4. Significance and Use
4.1 Uses—This guide is intended for use on a voluntary basis by parties such as lenders, loan servicers, insurers and equity investors in real estate (Users) who wish to estimate possible earthquake losses to groups of buildings (real estate portfolios). This guide outlines procedures for Providers (Professional Engineers or other risk analysts) to prepare an assessment for a specific User considering the User’s requirements for portfolio seismic risk. User needs may include portfolio acquisition, seismic risk management, earthquake insurance purchase, financial risk rating or reporting requirements (i.e., to shareholders, investors, etc.).
A seismic risk assessment prepared in accordance with this guide should reference or state that the guidance in this document was used as a basis for the investigation and the report, and should also identify any deviations from the guidelines. This guide is intended to reflect a commercially prudent and reasonable investigation for performance of seismic risk assessments. Building damageability assessments and terminology are intended to be generally consistent and compatible with ASTM E2026, Standard Guide for Seismic Risk Assessment of Buildings and ASTM E2557, Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments. Lenders and owners may use standards such as E2026 and E2557 to screen properties at acquisition for site stability and building stability, with estimates of damage levels to compare with their screening standards, and then perform portfolio studies periodically to monitor and manage risk accumulations, and to provide feedback to the acquisition due-diligence process. For large portfolios, the number of properties and their geographic distribution, as well as constraints on budget and schedule, may make it impractical to conduct new engineering investigations for all properties in the portfolio. Lenders or owners may utilize previous PML assessments to help characterize site conditions and building damageability, with engineering investigations limited to selected high-value buildings deemed likely to drive high-consequence portfolio-wide losses.
Further discussion of the individuals involved in portfolio seismic risk studies and their responsibilities is presented in Chapter 6.
4.1.1 Users—This guide is designed to assist the User to obtain assessments for the earthquake-related damage potential of geographically dispersed groups of buildings (portfolios). Potential Users include, but are not limited to, building owners, building tenants, lenders, loan servicers, insurers and insurance brokers, rating agencies, potential investors/owners and mortgagors. For these Users, the principal objective may be the assessment of financial risks from damage to buildings, and (as applicable) contents as well as losses from business interruption resulting from the inability to occupy damaged or non-functional buildings or systems.
4.1.2 Types of Investigations—This guide provides suggested approaches for the performance of two different levels of seismic risk assessments – Desktop and Engineered. A Desktop study is typically provided by an insurance broker or other consultants, but is not conducted by a Professional Engineer. An Engineered study is conducted under the direction of a Professional Engineer (Civil or Structural), with the intent to improve the quality of site hazards and damage modeling. Assessment subtypes arise from the stakeholder position of the User and the intended use of the results (e.g., for the selection of earthquake insurance coverage amounts). Each is intended to address the differing financial and management needs of the User. Types of investigations depend upon the needs and objectives of the User, the information available, the seismic risk assessment software employed, whether engineering professionals are engaged, and the budget and schedule allotted. Portfolio seismic risk assessments are typically probabilistic (relating consequence to annual probability of exceedance, or to average return period), although specific earthquake scenarios may be extracted from an earthquake catalog and presented separately, or a deterministic scenario earthquake may be the specific subject of the study. This standard is limited to the subtypes defined below.
4.1.2.1 Basic Portfolio Seismic Risk Assessment (Ground-up Losses).
This is the most straightforward type of study, computing portfolio-wide loss resulting from damage to buildings, and (where applicable) contents and basic business interruption losses caused by building closure for repairs. This type of study computes "ground-up" losses, without allocation of the losses to the affected stakeholder(s), unlike studies for insured loss or lender loss. Portfolio studies for deterministic earthquake scenario(s) are typically limited to ground-up losses and other direct impacts.
4.1.2.2 Insurance Portfolio Seismic Risk Assessment (Direct or Gross Insurer Losses)
These studies are done to inform decisions involving the purchase of earthquake insurance. The studies typically involve the computation of both ground-up and gross or direct (insurer) loss for a large synthetic earthquake catalog or “event-set,” and the results presented in risk tables and risk curves with losses as a function of annual exceedance probability or average return period. Additionally, average annual loss rates are presented, as these represent (unloaded) pure premiums. The insurer's loss is reduced with respect to the ground-up (or unallocated) loss by the effect of the insurance deductible for each building and each line of coverage (building, contents, and business interruption). Gross losses are those that are paid by the insurer, so estimates of gross losses can be used to inform decisions on limits of pooled insurance coverage for the portfolio. The allocation of losses between stakeholder parties shall be done using statistically sound methods, accounting for the uncertainties in hazards, and the variability in damage and loss given the hazards.
4.1.2.3 Lender Portfolio Seismic Risk Assessment (Lender Loss)
These studies are done to inform risk management decisions by lenders, including requirements for borrowers (i.e., owners) to purchase of earthquake insurance. Real estate loans typically are limited to some fraction of the market value of the real estate property, with the owner retaining a significant financial stake. Portfolio risk studies for lenders typically involve the computation of losses that may accrue to lenders when owner equity and owner-retained earthquake insurance are considered as risk buffers. In simple terms, the owner’s equity is found as the current market value minus current mortgage balance. This equity creates a financial stake for the owner. The owner’s equity varies over time as real estate market values change and as the loan principal balance diminishes. The lender’s loss is reduced with respect to the ground-up (or unallocated) loss by the effect of the owner’s equity, as well as any owner-retained earthquake insurance. The estimation of losses to lenders shall be done using statistically sound methods, accounting for the uncertainties in hazards, and the variability in damage and loss given the hazards.
4.1.3 Application and Temporal Relevance of Report—A User should only rely on the portfolio seismic risk assessment report for the specific purpose that such assessment was commissioned, for that time when the report was completed, for the state of the buildings in their respective condition (known or assumed) and values in place at the time of assessment as documented in the report.
4.1.4 Availability of Information—This guide recognizes that a Provider’s findings and risk estimates may be affected or contingent on information that is readily available to the Provider during the conduct of an investigation, as well as the budget and schedule. For instance, a Provider’s loss estimates may be affected by the availability of previous seismic risk assessments or other engineering information for high-value buildings.
4.2 Principles—The following principles are an integral part of this guide and should be referred to in resolving any ambiguity or exercising such discretion as is accorded the Provider in estimating loss to portfolios of buildings from earthquakes. The principles should also be used in judging whether a Provider has conducted an appropriate assessment and estimation of earthquake loss to a group of buildings, and has adequately described the quality of the study and its limitations.
4.2.1 Uncertainty Not Eliminated—No estimate can wholly eliminate uncertainty regarding risks to a portfolio of buildings resulting from actual earthquakes. The successive levels of assessment described in this guide are intended to reduce, but not eliminate, uncertainty regarding the estimation of financial loss. This guide describes a method to communicate the quality of the study, and acknowledges that practical limits of time and cost impact the quality of the assessment.
4.2.2 Not Exhaustive—There is a point at which the time and cost to gather information outweighs the usefulness of the information and, in fact, may be detrimental to the orderly and timely completion of transactions. This guide identifies and suggests that a balance be sought between the competing goals of limiting the costs and schedule versus limiting the uncertainty regarding unknown conditions by acquiring as much information as possible.
4.2.3 Level of Investigation—Not every site or property warrants the same level of investigation in seismic risk assessment. Consistent with good commercial or customary practice, choosing the appropriate assessment for each property level is guided by the type of buildings subject to assessment and their relative values, the resources and time available, the expertise of the Provider and risk tolerance of the User, information available from previous studies and the information developed during the investigation. Further discussion of the level of investigation for each property and the impact on the quality of the portfolio seismic risk results is provided in Chapter 8.
4.3 Use of Existing Reports and Data—This guide recognizes that prior reports or other data sources can be utilized in a portfolio risk assessment, to economize on the required field work and drawing review or other investigations. These resources may include previous single site Seismic Risk Assessments prepared under ASTM E2026 and E2557, geotechnical investigation reports, or prior portfolio Seismic Risk Assessments. Other site-specific documents may be available that, while not necessarily prepared for the purpose of seismic risk assessment, contain useful information on the buildings or hazards. Such documents may include Property Condition Assessment reports, and property risk reports prepared by insurers or third parties. Restrictions on use and reliance that are noted in existing reports or documents should be respected. Prior reports and data that are used should be listed in the report for the portfolio seismic risk assessment (see 9. Report Requirements). Usage of prior reports or other sources of data should be based on the following principles in addition to the specific procedures set forth in this guide.
4.3.1 Use of Reports or Data Provided by User—The User may furnish prior reports or other data sources to the Provider prior to commencing the study, in order for the User and Provider to agree upon appropriate use of such and the scope of any additional investigation.
4.3.2 Existing Information Meets or Exceeds—Information from prior reports or other data sources may be used if, in the reasonable judgment of the Provider, the information in the prior report meets or exceeds the requirements of this guide, and the conditions affecting the buildings or site are not likely to have changed materially since the prior report was prepared. In making this judgment, the Provider should consider the types of building construction assessed in the report, readily available information such as exterior photos, published maps, and any new information related to the behavior of building constructions of that specific type in recent earthquakes, as well as current understanding of the site conditions.
4.3.3 Actual Knowledge Exception—If the User or Provider has actual knowledge that the information being used from a prior report or data source is not accurate or is suspected of being inaccurate, then such information should not be used.
4.4 Superceding Investigation—When a new portfolio seismic risk assessment is performed for the same User, and that new investigation is consistent with this guide and has more complete and current information than a prior investigation, then the new investigation should supersede the former one.