See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/257875992

Financial Seismic Risk Analysis of Building Portfolios

Article  in  Natural Hazards Review · May 2014

DOI: 10.1061/(ASCE)NH.1527-6996.0000129

CITATIONS READS
12 402

2 authors:

Hiromichi Yoshikawa Katsuichiro Goda

Tokyo City University The University of Western Ontario
47 PUBLICATIONS   146 CITATIONS    202 PUBLICATIONS   2,400 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

CRUST: Cascading Risk and Uncertainty assessment of earthquake Shaking and Tsunami View project

Force- and Performance-Based Seismic Design Guidelines for Timber-Steel Hybrid Structures View project

All content following this page was uploaded by Katsuichiro Goda on 06 December 2018.

The user has requested enhancement of the downloaded file.

 Financial Seismic Risk Analysis of Building Portfolios
Hiromichi Yoshikawa1 and Katsuichiro Goda2

Abstract: The role of financial seismic risk analysis and risk quantification has grown rapidly in dealing with important risk-management
decisions for building portfolios. Recent developments in regional seismicity modeling, ground-motion modeling of spatially correlated seis-
mic effects, and seismic fragility analysis have enabled more accurate estimation of earthquake risk exposure of building portfolios. The result
from quantitative seismic loss estimation can be represented by a seismic loss curve and various scalar risk metrics, such as annual expected loss,
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.

value at risk, and tail value at risk, which are all expressed in monetary terms. Their use facilitates the risk-based decision making and risk
communication. This study illustrates the current risk-quantification approaches through a case study for a group of wood-frame houses in Can-
ada. Potential pitfalls in using simple risk metrics for decision analysis on seismic risk-transfer and risk-mitigation strategies are discussed. The
results indicate that the use of tail value at risk may be appropriate as it provides more consistent risk-comparison results by reflecting the
expected risk of rare events. DOI: 10.1061/(ASCE)NH.1527-6996.0000129. © 2014 American Society of Civil Engineers.
Author keywords: Earthquake engineering; Risk management; Seismic analysis; Wood structures.

Introduction of various seismic events. For instance, FEMA’s Hazus-MH 2.1 is

Seismic vulnerability of urban cities is a global and imminent prob-
lem in active seismic regions. Large-scale earthquake disasters cause
devastating tangible and intangible loss. Recent examples include the
2010–2011 Christchurch, New Zealand, sequences (Wilkinson et al.
2013) and the March 11, 2011, Great East Japan mainshock and
subsequent aftershocks (Goda et al. 2013). The economic con-
sequences due to catastrophes are enormous and far-reaching across
various sectors; total economic losses for the two events have reached
US$15–$20 billion and US$300–$400 billion, respectively (Daniell
and Vervaeck 2012). These events impose tremendous financial stress
on governments/municipalities as well as insurers/reinsurers under-
writing earthquake insurance policies, revealing limitations of con-
ventional financial risk-management instruments/tools, such as public
support and earthquake insurance (Grace et al. 2003; Lalonde 2005).
Moreover, recent major earthquake disasters in developed countries
around the world have highlighted a paradigm shift in earthquake risk
management from life safety to damage control and loss reduction.
To assess potential impact of future destructive earthquakes ac-
curately and to implement risk-mitigation measures effectively,
quantitative seismic loss estimation and decision-making tools are
essential. Probabilistic seismic risk analysis (PSRA) entails compre-
hensive understanding of ground shaking information, such as fault
rupture process, wave propagation, and site effects, as well as vul-
nerability of infrastructure, such as structural damage mechanism,
seismic loss generation, and societal/economic impact (Goulet et al.
2007; Ellingwood et al. 2008; Yoshikawa 2013). PSRA quantitatively
evaluates, through probabilistic calculus, the potential damage and
loss that a certain group of structures is likely to experience because
1
Professor, Dept. of Urban and Civil Engineering, Faculty of Engineer-
ing, Tokyo City Univ., Tokyo 158-8557, Japan (corresponding author).
E-mail: hyoshika@tcu.ac.jp
2
Senior Lecturer, Dept. of Civil Engineering, Queen’s School of Engi-
neering, Univ. of Bristol, Bristol BS8 1TR, U.K.
Note. This manuscript was submitted on January 20, 2013; approved on
July 30, 2013; published online on August 1, 2013. Discussion period open
until October 1, 2014; separate discussions must be submitted for individual
papers. This paper is part of the Natural Hazards Review, Vol. 15, No. 2,
May 1, 2014. ©ASCE, ISSN 1527-6988/2014/2-112–120/$25.00.
capable of assessing regional seismic loss to a number of buildings
and infrastructure due to a scenario earthquake, and serves as a critical
risk-management tool in both predisaster planning and postdisaster
relief phases. However, its use is limited because the probability
distribution of aggregate seismic loss due to multiple events cannot be
evaluated directly. Such information is valuable for comparing viable
mitigation options and for analyzing insurance portfolios under
earthquake risk (Goda and Yoshikawa 2012). Moreover, the majority
of currently available PSRA frameworks do not take into account
simultaneous seismic effects on building portfolios and infrastructure
systems realistically (Goda and Hong 2008; Goda and Atkinson
2009). The seismic demand correlation is one of the major sources of
spatiotemporally concentrated seismic losses, and ignoring this effect
may induce significant bias in the estimated seismic loss (Goda et al.
2011).
Mathematically, seismic risk due to a scenario earthquake can be
defined as the convolution of a seismic hazard function and a fra-
gility function of structures. By taking into account possible sce-
narios with occurrence probabilities, overall seismic risk can be
expressed as a seismic risk curve, which is a plot of seismic risk
measure (e.g., structural drift response, damage level, and economic
loss) as a function of occurrence probability. Using a seismic risk
curve, various risk metrics, such as annual expected loss (AEL),
probable maximum loss (PML), value at risk (VAR), and tail value
at risk (TVAR) (Artzner et al. 1999; Bargès et al. 2009), can be
derived. These metrics are useful for succinctly summarizing im-
portant features of seismic risk, expressed in monetary terms, and
they facilitate the risk-based decision making and risk communi-
cation among stakeholders (e.g., owner, investor, and risk consul-
tant). The adoption of such seismic risk metrics has been promoted
greatly in Japan. For instance, PML values often are included in
financial reports of building/property assets (Kanda and Okamura
2006), providing valuable information for investors and asset man-
agers who are not familiar with engineering-based indices (e.g.,
design base shear coefficient). The inherent limitation of simple risk
metrics is that they only reflect one aspect of the entire seismic risk
curve. One of the crucial factors is which probability level to focus on
in evaluating such metrics. The risk metrics also are sensitive to key
features of the adopted hazard and vulnerability models. Sensitivity to

112 / NATURAL HAZARDS REVIEW © ASCE / MAY 2014

Nat. Hazards Rev. 2014.15:112-120.

 such modeling error is important, as it could lead to a misinformed
decision.
This study presents a review of financial seismic risk analysis and
risk quantification. Seismic risk for building portfolios is discussed
by highlighting the incorporation of spatially correlated ground
motions in the assessment. A focus is given to evaluation of popular
risk measures (AEL, VAR, and TVAR) and seismic risk comparison
using these metrics. Then, the proposed approaches for risk quan-
tification are demonstrated through a case study for a group of wood-
frame houses in Canada (Goda et al. 2011), where regional seismic
characteristics differ significantly in the west and the east. The aims
of the case study are to (1) investigate effects of different seismic
hazard information (high versus moderate seismicity with different
dominant scenarios) and ground-motion predictions (spatial cor-
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.
relation of seismic excitations) to identify potential pitfalls in using
simple risk metrics for decision making, and (2) discuss usefulness
and limitation of seismic risk curves and risk metrics for asset man-
agement under catastrophic earthquake risk. Finally, conclusions and
future challenges of financial seismic risk analysis are highlighted.
An idealistic view that various components of risk quantification
for rare earthquake disasters are possible is adopted in this study for
practical purposes. Numerous assumptions and simplification are
made in the assessment, leading to considerable uncertainty asso-
ciated with risk estimates. Therefore, one should be cautious when
results from risk assessment are used for making decisions related to
seismic risk mitigation. Nevertheless, one should strive to enhance
seismic risk modeling capability further, because such a proactive
approach will advance our understanding of highly complex and
uncertain risk processes and, eventually, improve risk-management
skills.
PSRA
A PSRA methodology for evaluating a seismic risk curve for building
portfolios, which quantifies an adopted measure of seismic conse-
quences as a function of annual occurrence probability, is described
herein. An extension of the conventional PSRA for a single structure
to that for multiple structures is emphasized. Following the analysis
framework, several scalar risk metrics, which can be derived from
a seismic risk curve, are defined, and decision-analysis techniques
based on stochastic dominance (Levy 2006) are introduced. These
approaches are implemented subsequently in a case study for wood-
frame houses in Canada.
Seismic Risk Analysis of Multiple Buildings
PSRA is an essential part of quantitative assessment of earthquake
risk impact on built environments. It can be formulated in various
forms, depending on the scope of assessment, structures, available
data, and applicable models (Moehle and Deierlein 2004; Porter
et al. 2006; Goulet et al. 2007). An initial step, prior to PSRA cal-
culations, involves the collection of building portfolio information
(e.g., location, structural/material type, year built, occupancy, and site
condition). A standard computational method involves several steps
as follows: (1) generation of significant earthquake scenarios (EQS)
based on stochastic regional seismicity models; (2) estimation of
seismic intensity measure (IM) at multiple sites; (3) estimation of
engineering demand parameter (EDP) given IM via applicable
seismic demand prediction models; (4) evaluation of damage factor
(DF) by comparing seismic demand and seismic capacity; and
(5) estimation of economic loss (EL) via damage-loss and cost models.
This framework is shown in Fig. 1. It is noted that the framework is
generic and alternate procedures can be developed. For example, in
Nat. Hazards Rev. 2014.15:112-120.
cases when a single building site is of interest, Steps 1 and 2 are often
combined through probabilistic seismic hazard analysis, producing
a seismic hazard curve as output (i.e., plot of IM as a function of
annual occurrence probability). Similarly, Steps 3 and 4 can be
integrated into seismic fragility curves (i.e., plot of cumulative prob-
ability for a specific damage state as a function of IM). Important
requirements for a viable PSRA framework are that main charac-
teristics of key variables (e.g., EQS, IM, EDP, DF, and EL) are
modeled comprehensively and that their uncertainty and dependency
are propagated consistently through probabilistic calculus. Brief de-
scriptions of the main calculation steps are given subsequently.
Regional significant EQS can be established by compiling his-
torical seismic events, potentially causative earthquake sources (e.g.,
active faults and subduction zones), and other related geologic/
seismological evidence (McGuire 2004). A seismic hazard model,
consisting of seismic source zones and associated magnitude-
recurrence relationships (Step 1 in Fig. 1), provides a convenient
mathematical representation of regional seismicity in space and time.
A direct and comprehensive way to identify significant EQS is Monte
Carlo sampling from an adopted seismic hazard model (Atkinson and
Goda 2011), producing a synthetic earthquake catalog (list of oc-
currence time, location, magnitude, source dimension, and so forth).
This step is a critical component in quantifying seismic risk; usually,
estimation of occurrence of future major earthquakes is highly un-
certain, and careful consideration of adopting simplified models is
required (e.g., time-invariant versus time-dependent models and upper
magnitude truncation).
One of the key requirements for earthquake risk assessment of
building portfolios is the consideration of spatially correlated seis-
mic IM (e.g., spectral acceleration) at multiple building sites. This is
beyond the capability of conventional ground-motion prediction
equations, because they have been developed for a single site. Using
appropriate spatial correlation models of ground-motion parameters
(Goda and Hong 2008; Goda and Atkinson 2009), simultaneous
seismic intensities of buildings with different fundamental vibration
periods at different locations can be evaluated for a given EQS.
Steps 1 and 2 in Fig. 1 generate probabilistic estimates of IM at
multiple sites for many seismic events over a certain period (i.e.,
multiple seismic intensity maps).
Nonlinear dynamic analysis of structural models subjected to a
set of ground motion records facilitates the probabilistic character-
ization of inelastic structural response (EDP, e.g., maximum inter-
story drift) for a given seismic hazard level (IM). Various numerical
methods have been developed. One of the most computationally
intensive approaches is incremental dynamic analysis (IDA;
Vamvatsikos and Cornell 2004). In IDA, samples of EDP and IM are
generated by conducting numerous nonlinear dynamic analyses with
records scaled at various IM levels, and are used to develop a
probabilistic relationship between EDP and IM (Step 3 in Fig. 1). A
careful record selection is important to avoid bias induced by ex-
cessive record scaling (Luco and Bazzurro 2007). For this purpose,
conditional mean spectrum can be used as target response spectrum
by taking into account detailed characteristics of significant EQS
and their response spectral shapes (Baker 2011; Goda and Atkinson
2011).
Structural vulnerability models quantify the extent of structural
damage (DF) for a given inelastic structural response (EDP), and
have significant impact on seismic loss estimation. Damage analysis
is carried out by comparing sustained inelastic seismic demand to
uncertain structural capacity (Step 4 in Fig. 1). In displacement-
based damage assessment, structural capacity typically is specified
in terms of yield and ultimate displacements, and these variables are
associated with specific damage states (e.g., slight, extensive, and
collapse). A simple form of displacement-based DF can be defined
NATURAL HAZARDS REVIEW © ASCE / MAY 2014 / 113
 Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.

114 / NATURAL HAZARDS REVIEW © ASCE / MAY 2014

Nat. Hazards Rev. 2014.15:112-120.

Fig. 1. PSRA methodology for building portfolios
 as the ratio of sustained postyield displacement demand due to an
earthquake to allowable postyield displacement capacity of a struc-
tural system. For instance, DF 5 0:0 and 1:0 indicates no damage and
complete damage, respectively, while partial damage can be repre-
sented by a value between 0.0 and 1.0. Other forms of DF based on
different variables (e.g., acceleration or dissipated energy) also can be
adopted. It is noted that Steps 3 and 4 often are replaced by fragility
curves, which generate an estimate of seismic damage severity as
a function of IM directly.
Implementation of damage-loss functions and cost models facil-
itates the quantification of EL caused by an earthquake. Expressing all
consequences in monetary terms is not a trivial task (e.g., modeling
indirect effects across regional/national economy) and may not be
appropriate (e.g., human casualty). Nonetheless, it promotes informed
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.

decision making and risk communication among stakeholders, and

is useful for risk-based earthquake risk management. For building
portfolios whose functionality is not interdependent, seismic loss
estimation can be conducted for individual buildings by using simple
analytical functions to describe nonlinear damage-loss functions for
different loss categories (e.g., building-related repair/replacement
cost and business interruption cost; Step 4 in Fig. 1).
Finally, aggregate seismic loss for the entire portfolio can be
obtained as the sum of seismic losses for individual buildings (Step 5
in Fig. 1). To evaluate seismic losses of building portfolios over an
extended period, seismic vulnerability assessment (Steps 3 and 4)
needs to be repeated for all events in the synthetic catalog (Steps 1
and 2). Moreover, to assess earthquake risk exposure for an insurer
who undertakes seismic risk of the building portfolio, insurance
payout functions can be applied to estimated seismic losses for
individual buildings and loss categories.
Seismic Risk Curve, Risk Metrics, and
Stochastic Dominance
A seismic risk curve is calculated based on earthquake hazard in-
formation and seismic vulnerability of a structure, and quantifies an
adopted seismic risk measure as a function of annual occurrence
probability. In other words, it is equivalent to the probability dis-
tribution of the seismic risk measure by taking all relevant uncer-
tainties in seismic hazard and structural vulnerability into account. A
seismic loss curve for 2,000 wooden houses in Vancouver, British
Columbia, Canada, is shown in Fig. 2 (Goda and Yoshikawa 2012).
One of the most common risk metrics is the annual expected loss
(AEL), which can be obtained as an area under a seismic risk curve.
The limitation of AEL is that it fails to capture the extent of dev-
astating consequences due to rare events. Another popular risk
metric is the probable maximum loss (PML), which is defined as the
0.9-fractile value for a scenario that corresponds to a probability
level. Conventionally, the probability level for evaluating PML is
taken as the return period of 475 years, whereas the definition re-
garding the probability level can be extended to other levels, which
results in a PML curve (i.e., PML values at different probability
levels are connected to form a curve). Use of the two curves may be
beneficial as they capture different aspects of the seismic loss dis-
tribution (i.e., average versus rare event). In actuarial sciences and
finance, use of VAR and TVAR is prevalent. VAR is simply
a fractile value on a seismic risk curve corresponding to a selected
probability level. Mathematically, TVAR is defined as (Artzner et al.
1999; Bargès et al. 2009)
ð1
TVARk ¼ 1 VARu du (1)
12k
k the conditions for stochastic dominance [Eq. (2)], such that the
Fig. 2. Seismic loss curve and risk metrics
where k 5 probability level of interest; and VARu 5 fractile value
corresponding to the probability level of u. Graphically, TVARk is
obtained as the area under a seismic risk curve below the probability
level of k, normalized by 1 2 k (Fig. 2). TVAR accounts for rare
events in terms of their severity and frequency.
In normative decision theory, adoption of a so-called utility
function uðxÞ where x 5 return, which describes preferences of a
decision maker, is popular. However, in practical applications, deri-
vation of uðxÞ is not trivial and involves arbitrariness to some extent.
When several risk-mitigation options are compared, it may be more
appropriate to identify a set of efficient or optimal solutions that are
not clearly dominated by others. For such purposes, stochastic dom-
inance rules can be applied (Goda and Hong 2006; Levy 2006).
Depending on risk attitudes of decision makers, several stochastic
dominance criteria have been developed. The first-degree stochastic
dominance (FSD) criteria are related to intuitive attitudes about return
[u9ðxÞ $ 0 where u9 indicates a derivative with respect to x], i.e., one
prefers greater outcomes, and can be described mathematically as
FðxÞ # GðxÞ (note: a strong inequality must hold for at least one value
of X), where FðxÞ and GðxÞ are the cumulative distribution functions
of two uncertain options F and G, respectively. If this condition is met,
F is preferred to G for all decision makers with u9ðxÞ $ 0.
Similarly, the second-degree stochastic dominance (SSD) crite-
ria are applicable to risk-averse attitudes [u9ðxÞ $ 0 and u99ðxÞ # 0),
and can be expressed as
ðx ðx
FðsÞds # GðsÞds (2)
2‘ 2‘
A strong inequality must hold for at least one value of X. The SSD
rule is useful because, in risk management, decision makers often are
considered to be risk averse (although this is not necessarily ap-
plicable to all situations). If the aforementioned condition is satis-
fied, F is preferred to G for all risk-averse decision makers. The
stochastic dominance criteria are readily applicable to seismic loss
curves. The advantage of using stochastic dominance criteria in
finding a set of efficient solutions is that the results are not dependent
on specific features of utility functions and can be interpreted from
normative decision theory. In addition, there are so-called almost
stochastic dominance rules (Levy 2006), which essentially relax

NATURAL HAZARDS REVIEW © ASCE / MAY 2014 / 115

Nat. Hazards Rev. 2014.15:112-120.

 requirements are met for most, rather than all, decision makers Seismic Loss Model and Risk-Mitigation/Transfer Costs
(excluding those who have extreme utility functions).
A simulation-based seismic risk model for multiple wood-frame
To demonstrate the use of the stochastic dominance criteria,
houses, developed by Goda et al. (2011), is used in this case
comparison of three seismic design options for a structure in Van-
study. It incorporates the following: (1) detailed seismic hazard
couver is shown in Fig. 3, in terms of cumulative probability plot
analysis based on up-to-date seismological findings (Atkinson and
[Fig. 3(a)] and integral of cumulative probability function [Fig. 3(b)].
Goda 2011); (2) spatial correlation of IM (Goda and Hong 2008;
This example is modified from Goda and Hong (2006). The former is
Goda and Atkinson 2009); (3) IDA using a set of carefully selected
for FSD whereas the latter is for SSD. The seismic risk measure is
records based on conditional mean spectra (Goda and Atkinson
taken as the life-cycle cost of a building during the service period.
2011); and (4) local building information, such as size, age, occu-
Fig. 3(a) shows very different seismic risk curves; changing seismic
pancy, and structural type (Goda et al. 2011). The results presented
resistance levels results in different seismic damage and initial
are based on simulation over 1 million years. A building portfolio
construction costs. The structure with low seismic resistance is as-
consists of a set of 500 hypothetical wood-frame houses, which are
sociated with lower construction cost and higher seismic damage cost,
randomly distributed over a 1 3 1 km area. The local site condition is
whereas the structure with high seismic resistance has higher con-
soft soil (average shear-wave velocity in the uppermost 30 m
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.

struction cost but much reduced seismic damage cost. As three risk
curves shown in Fig. 3(a) intersect one another, none of these options
is preferred according to FSD (i.e., there are some pros and cons for
decision makers with u9ðxÞ $ 0). Fig. 3(b) shows the integral of
cumulative distribution functions for the three options. In this figure,
the option with high resistance is identified as optimum because it
lies below the other two options for all values of x. In other words, all
risk-averse decision makers prefer the high-resistance solution.
Case Study: Financial Seismic Risk Analysis of
Wood-Frame Houses
This case study presents financial seismic risk analysis of wood-
frame houses in Canada. Four locations are considered for the
building portfolio: Vancouver, Victoria, Montreal, and Ottawa
(i.e., major population centers). The main objectives are to in-
vestigate the effects of different seismic hazard information and
spatial correlation models on seismic risk curves and risk metrics,
and to assess their usefulness and limitations for earthquake risk
management. Moreover, a practical situation where a building
portfolio manager has several risk-mitigation options, such as
seismic retrofitting and purchasing earthquake insurance, are
discussed.
VS30 5 250 m=s, i.e., National Earthquake Hazards Reduction Pro-
gram site class D).
Four typical classes of wooden houses in Canada have been
identified by White and Ventura (2006), i.e., Houses 1 to 4. The 500
buildings belong to the same house model class. It is considered that
these four house types are prevalent across Canada (Paultre et al.
1993; Ventura et al. 2005). House 1 has blocked plywood/oriented
strand board (OSB) shear walls with exterior stucco cladding and
gypsum wallboard (GWB) interior finish; House 2 has blocked
plywood/OSB shear walls with GWB interior finish; House 3 has
unblocked plywood/OSB shear walls with GWB interior finish; and
House 4 has horizontal boards with GWB interior finish. In terms of
seismic capacity, House 1 has superior seismic resistance with
higher stiffness/strength and ductility capacity; Houses 2 and 3 have
similar seismic resistance (but House 2 has higher capacity than
House 3); and House 4 has low seismic resistance in terms of both
stiffness/strength and ductility capacity. The seismic capacities of
the four house models are represented by the yield and ultimate
interstory drift ratios (both parameters are modeled by the lognormal
distribution); to account for uncertainty of these parameters for
different house models, their mean and coefficient of variation are
varied based on the assumed statistical information of these con-
struction types (Goda et al. 2011). The damage-loss functions and

Fig. 3. Stochastic dominance criteria: (a) FSD; (b) SSD

116 / NATURAL HAZARDS REVIEW © ASCE / MAY 2014

Nat. Hazards Rev. 2014.15:112-120.

 cost models are the same as Goda et al. (2011), which are determined
based on local structural and cost information. The total loss of the
500 buildings amounts to about CAD$140 million.
In this case study, different house types are treated as seismic
retrofitting, i.e., upgrading from one house type with lower re-
sistance to another with higher resistance. For decision analysis,
implementation costs for different houses are necessary. As di-
rect information is not readily available, representative values are
obtained by consulting published data (Hazus-MH; Porter et al.
2006; White and Ventura 2006). Specifically, the following percen-
tages in terms of building replacement cost are adopted as upgrading
costs: 3.0, 1.5, 1.0, and 0.0% for Houses 1 to 4 (base is set to House
4); these percentage values are considered to be realistic. It is noted
that retrofitting costs must be incurred at the current time. Assuming
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.

that a loan is available to finance this retrofitting, the annualized cost

of retrofitting CR,A is calculated as
g
CR,A ¼ CR (3)
1 2 expð2gTÞ

where CR 5 total retrofitting cost; and the interest rate g and duration
T are set to 0.05 and 30 years, respectively.
Earthquake insurance can be useful in transferring seismic risk
to an insurer, who has a higher financial risk-bearing capacity. When
purchase of earthquake insurance is considered, deductible and limit
(or cap) are set to 0.1 and 0.5, respectively (i.e., seismic loss up to
10% of the total insured value is incurred entirely by an owner,
seismic loss between 10 and 50% of the total insured value is cov-
ered by an insurer, and, if the seismic loss exceeds 50% of the total
insured value, the excess loss is borne by the owner). This setup is
typical for earthquake insurance. In exchange for earthquake risk
coverage, an insurer collects insurance premium, consisting of
pure premium and risk premium (including transaction costs). The
pure premium is equivalent to the expected payout for earthquake
loss coverage [EðLI Þ], whereas the risk premium is the additional
cost, demanded by an insurer to undertake low-probability high-
consequence risks. In this case study, the total insurance premium
PI is calculated as
PI ¼ ð1 þ aÞEðLI Þ (4)
where a 5 safety-loading factor set to 1.0.
Effects of Spatial Correlation Model and
Regional Seismicity
Using an appropriate spatial correlation model is a modeling issue
and, thus, should be overcome; a partial correlation case, reflecting
spatial distribution of a building portfolio in the assessment, is more
accurate. To inspect their effects on estimated aggregate seismic
loss, seismic loss curves for House 4 in Vancouver (considering
three correlation cases of partial, no, and full) are compared in Fig.
4. A summary of risk metrics for the three cases is given in Table 1.
Two important observations are as follows: (1) three curves intersect
one another, indicating that the order of the loss curves in terms of
severity is full , partial , no at probability levels above the in-
tersection point, whereas the order is reversed at probability levels
below the intersection point; and (2) differences of the loss curves in
the upper right tail (i.e., small annual probability) are significant.
Regarding the calculated values of risk metrics, AEL for the three
curves is almost identical (Table 1), whereas VAR and TVAR vary
significantly depending on the probability level of interest. It is
noted that the annual loss occurrence probability differs for the
three cases (Table 1). The results clearly show the importance of
Fig. 4. Comparison of seismic loss curves for House 4 in Vancouver
by considering three spatial correlation models
Table 1. Summary of Risk Metrics for House 4 in Vancouver by
Considering Three Spatial Correlation Cases
Correlation Annual rate AEL VAR0:99 VAR0:999 TVAR0:99 TVAR0:999
Partial 0.078 249 6,072 41,793 20,079 66,982
No 0.138 247 6,614 29,666 16,116 42,351
Full 0.050 250 6,149 43,680 21,628 75,146
Note: Unit 5 CAD$1,000.
spatial correlation modeling for seismic loss estimation of building
portfolios. An important issue to be pointed out, related to decision
making, is that when seismic loss curves intersect one another, AEL
and VAR may fail to capture key features of underlying risk curves.
For instance, insensitivity of AEL to different correlation cases is not
effective as a risk metric, whereas dependency of VAR on selected
probability level can lead to different risk comparisons (e.g., 0.99
level versus 0.999 level). In contrast, the risk ordering based on
TVAR is intuitive and consistent at 0.99 and 0.999 levels (i.e.,
full . partial . no; Table 1). Moreover, this trend is preserved for
all probabilities of interest for risk-management decisions, which
is not the case for AEL and VAR. This is important to avoid mis-
informed decision making related to seismic risk assessment.
Next, seismic loss curves for House 4, which is located in Van-
couver, Victoria, Montreal, and Ottawa, are compared in Fig. 5. It is
noted that seismic hazard levels as well as dominant EQS in terms of
expected magnitude and event type are different in the west and the
east. In western Canada, seismic hazard levels are relatively high
because of three active earthquake sources (i.e., shallow crustal events,
deep inslab events, and interface events from the Cascadia sub-
duction zone). For example, uniform hazard spectra for Vancouver
and Victoria at the return period of 2,500 years (i.e., probability
level adopted for the national seismic hazard maps in Canada) are
between 1.0 and 2.0g in the short-vibration-period range (0.1 to 0.5 s)
and between 0.25 and 0.8g in the long-period range (1.0 to 3.0 s) for
soft soil (Atkinson and Goda 2011). On the other hand, seismic
hazards in the east are mainly contributed by local moderate earth-
quakes (Mw 5 5:0e6:5) and potential large earthquakes originated
from the St. Lawrence rift zone (Mw 5 7:0e7:5). Because of less-
active seismicity in eastern Canada, uniform hazard spectra for

NATURAL HAZARDS REVIEW © ASCE / MAY 2014 / 117

Nat. Hazards Rev. 2014.15:112-120.

 Montreal and Ottawa at the return period of 2,500 years are lower
than those for Vancouver and Montreal (0.3–0.7g in the short-
period range and 0.05–0.2g in the long-period range).
Fig. 5 clearly shows the impact of regional seismicity; the order
of risk curves is the same as the order of seismic hazards. It is
important to point out that the use of VAR can be misleading,
depending on which probability level is referenced. For instance, if
one looks at the return period of 500 years (which is one of the most
popular probability levels for seismic risk management), VAR for
Montreal and Ottawa is significantly lower than VAR for Vancouver
and Montreal. This is simply because seismic risk curves have not
yet reached situations where the majority of houses suffer from
seismic damage. On the other hand, AEL and TVAR are capable of
capturing differences of seismic loss at different locations re-
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.
premium (including risk premium) and seismic upgrading cost
(i.e., House 4 to House 2) are included in the seismic risk curves.
When earthquake insurance coverage is included, the seismic loss
curves without and with insurance start to deviate from each other at
probability levels around 1022 and 4 3 1022 for House 4 and House
2, respectively. These points correspond to situations where the
deductible (set to 0.1) is reached; thus, an insured begins to receive
compensation from an insurer. After these points, the cases with
insurance are associated with much lower seismic losses. With the
increase of aggregate seismic loss, the effect of the limit (set to 0.5)
is initiated gradually, and the slope of the seismic loss curve with
insurance becomes similar to that without insurance. From this
figure, it is obvious that insurance can reduce the earthquake risk
exposure for rare cases significantly. It is noted that both seismic

alistically, because both measures integrate an area under the seismic upgrading and earthquake insurance may be attractive for those who
loss curve (although AEL fails to quantify the upper-tail risk).

Effects of Seismic Retrofitting and

Earthquake Insurance
Seismic resistance is one of the critical factors in determining the
extent of seismic damage. By regarding a change from one house
model to another (i.e., different horizontal load-resisting systems) as
seismic retrofitting, seismic loss curves for different house models in
Vancouver are compared in Fig. 6. It is noted that seismic retrofitting
costs (CR,A ), which are expressed as a fraction of building re-
placement cost, are included in the loss curves. Fig. 6 shows the
reduction of seismic loss curves owing to upgrading is significant.
The differences of the seismic loss curves for normal situations
(where no major seismic loss events occur), which is shown in
a zoomed subplot (Fig. 6), clearly indicates that the total costs for
building owners are greater for such cases because of retrofitting.
For this comparison, the use of VAR and TVAR leads to similar
ordering of seismic risk, when the risk threshold level is greater than
0.99. Note that sensitivity of the seismic loss curves and risk metrics
to seismic retrofitting cost information is not explored thoroughly;
using different discount rates as well as time horizons has sig-
nificant influence on the assessment. Fig. 6. Comparison of seismic loss curves for Houses 1–4 in Vancouver
Fig. 7 compares seismic loss curves for two house models in including retrofitting costs
Vancouver without and with insurance coverage. Both insurance

Fig. 7. Comparison of seismic loss curves for Houses 2 and 4 in

Fig. 5. Comparison of seismic loss curves for House 4 in four cities Vancouver without and with earthquake insurance

118 / NATURAL HAZARDS REVIEW © ASCE / MAY 2014

Nat. Hazards Rev. 2014.15:112-120.

 are risk averse, even if the costs of upgrading and insurance exceed
the risk-neutral evaluations (i.e., expected benefits from reduced
seismic damage through upgrading and insurance are less than their
expected costs). Regarding the use of risk metrics for the situation
of Fig. 7, different evaluation of risks may be reached with VAR,
depending on a probability level that is referenced for decision
making (note: it also depends on insurance payment parameters).
In summary, it is concluded that the use of scalar risk metrics
must be considered carefully, because, by definition, risk metrics
only reflect part of the underlying risk processes. In particular, VAR
depends on a selected probability level for the assessment. The sole
use of AEL is not recommended as it fails to capture the right tail of
the loss distribution. TVAR may be useful for seismic risk man-
agement, as it reflects the expected risk of rare events and it tends
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.
to provide more consistent risk comparison results for different
seismic demand modeling cases, seismic capacity cases, and in-
surance cases.
Decision Analysis for Seismic Risk Mitigation
A decision analysis is given for a hypothetical portfolio of 1,000
houses in Vancouver and Montreal. A risk manager of the building
portfolio is concerned about earthquake risk exposure to a combined
portfolio of 500 Houses 3 in Vancouver and 500 Houses 4 in
Fig. 8. Comparison of seismic loss curves for a hypothetical portfolio
of 1,000 houses in Vancouver and Montreal by considering five risk-
transfer/mitigation cases
Table 2. Summary of Risk Metrics and Risk Comparisons for a Hypothetical Portfolio of 1,000 houses in Vancouver and Montreal
Option AEL and SDa
Van-H3&Mont-H4 169 and 1,821 (1 and 5)
Van-H3Ins&Mont-H4 200 and 1,213 (3 and 1)
Van-H1Upg&Mont-H4 234 and 1,213 (4 and 2)
Van-H3&Mont-H4Ins 178 and 1,665 (2 and 3)
Van-H3&Mont-H2Upgb 238 and 1,666 (5 and 4)
Note: Unit 5 CAD$1,000; number in parentheses represents the risk order based on the risk metrics.
a
SD of annual seismic loss of the portfolio.
b
This option is dominated by the options Van-H3Ins&Mont-H4 and Van-H1Upg&Mont-H4 based on the SSD rule.
Nat. Hazards Rev. 2014.15:112-120.
Montreal (base case, denoted by Van-H3&Mont-H4), assuming
that seismic protection of existing buildings in the east is less than
that in the west. Note that major seismic loss events can occur to both
building groups in Vancouver and Montreal within a fiscal year. The
manager has four risk-transfer/mitigation options as follows: (1)
purchase insurance for the houses in Vancouver Van-H3Ins&Mont-
H4; (2) upgrade from House 3 to House 1 for the houses in Van-
couver Van-H1Upg&Mont-H4; (3) purchase insurance for the
houses in Montreal Van-H3&Mont-H4Ins; and (4) upgrade from
House 4 to House 2 for the houses in Montreal Van-H3&Mont-
H2Upg.
Fig. 8 shows seismic loss curves for the five cases, and a summary
of risk metrics and risk comparisons for these cases is presented in
Table 2. In the table, the risk order of the five cases also is included
(smaller values are preferred). Inspection of Fig. 8 and Table 2
indicates that the seismic loss curves intersect one another; the cases
with insurance/upgrading have greater reference cost due to in-
surance premium or upgrading costs, but are associated with reduced
seismic losses in cases of significant earthquake. This tendency is
manifested in the calculated values of AEL (Table 2); the base case is
associated with the least expected cost. The impact of implementing
risk-transfer/mitigation measures for the houses in Montreal is
relatively minor because of the dominant influence of the houses in
Vancouver (Fig. 5).
The risk ordering in Table 2 suggests that the ranking based on
AEL is different from those based on VAR and TVAR (note: de-
cision making based on AEL is a risk-neutral approach), and that, in
cases where potential large earthquake loss is concerned, the risk-
transfer/mitigation for the houses in Vancouver is a viable solution
based on the VAR and TVAR values (about 10–70% reduction for
VAR0:99 , VAR0:999 , TVAR0:99 , and TVAR0:999 values in terms of
no risk-mitigation option). It is noteworthy that the VAR-based risk
ordering at relatively small probability levels (around 0.99–0.999) is
more variable compared to the TVAR-based risk ordering. Further,
an application of the stochastic dominance rules to this problem
indicates that the Van-H3&Mont-H2Upg option is dominated by the
Van-H3Ins&Mont-H4 and Van-H1Upg&Mont-H4 options based
on the SSD rule (note: the FSD rule cannot eliminate any of the
options as the seismic loss curves for the five cases intersect). In light
of the result based on the SSD rule, the VAR-based risk ordering
can be misleading, if only a few risk metrics (in terms of probability
level) are used for decision making.
Finally, it is emphasized that the decision analysis described pre-
viously can be extended. Different risk-transfer and risk-mitigation
options can be assessed easily [for instance, different insurance
parameters, in terms of deductible, limit, and safety-loading factor,
and different retrofitting options, in terms of proportion of upgra-
ded buildings and other available solutions (e.g., friction and fluid
dampers), which are not considered in this case study].
VAR0:99 VAR0:999 TVAR0:99 TVAR0:999
1,304 (5) 25,211 (5) 10,317 (5) 47,263 (5)
1,236 (3) 15,478 (2) 7,232 (2) 30,007 (1)
406 (1) 13,924 (1) 5,508 (1) 31,067 (2)
1,283 (4) 21,598 (4) 9,355 (4) 42,933 (3)
846 (2) 21,502 (3) 8,689 (3) 43,671 (4)
NATURAL HAZARDS REVIEW © ASCE / MAY 2014 / 119
 Summary and Conclusions
This study reviewed the recent developments of financial seismic
risk analysis and risk quantification for building portfolios in dealing
with important risk-management decisions. From hazard- and risk-
modeling viewpoints, regional seismicity modeling, consideration
of spatially correlated ground motions for simultaneous seismic ex-
citation input to multiple structures, and detailed seismic fragility
analysis (via IDA, damage-loss functions, and cost models) are im-
portant and can have significant influence on a seismic loss curve of
a building portfolio. To succinctly represent key features of a seismic
loss curve, various scalar risk metrics, such as AEL, VAR, and TVAR
expressed in monetary terms, have been used in practice to facilitate
the risk-based decision making and risk communication. The risk-
Downloaded from ascelibrary.org by University of Bristol on 04/17/14. Copyright ASCE. For personal use only; all rights reserved.
quantification approaches were illustrated through a case study of
a group of wood-frame houses in Canada. Important conclusions
from the case study are that exclusive reliance on AEL in decision
making (i.e., risk-neutral approach) is not appropriate in dealing with
low-probability high-consequence risks; risk ordering based on VAR
is dependent on probability level and can be misleading; and TVAR
tends to provide more consistent risk-comparison results by reflecting
the expected risk of rare events (e.g., Fig. 4 and Table 1 for the effects
of spatial correlation; Fig. 8 and Table 2 for the illustrative problem
for seismic risk-mitigation decision making).
The authors envisage the role of financial seismic risk analysis as
greater in the future owing to a major paradigm shift from life safety
to damage control and loss reduction. The future extensions of the
framework should consider incorporation of the effects of after-
shocks and multihazards (ground failure, fire, tsunami, and so forth)
from hazard- and risk-modeling perspectives. From consequence-
modeling viewpoints, interdependency of functionality of inter-
connected infrastructure systems, dynamic modeling of recovery
process, and modeling indirect economic effects are of paramount
importance. These issues have been addressed partially by various
researchers; yet, full consideration of these challenging problems
needs to be achieved.
Acknowledgments
The authors thank two anonymous reviewers for their insightful sug-
gestions on the original manuscript. This research project was sup-
ported by the Kajima Corporation Research Grant. The second
author is grateful for financial support provided by the Leverhulme
Trust through the 2011 Philip Leverhulme Prize.
References
Artzner, P., Delbaen, F., Eber, J. M., and Heath, D. (1999). “Coherent
measures of risk.” Math. Finance, 9(3), 203–228.
Atkinson, G. M., and Goda, K. (2011). “Effects of seismicity models and
new ground-motion prediction equations on seismic hazard assessment
for four Canadian cities.” Bull. Seismol. Soc. Am., 101(1), 176–189.
Baker, J. W. (2011). “Conditional mean spectrum: Tool for ground-motion
selection.” J. Struct. Eng., 10.1061/(ASCE)ST.1943-541X.0000215,
322–331.
Bargès, M., Cossette, H., and Marceau, É. (2009). “TVaR-based capital
allocation with copulas.” Insur. Math. Econ., 45(3), 348–361.
Daniell, J., and Vervaeck, A. (2012). “Damaging earthquakes database
2011—The year in review.” Æhttp://www.cedim.de/download/
CATDATDamagingEarthquakesDatabase2011AnnualReview.pdfæ (Jan.
3, 2013).
Ellingwood, B. R., Rosowsky, R. V., and Pang, W. (2008). “Performance
of light-frame wood residential construction subjected to earthquakes
120 / NATURAL HAZARDS REVIEW © ASCE / MAY 2014
View publication stats Nat. Hazards Rev. 2014.15:112-120.
in regions of moderate seismicity.” J. Struct. Eng., 10.1061/(ASCE)
0733-9445(2008)134:8(1353), 1353–1363.
Goda, K., et al. (2013). “Ground motion characteristics and shaking damage
of the 11th March 2011 Mw 9:0 Great East Japan earthquake.” Bull.
Earthquake Eng., 13(1), 1–30.
Goda, K., and Atkinson, G. M. (2009). “Probabilistic characterization of
spatially-correlated response spectra for earthquakes in Japan.” Bull.
Seismol. Soc. Am., 99(5), 3003–3020.
Goda, K., and Atkinson, G. M. (2011). “Seismic performance of wood-
frame houses in south-western British Columbia.” Earthquake Eng.
Struct. Dynam., 40(8), 903–924.
Goda, K., Atkinson, G. M., and Hong, H. P. (2011). “Seismic loss estimation
of wood-frame houses in south-western British Columbia.” Struct. Saf.,
33(2), 123–135.
Goda, K., and Hong, H. P. (2006). “Optimal seismic design considering risk
attitude, societal tolerable risk level, and life quality criterion.” J. Struct.
Eng., 10.1061/(ASCE)0733-9445(2006)132:12(2027), 2027–2035.
Goda, K., and Hong, H. P. (2008). “Spatial correlation of peak ground
motions and response spectra.” Bull. Seismol. Soc. Am., 98(1), 354–365.
Goda, K., and Yoshikawa, H. (2012). “Earthquake insurance portfolio
analysis of wood-frame houses in south-western British Columbia,
Canada.” Bull. Earthquake Eng., 10(2), 615–643.
Goulet, C. A., et al. (2007). “Evaluation of the seismic performance of a
code-conforming reinforced-concrete frame building—From seismic
hazard to collapse safety and economic losses.” Earthquake Eng. Struct.
Dynam., 36(13), 1973–1997.
Grace, M. F., Klein, R. W., Kleindorfer, P. R., and Murray, M. R. (2003).
Catastrophe insurance: Consumer demand, markets and regulation,
Kluwer Academic Publishers, Boston.
Hazus-MH 2.1 [Computer software]. Washington, DC, FEMA.
Kanda, J., and Okamura, S. (2006). “Estimation of PML for buildings with
various strengths in Japan.” Proc., 2nd Int. Forum on Engineering
Decision Making, International Forum on Engineering Decision
Making, Delft, Denmark.
Lalonde, D. (2005). “Risk financing.” Catastrophe modeling: A new ap-
proach to managing risk, Springer, New York.
Levy, H. (2006). Stochastic dominance: Investment decision making under
uncertainty, 2nd Ed., Springer, New York.
Luco, N., and Bazzurro, P. (2007). “Does amplitude scaling of ground
motion records result in biased nonlinear structural drift responses?”
Earthquake Eng. Struct. Dynam., 36(13), 1813–1835.
McGuire, R. K. (2004). Seismic hazard and risk analysis, Earthquake
Engineering Research Institute, Oakland, CA.
Moehle, J., and Deierlein, G. (2004). “A framework methodology for
performance-based earthquake engineering.” Proc., 13th World Conf.
on Earthquake Engineering, International Association for Earthquake
Engineering, Tokyo.
Paultre, P., Lefebvre, G., Devic, J. P., and Côté, G. (1993). “Statistical
analyses of damages to buildings in the 1988 Saguenay earthquake.”
Can. J. Civ. Eng., 20(6), 988–998.
Porter, K. A., Scawthorn, C. R., and Beck, J. L. (2006). “Cost-effectiveness
of stronger woodframe buildings.” Earthquake Spectra, 22(1), 239–
266.
Vamvatsikos, D., and Cornell, C. A. (2004). “Applied incremental dynamic
analysis.” Earthquake Spectra, 20(2), 523–553.
Ventura, C. E., Finn, W. D. L., Onur, T., Blanquera, A., and Rezai, M.
(2005). “Regional seismic risk in British Columbia—Classification of
buildings and development of damage probability functions.” Can.
J. Civ. Eng., 32(2), 372–387.
White, T. W., and Ventura, C. E. (2006). “Seismic performance of wood-
frame residential construction in British Columbia.” Earthquake En-
gineering Research Facility Rep. No. 06-03, Univ. of British Columbia,
Vancouver, BC, Canada.
Wilkinson, S., et al. (2013). “Observations and implications of damage
from the magnitude Mw 6.3 Christchurch, New Zealand earthquake
of 22 February 2011.” Bull. Earthquake Eng., 13(1), 1–35.
Yoshikawa, H. (2013). “Seismic risk and possible maximum loss (PML)
analysis of reinforced concrete structures.” Handbook of seismic risk
analysis and management of civil infrastructure systems, Woodhead
Publishing, Cambridge, U.K.