EARTHQUAKE PROBABLE MAXIMUM LOSS AND SEISMIC RISK ASSESSMENT. Structural Engineering Group Marx Okubo Associates, Inc.

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1 December 2013 For Immediate Release EARTHQUAKE PROBABLE MAXIMUM LOSS AND SEISMIC RISK ASSESSMENT ABSTRACT by Structural Engineering Group Marx Okubo Associates, Inc. Melissa Clark, PE, Associate, Denver Ronald L. Burgess, PE, Assistant Vice President, Houston Chris Geier, PE, Vice President, Irvine Stephen Chenot, PE, SE, Senior Associate, Irvine Kristine Balasabas, EIT, Project Coordinator, San Francisco Jason Coray, PE, SE, SECB, Senior Associate, San Francisco Joel Villamil, PE, SE, LEED AP, Senior Associate, San Francisco Margaret Villamil, PE, SE, Associate, San Francisco Keith Moore, PE, SE, Senior Associate, Seattle Rebecca Melton, PE, Senior Associate, White Plains A Seismic Risk Assessment is critical for the risk management of commercial real properties and due diligence of properties in earthquake prone areas. This assessment helps risk managers, investors, and owners understand the potential earthquake related losses to real property by identifying the seismic risk and estimating the magnitude of damageability loss. The main tool within the assessment for estimating the magnitude of seismic loss is Probable Maximum Loss (PML), which is a loss (damage) estimate expressed as a percentage of the total replacement cost of real property. Although the determination of PML is important to the management and transaction of properties, the calculation and use of PML is not entirely standardized across the real estate and technical communities. This paper provides a brief history of seismic loss estimation including the development of PML, discuss common industry standard PML calculation methods, and describe inherent issues in publishing seismic loss estimates. Additionally, a glossary of important terms commonly utilized in discussions of earthquakes and seismic assessments is attached at the end of this paper for reference. Atlanta Dallas Denver Houston Irvine Pasadena San Francisco Seattle White Plains

2 BRIEF HISTORY OF SEISMIC LOSS ESTIMATION The concept of "Probable Maximum Loss" (PML) as used for commercial real estate seismic risk assessment was first developed as early as the 1970s. Karl Steinbrugge originally defined PML in terms of probable maximum loss zones that were used by the California Department of Insurance for underwriting purposes. One of the initial purposes of PML was to provide a basis for insurers to determine the level of their exposure when insuring properties in earthquake prone areas. In the 1980s, insurers began to require a statistical representation of PML in order to set more realistic premiums based upon the seismic risk for specific properties. Due to increased insurance premiums, high deductibles, and losses from earthquakes, it then became necessary and more widely accepted for potential property owners to also assess their seismic risk and potential loss prior to purchasing a property located in an area of known earthquake activity. As the use of seismic loss estimation grew within the real estate community, developing protocols for the performance of seismic risk assessments varied while definitions associated with "percentage loss" and its methodology of calculation became less consistent. The term "PML" lacked universal definition, the qualifications of the seismic loss providers varied greatly, and the level of diligence of the assessment lacked consistency. These inconsistencies led to the development of standards by the American Society for Testing and Materials (ASTM) for both guidance in the performance of seismic risk assessments and the practice of reporting seismic loss estimates that the real estate and technical communities can follow. Later iterations of the ASTM standards included the establishment of a standard of care for evaluation and classification of the financial risks from seismic losses to real property improvements for use in financial transactions. The specific ASTM standards are discussed further in this paper. 2 P a g e

3 SEISMIC LOSS ESTIMATION TODAY As part of a seismic risk assessment, a seismic loss estimate that includes calculation of PML is used by stakeholders in the real estate community as a tool to assist in making a variety of riskmitigating management and financial decisions. Owners may use a seismic risk assessment that includes a seismic loss estimate to determine seismic insurance requirements and amounts, to comply with mortgage refinancing requirements, or to understand the magnitude of potential seismic risks. The seismic loss estimates may also be used in cost comparisons between insurance premiums and seismic retrofits, as significant seismic upgrades to property may lower insurance premiums and improve returns on investments. Owners positioning their properties for disposition may also use a seismic risk assessment that includes a seismic loss estimate as a standard means of information disclosure. This can expedite the sale of the property, as any major expenditures due to seismic performance deficiencies are determined prior to the sale in order to address issues that may jeopardize the transaction. Lenders and underwriters commission or require seismic risk assessments that include seismic loss estimates primarily to determine if seismic insurance is required and to assess the inherent risk in funding a particular property. Typically, a PML of 20% is used as a threshold value. The 20% threshold has its origin in how seismic insurance policies were first written as the common deductible offered by an insurer was 20%, i.e, the insured would be responsible for the first 20% of costs associated with damage due to an earthquake event. Traditionally in the commercial real estate finance industry, the PML used as the threshold above which banks would require supplemental earthquake insurance has been 20% of the building s replacement cost. This percentage has its origins in the typical mortgage being 80% of the property s value. The bank presumes that if the loss exceeds the borrower s equity (20%, representing the down payment) the borrower may default, leaving a repair cost exceeding the lender s collateral. Buyers and investors seeking to acquire a property in earthquake prone areas may use a seismic risk assessment that includes a seismic loss estimate as a means to compare risk between various properties, to determine seismic insurance requirements and amounts, or to comply with mortgage financing requirements. Buyers may also have their own internal thresholds for seismic loss estimates in determining insurance allocations for their portfolios or for considering whether or not to purchase a given property. Seismic risk assessments may utilize the seismic loss estimate to discuss inherent risks and ways to mitigate them. Mitigation techniques may include seismic upgrades, higher insurance premiums, sales price reduction justification, and/or more detailed studies of the particular structure. 3 P a g e

4 ASTM STANDARDS FOR SEISMIC RISK ASSESSMENT As previously mentioned, issues in consistency in the performance of seismic risk assessments and the determination of seismic loss estimates, including the calculation of PML, have led to the development of ASTM standards in order to discuss specific approaches for real estate and technical communities to consider when characterizing seismic risk. ASTM E : Standard Guide for the Estimation of Building Damageability in Earthquakes: This standard was created to provide some definition and consistency to seismic evaluations. The document assists in providing a standard definition base for both probability of exceedance as well as confidence level. ASTM E also set parameters on the levels of evaluations and the qualifications of individuals performing these reviews. While the document succeeds in defining terminology for use, it does not provide standardization for estimating losses. When the first edition of ASTM E2026 was published in 1999, it claimed that "there has been no previous industry or professional consensus on what PML means or how it is computed." This standard recently evolved into two separate documents: ASTM E and ASTM E ASTM E : Standard Guide for Seismic Risk Assessment of Buildings: The stated objectives for this standard include encouraging standardized seismic risk assessments, defining relevant site hazards, and establishing guidelines for field observation and document review. ASTM E : Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due Diligence Assessments: This standard is a "voluntary standard" designed to allow users to "objectively and reliably compare the financial risks of earthquake damage to buildings, or groups of buildings, on a consistent basis." The document provides guidelines such as qualification requirements for seismic risk assessment providers and defines the levels of investigation that can be performed. Most importantly, the standard states that the practice "may permit a user to satisfy, in part, their requirements for due diligence in assessing a property s potential for losses associated with earthquakes for real estate transactions." 4 P a g e

5 METHODS FOR CALCULATING SEISMIC LOSS ESTIMATES AND PML While there are numerous publicly available and proprietary methods for determining seismic loss estimates, the three most widely practiced today are ATC 13, Thiel Zsutty, and ST Risk. These statistical methods use various seismic uncertainty models to combine ground acceleration, structure damageability, and other factors to derive seismic loss estimates. ATC 13: Earthquake Damage Evaluation Data for California: This method provides a loss estimation method intended for use in the most active earthquake regions (formerly designated by the Uniform Building Code as Zone 4) of California. To facilitate the estimation of economic loss from earthquakes, the Federal Emergency Management Agency (FEMA) contracted Applied Technology Council (ATC) to compile historical earthquake damage and loss data in order to develop probable loss estimates. The resulting document, ATC 13, is a collection of expert opinions from professionals in seismology, structural engineering and architecture. It was published in 1985 and thus, unfortunately, does not represent data developed following either of the two most recent and well documented earthquakes, the 1989 Loma Prieta Earthquake and the 1994 Northridge Earthquake, or any subsequent earthquakes. It represents the impressions of the experts on expected damage to California buildings based on a variety of earthquake intensities, and not actual earthquakes. The impressions or opinions of the experts have been averaged and correlated in such a way as to present a statistical basis useful in making distinctions between various building types. Modeling parameters are limited to building "class" (construction type) and "quality" (largely building age). While the ATC 13 method is useful for most existing building types, it is not directly applicable to some modern structural systems developed since the 1989 and 1994 earthquakes, such as eccentrically braced frames, buckling restrained braced frames, base isolated structures, and truss frames. Thiel Zsutty Method: This method was published in 1986 and may be used at any site where ground motions can be determined. Modeling parameters are numerous and include surface soil characterization, water table depth, and a building damageability parameter. Unlike other methods, this method does not limit the user to a group of base building classes or type limitations, which means that a certain higher level of judgment and expertise is required to make proper modeling characterizations. While the Thiel Zsutty method has the advantage of being the most accommodating for the widest variety of building types, the method is also older and does not account for advances in construction techniques or for improved understanding of building seismic behavior. 5 P a g e

6 ST Risk: This method is a computer based, proprietary assessment program developed by Risk Engineering Incorporated and Degenkolb Engineers that can be applied to building sites worldwide. Generally, the program uses building specific input regarding the strengths and weaknesses of a structure combined with site specific ground motions and damageability curves for a particular building type. The end result provides loss estimates for different earthquakes with different confidence levels. While ST Risk has the ability to evaluate a majority of building types in modern construction, it may not be applicable for recently developed building lateral systems such as buckling restrained braced frames, base isolated structures, and framing improved with seismic damping devices. 6 P a g e

7 ISSUES WITHIN THE SEISMIC RISK ASSESSMENT INDUSTRY Inherent issues arise in publishing a seismic loss estimate, or PML, for a particular building, most of which are based on the comparison between estimation methods, the role of engineering judgment, and the perceived integrity of the estimates. Depending on the method (i.e. ATC 13, Thiel Zsutty, ST RISK, etc.), the damageability (loss estimate) of a particular building may be based on a collection of professional opinions, a single equation that incorporates ground accelerations and a variable coefficient, or alignment with pre determined fragility curves. The methods similarly attempt to anticipate a building's performance during an earthquake event using past performances of similar buildings having experienced similar earthquake events. However, the way that each method accounts for past performance and determines an anticipated performance for a specific building is not consistent. Although the goal of accurately estimating potential seismic losses is similar, the different methods of calculation coupled with engineering judgments and expert opinions often result in varying estimates. It has been said that predicting earthquake performance is like driving a car while only looking through the rearview mirror. In other words, we can only anticipate the future from what is known from the past. The database for seismic loss (damage) on the modern built environment is very limited. Engineering judgment must consider reconnaissance from recent earthquakes, current research, and the anticipation of improved performance from new technology in estimating the performance of a specific building in a particular seismic scenario. It can be expected that this judgment may vary from seismic consultant to seismic consultant. For example, recent research has yielded a new understanding of the flawed performance of modern steel braced frames under significant lateral loading. Conversely, new structural technology such as buckling resistant braced frames, base isolated structures, and rocking failure mechanisms have a limited history of actual earthquake performance and have no information on the cost of repairing such systems post earthquake event. Similarly for retrofitted buildings, the seismic consultant must judge how the building's vulnerabilities have been addressed and how changes in strength, ductility, seismic dampening, and added redundancy may affect the building's potential performance. Determination of a seismic loss estimate based on individual seismic consultant judgment provides an opportunity for a published opinion of a seismic loss estimate to be of questionable integrity. Seismic consultant opinions may be influenced by client peer pressure for investment or insurance purposes or possibly to achieve pre set criteria. The accuracy of the opinions may also be affected by the level of detail associated with the estimate requested. 7 P a g e

8 For example, low level estimates (i.e. Level 0 or Level 1 as per ASTM E ) may not capture major seismic performance characteristics of the building that may only become known to the seismic consultant under more thorough reviews. Similar opportunities for inaccuracy include limited seismic risk assessments where the seismic consultant is not requested to personally visit the site, does not personally conduct the evaluation, or perform evaluations on buildings outside their area of expertise. All of these practices have a bearing on the legitimacy of a seismic risk assessment and on the integrity of the included seismic loss estimate. CONCLUSION Seismic risk assessments that include a seismic loss estimate are critical for the risk management of commercial real property in earthquake prone areas. Owners, lenders, and buyers of real property use the seismic risk assessment for a variety of purposes, including determining earthquake insurance requirements and amounts, complying with mortgage financing requirements, and understanding the magnitude of potential seismic risks. The main tool within the seismic risk assessment for estimating the amount of seismic damageability, Probable Maximum Loss (PML), may also be used in cost comparisons between insurance premiums and seismic retrofit benefits, as significant seismic upgrades to property may lower insurance premiums and improve returns on investments. The calculation and use of PML since early inception in the 1970s was not standardized across the real estate and technical communities. The "percentage loss" definitions and calculation methodology of PML were not consistent. In addition, the seismic loss analyst's qualifications and the level of diligence performed varied greatly. These inconsistencies and varying assessment diligence led to the development of standards by the American Society for Testing and Materials (ASTM) for determining loss estimates when performing seismic risk assessments of real property. Seismic risk assessments that include a seismic loss estimate, PML, are an essential risk management tool, but they must be performed in accordance with industry standards and by qualified personnel. In order to provide more useful seismic loss estimates and to facilitate better risk management decisions, the seismic consultant and the client (risk manager, investor, underwriter, owner) commissioning the seismic risk assessment need to share an understanding regarding the appropriate type and level of seismic risk assessment to be performed. 8 P a g e

9 GLOSSARY The following terms from the preceding discussion are categorized and defined as follows: 1. Earthquake Properties Earthquake Magnitude Intensity Magnitude versus Intensity Peak ground acceleration (PGA) Rupture (sudden slip on a fault and the resulting ground shaking and radiated seismic energy caused by the rupture), volcanic or magmatic activity, or other phenomena resulting in sudden stress changes in the earth. A numerical value that characterizes the relative size of an earthquake. A quantitative way to compare earthquakes, based on instrumental recordings, independent of the location of the observer. A numerical value describing the severity of an earthquake in terms of its effects on the earth's surface and on humans and their structures. There are many intensities for an earthquake depending on location. For each earthquake, there will be one magnitude but potentially many different intensities at different sites. A measure of earthquake acceleration on the ground from an earthquake. The peak ground acceleration is the largest increase in velocity recorded at a particular location during an earthquake. The ground motion as used in seismic risk assessments is a statistical combination based on local fault or tectonic structures, the estimated size and recurrence of earthquakes on these faults, the distance from the faults to the site, and the local soil conditions. 9 P a g e

10 Peak ground acceleration (cont.) The United States Geological Survey (USGS) has published ground accelerations for specific earthquake scenarios. There has been a noteworthy change in the ground motion values between the 2002 and 2008 maps as the values contained in the 2008 version are typically lower, with few exceptions. In many cases, the ground motion revisions may result in reduced seismic damageability if evaluated per the most recent maps as compared to years before. 2. Building Response to Earthquakes Seismic Vulnerability Seismic Risk The susceptibility of a building to receive damage due to an earthquake. The relationship between seismic hazard and expected damage, loss, or disruption. Seismic vulnerability depends upon: 1. The materials of which the structure is made 2. The mechanical properties of construction materials 3. The geometry and layout of a building 4. The detailing of structural components A quality accounting for both loss severity and frequency due to potential seismic events. The probable building damage and relative danger to human life if a likely earthquake on a particular fault occurs. 3. Seismic Risk Assessment Terms Seismic Risk Assessment (SRA) A risk study assessing the possibility of damage to a building when it is subjected to an earthquake and resultant seismic hazards. ASTM E2026 defines four levels of SRAs performed that range from a Level 0 "desktop" review based on publicly available information to a Level 3 detailed review consisting of computer modeling and select destructive testing. 10 P a g e

11 Seismic Risk Assessment (cont.) The level of SRA performed can be correlated to the level of risk uncertainty. The greater the engineering effort in understanding the building and its seismic response, the more uncertainty can be taken out of the risk assessment. Types of Investigation a. Building Stability (BS) ASTM E2026 provides suggested approaches for the performance of five different types of seismic risk assessments as listed below. Each is intended to serve different financial and management needs of the user. Assessment of whether the building should maintain its vertical load carrying capacity in whole or in part during considered earthquake hazards. b. Site Stability (SS) Assessment of the likelihood that the site should remain stable in earthquakes and should not be subject to failure through faulting, soil liquefaction, landslide, or other site response(s) that can threaten the building s stability or cause damage. c. Building Damageability (BD) Assessment of the damageability as influenced by Vulnerability and Exposure. The "vulnerability" is the building's susceptibility to damage from a seismic event and is based on building specific strength, stiffness, mass (or weight), materials, configuration, and the enforcing building code. The "exposure" of a building is the resultant damage cost from a seismic event. d. Contents Damageability (CD) Assessment of the damageability of the building contents from a seismic event. Loss from CD are typically not provided due to the high uncertainty of tenant contents beyond the control of building owners. 11 P a g e

12 Types of Investigation (cont.) e. Business Interruption (BI) Assessment of the implications for continued use or partial use of the building for its intended purpose due to a seismic event, whether damage occurs to the building systems, or contents, or both. Loss estimates from BI are typically not provided due to the high uncertainty of variables beyond the control of building owners (i.e. availability of utilities or contractors following an event). Loss Estimate The likely damage to a building generally expressed as a percent of building replacement value estimated to occur from a specified earthquake and resulting seismic hazard. For any ground motion, buildings within a certain class (i.e. low rise steel braced frames) will have a range of potential damage. Some buildings will receive little or no damage, while others may have extensive damage. The loss estimates are adjusted based on the design features (deficiencies or strengths) of the specific building. Probability of Exceedance The ASTM standards prescribe the use of a "probabilistic" method of determining site seismicity. In the probabilistic method, the seismicity of a building site is determined from a combination of many area faults that are different distances from the site, have varying frequencies of earthquakes, and can produce different magnitudes. This is in contrast to the "deterministic" method that determines the site effects due to a single size earthquake on a single fault, i.e., a Magnitude 6.7 on the San Andreas Fault. The most commonly used probability of exceedance is 10% in 50 years. In other words, the Peak Ground Acceleration (PGA), which is defined above, is typically used for seismic loss estimation and represents the seismic hazard which has a 10% probability of exceedance in 50 years. 12 P a g e

13 Probable Maximum Loss (PML) The damage estimate, or value, expressed as a percentage of the total replacement cost of the building that has been subjected to seismic hazards. It is interesting to note that there is no standard definition of "PML," and, per current ASTM standards, the PML for a building is "user defined" other than those for Commercial Mortgage Backed Securities (CMBS). Oftentimes, the PML is defined as either the Scenario Expected Loss (SEL) or the Scenario Upper Loss (SUL), which are discussed below. Scenario Expected Loss (SEL) Scenario Upper Loss (SUL) Expected value of the scenario loss for the specified ground motion of the earthquake scenario selected, oftentimes provided as the average loss, or 50th percentile. The average or mean value would indicate that half of similar buildings would have greater damage and half would have less damage than the estimated loss. Scenario loss that has a 10% percent probability of exceedance due to the specified ground motion of the scenario considered. The 90th percentile indicates that only 10% of similar buildings would have greater damage than the estimated loss. In other words, given that the assumed seismic scenario event occurs, 9 out of 10 identical buildings would sustain this level of loss or less, and only 1 out of 10 would sustain more. Structural Engineering Group Marx Okubo Associates, Inc. Corporate Office 455 Sherman St, Suite 200 Denver, CO P a g e