How do you measure your risk?

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More businesses are realizing the value of measuring risk using location. An example from the insurance industry of this is the accumulation of risk.

“An accumulation of risk occurs when a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event. Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.”

Accumulation risk is measured in response to or plan in advance of natural catastrophes and earthquakes.

In Canada, risk is measured using both generic and specialized regions.  Generic regions include postal code boundaries  and municipalities.  Specialized regions such as those for earthquakes include Catastrophe Risk Evaluating and Standardizing Target Accumulations (CRESTA) zones to determine the accumulation of risk.

As per the Institute for Catastrophic Loss Reduction, Canadian reinsurers, insurers and regulators use CRESTA zones as the minimum standard for the capture of data and first level calculation of probable maximum loss (PML).  PML evaluations can influence underwriting decisions, and the amount of reinsurance allowed on a risk can be predicated on the PML valuation.

The original CRESTA zones were established in 1981 and introduced in Canada in 1986.  They have been recently re-worked globally and have been re-launched to the market for 2012/2013.

Three of Canada’s four largest cities are located in regions of high to moderate risk of earthquake damage – Vancouver (pictured right), Montreal, and Ottawa. Additional vulnerable communities include Victoria and Quebec City.

CRESTA zones can also be mapped against FSA (first three digits of the postal code) to determine the percentage (%) overlap of a CRESTA zone to help determine affected land area.

Users can interact with the CRESTA boundaries in the following ways:

• Obtain mapping data and tables to perform their own internal analytics;
• Take their portfolio (book of business) and assign the CRESTA value (e.g., Extreme, Very Low) that identifies the risk of an earthquake to occur in a specific area/region

An infographic for the Vancouver area has been created that summarizes the number of addresses and businesses and how they might be impacted here.

Contributed by @RobertSzyngiel