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USQUAKE Risk Analysis Methodology

A. EQECAT Modeling Approach

By their nature, catastrophic property loss events occur infrequently but with high severity. Traditional insurance loss estimating techniques rely on historical event frequency and magnitude and the associated losses to estimate future potential losses. Because of the limited historical information relevant to catastrophic events, this approach cannot fully quantify the wide range of potential future events and losses that are scientifically credible. EQECAT models provide the capability of analyzing individual scenarios, including historical events, and extend this capability to analyzing simulated future events. Based on scientific and engineering principles along with historical insurance loss information, the EQECAT models are simulation models that are capable of estimating the potential losses from catastrophic events that may occur in the future (i.e., "prospective") as contrasted with those that have occurred in the past (i.e., "retrospective"). Thus, the EQECAT loss estimation process is "prospective" in estimating the frequency and severity of property losses. EQECAT models recognize the randomness in natural phenomena by modeling the occurrence and severity of catastrophic events as stochastic variables and are capable of modeling the distribution of potential damages and losses for insurance and reinsurance portfolios exposed to natural hazards such as earthquakes.

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