We now live in a new historic era – when most major earthquakes can be predicted at least 2-5 months before they will strike. A new, physics-based methodology can detect stressed areas where future earthquakes will strike using satellite Big Data and offers much more accurate quake risk assessment. Indisputably, earthquake prediction is hugely beneficial for humanity. Re/insurers and ILS will emerge as the biggest winners from this exciting technological innovation: the earthquake re/insurance market will be several times bigger, much more efficient and more profitable for all stakeholders.

1. In August 2017, the ILS market was excited to hear about a new Mexican catastrophe bond
offering. The proposal looked attractive: a risk margin (effective coupon) of 4.5% with a 5.73%
modelled probability of a magnitude 8 earthquake in Mexico within the next 3 years. The deal
was oversubscribed, and happy investors flew off on well-deserved August holidays. But after
returning from the beach, investors were in for a surprise: they learned that just one month
after the bond was placed an M8.2 quake hit the designated Mexican area, so they lost
$150 m in investments… A reality check shows that the 5.73% probability of an M8 event was
in fact 100% incorrect. Logically, puzzled investors should be asking if earthquake risk can be
estimated more accurately?
Fortunately, thanks to novel earthquake prediction system, the answer is “yes”. We now live
in a new historic era – when most major earthquakes can be predicted at least 2-5 months
before they will strike. A new, physics-based methodology can detect stressed areas where
future earthquakes will strike using satellite Big Data and offers much more accurate quake
risk assessment. Indisputably, earthquake prediction is hugely beneficial for humanity.
Reinsurers/insurers and ILS will emerge as the biggest winners from this exciting
technological innovation: the earthquake re/insurance market will be several times bigger,
much more efficient and more profitable for all stakeholders.
The current quake insurance market is not in a good shape. Let’s take California. In 1994, 34%
of California’s homes were insured against quakes, but today only 10% are insured. Thus,
insurance penetration has declined significantly over the last 25 years. The same trend can
be observed in many seismically active countries.

2. Unsurprisingly, all recent major earthquakes have revealed a huge gap in insurance
protection: the economic damage from the 2011 Tohoku quake exceeded $360 bn, while the
insured loss was just $21-34 bn. The 2016 quake in central Italy had an economic cost of
€7.1 bn, but again, the insured loss was just €108 m, and so on. Californians, Italians, and
billions of people who live in seismic areas are fully aware that the risk of quakes exists and
is very real. However, globally over 90% prefer not to buy any quake insurance. But why?
People do not buy coverage because they feel that the high premiums and deductibles mean
that today’s quake insurance is not a valuable proposition. That is a big problem for everyone:
the public, businesses, re/insurers, ILS and governments. While re/insurers have lost many
clients, uninsured people and businesses will be totally unprepared to face the next major
event and suffer big losses.
How have we reached this point? Retrospectively, it appears the industry has been involved
in a vicious circle of decades of misleading quake risk assessment. Twenty-five years ago, the
1994 Northridge earthquake produced a real shock: US insurers lost $24 billion in 2013 dollars
and had to use the premiums they had collected over the last 30 years to pay out on all the
claims. In the aftermath of the Northridge earthquake, many US insurers did not even try to
recover their whopping losses. They decided that quake risks could not be assessed and
priced correctly and simply preferred to drop quake insurance altogether. Premiums for US
quake insurance rose several-fold, while insurance penetration dropped significantly over
subsequent decades. The rest of the world followed.
To clarify - we are not saying there is no major quake risk in California. Quite the
opposite. However, some areas are very risky, but others are not. To cover real risk,
premiums should be vary for low- and high-risk areas.
It is a cliché to say that accurate risk assessment is the key to success in the re/insurance
business. Earthquake prediction can assess risk much more precisely. Insurers can safely offer
more affordable insurance on more attractive terms and unlock the tremendous potential of
the quake insurance market. Re/insurers have now got an excellent tool to win clients back.
When this happens, the increasing insurance penetration will, in turn, result in even cheaper
premiums, etc. Therefore, thanks to Terra Seismic quake prediction system, the quake
insurance market will grow multiple fold. But there is also a further benefit for re/insurers!
The 2011 Christchurch earthquake was extremely expensive for the industry because it
caused significant human loss. Thanks to earthquake prediction, the majority of the human
loss can be avoided in future events. Minimal human loss will dramatically reduce re/insurers’
losses. Furthermore, the timely preparation of potentially dangerous facilities – such as
chemical plants, nuclear plants, oil and gas pipelines, etc. – can help avoid worst case
scenarios, such as the explosion at the Fukushima nuclear plant in the aftermath of the 2011
Tohoku quake and tsunami. Hence, we can prevent hundreds of billions of dollars in extra
economic losses due to the secondary effects of earthquakes. Again, this would significantly
reduce the bill for re/insurers.

3. Markets will be truly global, sophisticated, flexible and dynamic. Novel instruments, such as
tradable parametric insurance notes, will make markets even more attractive and efficient.
Old markets will be deeper, and new, emerging markets will open for business.
The advent of quake prediction turns the earthquake insurance market into a once-in-a-
lifetime dream market for every re/insurance executive: over 90% of the market is empty
with hundreds of millions of households and hundreds of thousands of companies as
prospective clients.
We must emphasize that real earthquake risk is not even and dynamic. Statistical models are
useful and quake prediction will improve their accuracy. Risk modelers could deliver
incredible value to their companies if they would only start to think outside the statistics box
and combine both methodologies to identify amazing new global opportunities. Clearly, the
demand for earthquake insurance can be radically increased if risk were priced correctly.
Earthquake prediction, a once in a century innovation, is going to have an unforgettable
impact and create a huge competitive advantage. Let’s use a famous historic example. During
the Battle of the Shangani on the 25th October 1893, 700 soldiers from the British colonial
force were attacked by 5,000 Matabele warriors. The odds were against the Brits: the attack
was at night, sudden and they were heavily outnumbered. But they had a new invention with
them – five Maxim guns – and although they were fearless, the Matabele suffered an
overwhelming defeat. The Maxim gun changed battlefield strategy forever. It was so brutally
effective that the new weapon represented a guarantee of victory. Hilaire Belloc wrote a now
famous adage, “Whatever happens, we have got the Maxim gun, and they have not”!
Nowadays, players who already use earthquake prediction are quietly chanting, “Whatever
happens, we have got quake prediction and they have not”! Be careful – we are in risky times
and new events are coming! Stay tuned and welcome to the new, safer Planet where major
earthquakes can be predicted!