PEER Workshop on Performance-Based Earthquake Engineering and Risk Management 16 November 2000

On 16 November 2000 PEER convened an invitational workshop on the role of performance-based earthquake engineering (PBEE) in the financial management of earthquake risks. Invited presentations provided various perspectives on risk management decision making (Craig Comartin of Comartin-Reis), risk components of the PEER performance-based earthquake engineering framework (Allin Cornell of Stanford), finance and economics (Howard Kunreuther of the Wharton School, University of Pennsylvania), and risk modeling (Fouad Bendimerad of Risk Management Solutions). Broad-ranging discussion followed.

The presentations and discussion revolved around three questions:

(1) How can PBEE contribute to management of earthquake risk — with particular attention to financial management of catastrophic risk?
(2) What are the gaps / research needs for making PBEE an effective tool for the management of earthquake risk?
(3) What role should PEER play in helping to address these gaps, particularly as they relate to financial management of earthquake risk?

An overarching conclusion of the workshop is that PBEE should contribute to informed decisions about earthquake risk management that go beyond decisions about seismic performance. These include decisions by building/facility owners about the purchase of various forms of insurance, self-insurance, other financial instruments, and facility use. However, while it was clear that building/facility owners and investors would be appropriate “clients” for such information, less clear was the extent to which insurance firms, bankers/investment firms, and reinsurance firms would be interested “clients” for building/facility-specific information related to PBEE outcomes.

Much of the discussion focused on a particular form of risk management, the securitization of risk through issuance of “catastrophic bonds” (“cat bonds”). These instruments spread risk by issuing for specified amounts bonds —usually indexed to a specified magnitude earthquake, or damage level.—that would pay if a particular trigger event occurred. To the extent that such bonds are linked to an event, rather than damage, PBEE is less directly relevant. However, because decisions to issue or purchase such bonds depend in part on alternative decisions about seismic upgrading, PBEE may have a supporting role.
Building-specific loss estimates, including attention to structural, nonstructural, and operational consequences, are one component of risk management requiring attention. Efforts are needed to obtain good data about damages, to focus on credibility and reliability of predictions concerning loss estimates, and to develop virtual simulations of building losses that can be used for communications with nonengineers for decision making, cost-estimation, and other purposes. Some of these issues are the subjects of current research in PEER, including projects under the direction of PEER Investigators Peter May, John Ellwood, Jacqueline Meszaraos, Mary Comerio, Simon Wilke, Eduardo Miranda, and Alfredo Ang. (See http://peer.berkeley.edu for more information).
Building portfolio analysis is another key component that will require attention by PEER. A central issue here is the extent to which the PBEE framework/loss estimation can or should feed into broader economic loss models such as those used by risk modelers and HAZUS. This question remains unanswered at this time.