USGS seismic hazard update: portfolio impacts

Updates to the USGS National Seismic Hazard Model will have material impacts on insurance portfolios

The US Geological Survey (USGS) has just released a major update to its US National Seismic Hazard Map. The initial implementation of CoreLogic's new model shows that the impact on earthquake insurance writers' risk assessment decisions could be enormous. The changes from this update vary and can be spatially subtle, but to exemplify the magnitude of this shift in risk, this article focuses on a sample of the market portfolio in California.[1]

Exposure and risk management decision-making is constantly evolving because external and internal pressures greatly influence these decisions. When the underlying science used to calculate peak risk increases or decreases, it is critical to ensure that risk management strategies react accordingly.

CoreLogic applies the new USGS risk model

The USGS released a national update to the National Seismic Hazard Model (NSHM) in January 2024 (USGS NSHM 2023), which built on the previous version released in 2020 (USGS NSHM 2018). The NSHM is a primary source of seismic risk data for fully probabilistic catastrophe models (CAT models) used in the (re)insurance industry to determine portfolio-level seismic risk.

CoreLogic, in partnership with the California Earthquake Authority (CEA), has integrated this updated hazard model into CoreLogic's disaster risk platform, Risk Estimation and Engineering (RQE™), to understand how the updated NSHM system will change California's typical earthquake hazard, referred to here as RQE v25.

The results were compared to the current version of the CoreLogic US Earthquake model, RQE v22, which is based on the NSHM 2018 release and includes the latest versions of the EQ seismic hazard models and USGS hazard models not used in other vendor solutions for CAT models.

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At this time, the only variable change analyzed in this study is seismic hazard. There were no changes to the weaknesses or financial components of the model.

The study results showed substantial changes in key modeling metrics, including average annual losses and return period (RP) at the portfolio level, as well as a high degree of spatial heterogeneity. Within a single zip code, there were material increases and decreases in damages and losses depending on the distance from the fault. A difference of just a few kilometers can make a difference.

The implication of these findings is that the new risk model will influence risk assessments and have a material impact at the individual property level.

How the updated NSHM can change insurance workflow

CoreLogic conducted a similar analysis using its proprietary data set. As shown in Figure 1, two areas in California were selected to visualize changes in damages and losses:

A group of zip codes that includes the Bay Area (NorCal) and the greater Los Angeles area (SoCal)

The geographic distribution of typical insured values ​​is shown in Figure 2.

Figure 1: Southern (SoCal) and Northern (NorCal) study areas.

Source: CoreLogic and USGS, 2024

© 2024 CoreLogic,Inc., all rights reserved.

Figure 2: Geographic distribution of insured values ​​modeled for this analysis

Source: CoreLogic, 2024

© 2024 CoreLogic,Inc., all rights reserved.

The overall damage and total loss changes from RQE v22 and RQE v25 are material in each area (Figure 3). This clearly shows how significant the impact the updated risk can have on any carrier's individual portfolio, depending on the spatial distribution of exposure.

The only change between the two releases is the seismic hazard update included in the NSHM 2023 release.

Figure 3: Modeled total land damage, total average annual loss, and loss ratio selection in the return period between RQE v22 (NSHM 2018) and RQE v25 (NSHM 2023) in the NorCal (red) and SoCal (dark blue) regions.

Source: CoreLogic, 2024

© 2024 CoreLogic,Inc., all rights reserved.

In the NorCal study area, 50- and 100-year base damage occurrences and total losses decreased significantly with the new risk update. The RP changes that occurred over a period of 250 years were very similar. Higher RP damage and losses increase in the tail. The average annual loss shows a reduction of -13% and -16% for ground damage and total loss, respectively.

In the SoCal study area, risk updating resulted in similar, though less severe, changes. CoreLogic noticed smaller drops in shorter RP damage and losses. Both damage and total loss increased from 250 RP (+20% and +15% in base damage and total loss, respectively), until the tail.

CoreLogic reviewed the update and identified the root of the changes in the results. At a high level, there is a decrease in both the frequency and intensity of small earthquake events along fault lines in the NorCal study area. At the same time, there is also an increase in the frequency and intensity of larger earthquakes. The changes in percentage point loss are consistent with the reasoning provided by the USGS regarding the nature of seismic hazard updating.

Determine the accuracy of the change

A critical aspect of this risk update is the typical loss change on a local scale. Seismic hazard is often incorrectly considered a low-resolution hazard with little variation in hazard risk over large distances.

A great example of how this happens is illustrated by a high-resolution analysis (Figure 4), which shows increases and decreases in loss across zip codes in close proximity. The images show the location of major fault lines. When using the latest risk model, there are changes in addressing how these fault lines are captured, resulting in very subtle changes in loss.

Figure 4: Zip-level percentage change in ground damage in the NorCal study area (top) between RQE v22 (NSHM 2018) and RQE v25 (NSHM 2023)

Source: CoreLogic, 2024

© 2024 CoreLogic,Inc., all rights reserved.

It is important to note that exposure distribution will play a major role in any changes in losses for California portfolios. For example, Figure 4 shows that portfolios with high exposures in San Francisco may see large increases while exposures just a few miles away in Oakland may see large declines.

The updated USGS risk map could have significant implications for earthquake insurance underwriting, portfolio optimization, and reinsurance due to the details of the changes. Taking a personal look at what variable risk does to typical portfolio losses may open the way for portfolio optimization and rebalancing at the insurance and reinsurance level.

Guide you through these modeling updates

CoreLogic intends to implement the updated NSHM in the US seismic model with the official release of RQE v25 (June 2025) and when the USGS has completed all necessary data.

CoreLogic is here to support any clients seeking to understand why and how this risk update will impact their individual portfolio on an advisory basis. For more information, please contact your CoreLogic Customer Success Manager or email [email protected].

[1] Loss variation sizes depend on the portfolio. Results may vary for different portfolios.

The CoreLogic data and information contained in this blog post may not be reproduced or used in any way without express written permission. Although all CoreLogic data and information are believed to be accurate, CoreLogic makes no representation or warranty as to the completeness or accuracy of the data and information and assumes no liability whatsoever for the information and data or any reliance thereon. CoreLogic® and Marshall & Swift® are registered trademarks of CoreLogic, Inc. And/or its affiliates.

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