CRE) professionals are familiar with seismic risk assessment (SRA) reports, another metric, building stability, can influence underwriting decisions as well. With each devastating earthquake and new mandatory retrofit ordinance, policies are increasingly updated to include building stability. Many financial institutions, especially lenders Fannie Mae and Freddie Mac, will not finance properties that do not meet construction stability requirements. By understanding both criteria, CRE players can more accurately measure their risk exposure in relation to seismic events.

Seismic risk assessment

SRA reports provide estimates of building damage scenario losses, often referred to as “PML” (probable maximum loss) scores. These scores indicate the potential financial loss a building would face after an earthquake, expressed as a percentage of the cost of replacing the building. Estimates are based on specific levels of seismic tremors, which typically represents a seismic event that has a 10% chance of occurring in a 50-year time frame.

Historically, if the expected loss exceeds 20% of the building replacement cost, lenders often require additional earthquake insurance. This threshold is important because it relates to a typical mortgage structure, where lenders cover 80% of the property price. If the building loss after an earthquake exceeds the borrower's equity (the remaining 20%), the risk of default increases, leaving the lender liable for significant repair costs.

Build stability

Building stability assessments evaluate the ability of a structure to remain upright and maintain its ability to withstand loads during an earthquake.

According to current standards, a building is considered stable if it is able to support its weight under the pressure of earthquakes, as defined in the International Building Code. The methods, interpretation, and application of masonry stability assessments have varied over the years, but upcoming standard updates to ASTM standards should provide the clarity needed.

Many financial institutions will not lend to or invest in properties that do not meet building stability requirements. If this happens, it may need to be retrofitted within a certain period and/or require expensive earthquake insurance.

The main differences between the assessments

There are two basic differences between assessing the potential damage of a building and assessing the stability of a building.

Damage assessment: This approach focuses on the potential damage caused by a large earthquake, specifically based on a 475-year return period. This level of evaluation is similar to considering the minimum design forces in the code to ensure the safe egress of occupants after an earthquake.

Stability Assessment: This assessment looks at the risk of a building collapsing during a more severe earthquake, specifically one with a 975-year return period. This higher threshold evaluates whether a building can withstand severe vibrations without failing.

Both assessments use similar data regarding the building and its environment, but the methodologies are different. Unlike most statistical methods used to assess building damage, building stability methods are more technical and code-based. Building codes are intended not only to ensure the safety of residents after a major earthquake, but also to prevent collapse during severe seismic events.

It is important to realize that there is not always a direct relationship between potential damage and building stability. Older or uniquely designed buildings may show different results when comparing damage assessments to stability assessments. A building may show lower damage estimates but is still at risk of collapsing during a more severe earthquake.

conclusion

While scenario loss estimates provide fundamental insights into the potential financial impact of an earthquake, building stability assessments provide a critical perspective on the risk of building collapse. This distinction is vital to evaluate occupant safety, protect financial investments, and determine the need for retrofitting in anticipation of major seismic events. Ignoring building stability can lead to disastrous consequences, making it a key consideration in any comprehensive risk management strategy. Learn more about seismic risk assessment in an upcoming webinar titled “Seismic 101: Understanding the Importance of Seismic Hazard Assessments” hosted by Partner Engineering and Science, Inc. Click here to register.

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