Seismic risk assessments for real estate portfolios: Impact of engineering investigation on quality of seismic risk studies

Abstract

Seismic risk evaluation studies for real estate portfolios conducted by technical professionals (often Civil and Structural Engineers) have become increasingly desirable and common in financial decisions. In this article, we develop a series of risk measures and ratings based on common outcomes from probabilistic portfolio seismic risk assessments. We first define two portfolio risk metrics: Portfolio Expected Loss (PELα) and Portfolio Upper Loss (PULα), where “α” is the annual exceedance probability, or the corresponding return period (“1/α”). PULα/PELα ratio characterizes the uncertainty in estimated portfolio risks which results from the uncertainty in seismic performance of the individual assets. Three uncertainty levels are defined, namely, low, medium, and high, based on the PULα/PELα. We then develop an asset risk metric, called Tail Contribution Index (TCIα), that characterizes the contribution of individual assets to the portfolio losses that fall within the high-consequence “tail” of the portfolio loss distribution. To describe the overall engineering efforts of a portfolio seismic risk study, we develop a portfolio risk metric, called Portfolio Level of Investigation (PLIα), that characterizes the effective level of engineering investigation. Three investigation levels are defined: low ( desktop), medium ( semi-engineered), and high ( engineered), based on the PLIα. Finally, based on the combination of uncertainty level and investigation level, we develop a rating scheme by which the quality (Qα) of a portfolio seismic risk study is characterized. Five quality levels are defined: very poor, poor, fair, good, and very good. These risk indices and ratings can help stakeholders and technical professionals better diagnose and communicate portfolio seismic risks, scope adequate studies, effectively utilize valuable resources, and base financial decisions on risk assessment results that have the desired reliability.