February 3rd, 2009

Prevent Soil Swells from Eroding Capital

Posted at 12:59 AM ET

GC Editor

Dr. Rebecca Cheetham, Instrat®

Shifting ground can move your portfolio. Subsidence, the damage caused to buildings due to ground movement resulting from the presence of expansive clay soils, can lead to costly claims that may not be expected. A subsidence problem can take years to materialize, which makes careful risk modeling incredibly valuable. Refining a sense of your portfolio’s subsidence exposure can help you manage your capital effectively, transfer risk if necessary, and improve your firm’s market performance.

Making the Ground Move

Some types of soil expand when wet and shrink as they dry. The resultant changes in soil volume cause the ground to shift, moving building foundations and placing their superstructures under stress. Such stress can cause visible damage, compromising the building’s integrity and requiring cash for repairs. The damage caused by subsidence can be difficult to predict and costly to cover.

“Subsidence” as considered by our model relates to the damage caused by particular soil properties, strictly termed as the downward movement of a building caused by soil shrinkage. Damage caused by the opposite process - the swelling of soil that pushes a structure upward - is called “heave.” The Guy Carpenter subsidence model addresses both phenomena.

The risk of subsidence is significant in areas where the soil’s clay mineral content is greater than 5 percent by weight. Clay minerals - particularly the smectite clay montmorillonite - have a propensity to expand when water is added and contract as they dry. This soil property can cause considerable building damage when combined with certain meteorological conditions. Seasonal changes in soil humidity lead to cycles of drought and rewetting, which result in an ongoing shrink/expand dynamic. The accompanying soil movements that occur, stress the building and can lead to damage (and claims).

Given that the absorption and extraction of soil moisture is one element that contributes to the subsidence hazard, man-made sources of water can aggravate an underlying problem. For example, localized underground water sources can result from leaking swimming pools, water pipes, and drainage systems, causing clay soils in building foundations to expand in a non-uniform manner. In the same way, large tree roots and dense vegetation in proximity to buildings will consume soil moisture, causing localized drying of the foundation soil.

Assessing the Damage, Threat

Subsidence can take years to manifest itself, leaving plenty of time for small, manageable problems to become large and expensive. Although certain subsidence problems result in only cosmetic damage, the worst cases can cause essential structural elements to become dislocated, cracked, or warped. To ensure that a severe subsidence problem does not recur, the building foundation needs to be deepened beyond the zone of expansive soil - a process known as underpinning. Every homeowner - and insurer - knows that such repairs are not cheap.

Of course, subsidence hazard does not necessarily translate to damage and some structures are more vulnerable than others. For example, relatively small and light buildings of up to two levels, such as detached houses, warehouses and structures without foundations are at greatest risk.

Insuring for Subsidence

In terms of the extent of expansive clay soils across Europe, the UK, France, Denmark, and Greece are potentially at risk from damaging subsidence events. Since 1976, insurance carriers in the UK have paid EUR8 billion in subsidence-related claims. UK insurers have adapted to the problem, requiring higher deductibles for properties in areas at risk and contracts have several policy exclusions. The flow of claims continues, but their cost is trending downward.

For example, in the UK, the cost of claims peaked at approximately EUR800 million in 1991, coming down to GBP408 million in 2003 (EUR484 million at November 30, 2008 rates) and ultimately to GBP162 million (EUR192 million at November 30, 2008 rates) in 2007. Similarly in France, subsidence (known alternatively here as “retrait-gonflement”) has been a costly peril. In the 10 years following its inclusion in the Catastrophes Naturelles scheme in 1989, subsidence became the second costliest natural peril behind flood. From 1989 to 2003, subsidence claims cost on average over EUR250 million per year to the French insurance industry. This equates to claims made by hundreds of thousands of households across vulnerable regions of the country.

Many existing subsidence models have accessed various data sets (e.g., soil type, vegetation, climatic information) to apply risk ratings to geographic areas (e.g., by postal code) or specific buildings. In addition to varying in resolution, such models also differ in the approach used to assess the hazard. When assessing the subsidence risk to an individual building situated on a clay soil, it may be sufficient to take into account the presence of large trees. Other models that operate across a larger scale may require access to soil maps or geological databases. More complex models may additionally assess how cyclical meteorological phenomena change subsidence risk over time.

Yet, there has been a gap in the marketplace. While most models have focused on ratings that identify areas at risk, the probabilistic modeling of subsidence due to expansive clay soils has not been addressed as extensively. To support insurers that have subsidence-exposed portfolios in France, Guy Carpenter has developed the first probabilistic subsidence model available for the entire country, helping carriers to identify the hazard and quantify the associated risk, ultimately allowing for more prudent capital management decisions. This model focuses on France, where the damages and cost of subsidence has been severe, but the methodology can be applied to other countries given equivalent data sets.

Guy Carpenter’s effort, which began in 2005, uses detailed maps - created by the French geological research institute Bureau de Recherche Géologiques et Minières (BRGM) - detailing subsidence hazard for the departments of mainland France and Corsica. With this approach, we are able to identify different degrees of risk based on the mapping of expansive soils in relation to building location. Alongside assessment of the hazard, a stochastic event set was derived principally from European meteorological data from 1960 to 2007 based on an estimation of the change in volumetric soil water content over 500 soil drought/ re-humidification cycles. Estimation of the soil water content included incorporation of information relating to rainfall amount, differences in air temperature, surface water runoff and the presence of vegetation.

In order to assess damage to building stock from defined subsidence events, a built environment module details the different types of building construction, as well as land-use per model unit (approximately 1 km2). By combining the built environment with a set of more than 30 vulnerability functions that have been developed for each construction and land-use type, it is possible to determine the effects of subsidence events of varying intensity. Damage for each event is gauged by the location of building stock in relation to the hazard and the severity of the event in question. The subsidence model only considers damage to houses and apartments as these are known to be most at risk from this peril.

This model is a powerful tool, equipping carriers in France to identify the threats to their portfolios and take action before claims begin to mount. Understanding the risk more thoroughly can translate to the improved deployment of firm resources, wider margins, and ultimately growth in firm value.

An Eye on the Future

The subsidence hazard is not static. The reality of climate change - which may include changes in precipitation and therefore drought occurrence - could increase the subsidence hazard of certain areas. Projections currently suggest that Mediterranean regions will experience decreases in precipitation and in soil moisture content during summer months. Regions in Central and Eastern Europe may be exposed to temperature extremes, as well as a decline in summer precipitation.

The situation is much different for maritime areas in northwestern Europe. Here, winter precipitation is expected to increase, leading to greater river flow, accompanied by an elevated risk of coastal flooding. Additionally, temperature increases above the global mean are likely to occur in the UK and other northern European countries. In London and other southeastern areas of the UK, increases in summer temperatures accompanied by reductions in rainfall by around 20 percent to 40 percent are projected

Future climatological shifts are likely to translate into changing patterns of soil moisture, exacerbating subsidence hazard in areas already affected and introducing the threat to places that may not presently be at risk. Insurers and reinsurers, therefore, must remain vigilant in regards to this fluid peril. Areas not at risk today could become sources of heavy or frequent claims a decade from now. Fortunately, the tools needed to understand and prepare for subsidence exist. Insurers and reinsurers can take action now to protect future returns.

Category: Property

Guy Carpenter & Company, LLC Terms and Conditions of Use


By continuing to access or use this site, or any service on this site, you signify your acceptance of the TERMS. From time to time, Guy Carpenter & Company, LLC (“Guy Carpenter”) may modify the TERMS. Accordingly, please continue to review the TERMS whenever accessing or using this site. Your use of this site, or any service on the site, after the posting of modifications to the TERMS will constitute your acceptance of the TERMS, as modified. If, at any time, you do not wish to accept the TERMS, you may not use the site. Any terms or conditions proposed by you that are in addition to or which conflict with the TERMS are expressly rejected by Guy Carpenter and shall be of no force or effect.

1. User Assent to Terms and Conditions of Service

You represent that you have read and agree to be bound by the TERMS for GCCapitalIdeas.com. You further agree: (i) to comply with U.S. law regarding the transmission of any data obtained from the Service (as defined herein) in accordance with the TERMS; (ii) not to use the Service for illegal purposes; and (iii) not to interfere or disrupt networks connected to the Service.

2. Disclaimer

All content provided on this Web site is based upon information which we believe to be reliable and should be understood to be general insurance information only. It is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Consult your reinsurance/insurance advisors with respect to individual coverage issues.

Guy Carpenter makes no representations or warranties, express or implied, with respect to the accuracy or reliability of the content contained on this Web site. Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Guy Carpenter undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a result of new information, research, future events or otherwise.

Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

3. Intellectual Property

This Web site, including, but not limited to, text, content, photographs, video, audio, and graphics (the “Service”), is protected by copyrights, trademarks, service marks, international treaties and/or other proprietary rights and laws of the U.S. and other countries. The Service is also protected as a collective work or compilation under U.S. copyright and other laws and treaties. All individual articles, columns and other elements making up the Service are also copyrighted works. You agree to abide by all applicable copyright and other laws, as well as any additional copyright notices or restrictions contained in the Service.

4. Restrictions on Use

You may not use the Service for any illegal purpose or in any manner inconsistent with the TERMS. You agree to use the Service solely for the use and benefit of your own organization, and not for resale or other transfer to, or use by or for the benefit of, any other person or entity. You agree not to use, transfer, distribute or dispose of any information contained in the Service in any manner that could compete with the business of Guy Carpenter. You acknowledge that the Service has been developed, compiled, prepared, revised, selected and arranged by Guy Carpenter and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort and money and constitutes valuable intellectual property and trade secrets of Guy Carpenter and such others. You agree to protect the proprietary rights of Guy Carpenter and all others having rights in the Service during and after the term of this agreement and to comply with all reasonable written requests made by Guy Carpenter or its suppliers of content, equipment or otherwise (“Suppliers”) to protect their and others’ contractual, statutory and common law rights in the Service. You agree to notify Guy Carpenter in writing promptly upon becoming aware of any unauthorized access or use of the Service by any party or of any claim that the Service infringes upon any copyright, trademark or other contractual, statutory or common law rights.

5. Further Restrictions on Use

You may not copy, reproduce, recompile, decompile, disassemble, reverse engineer, distribute, publish, display, perform, modify, upload to, create derivative works from, transmit or in any way exploit any part of the Service, except that you may download material from the Service and/or make print copies for use within your organization, provided that all copies retain all copyright and other proprietary notices. The analysis and presentation included in the Service may not be recirculated, redistributed or published by you without Guy Carpenter’s prior written consent. Modification of the Service’s content would be a violation of Guy Carpenter’s copyright and other proprietary rights. Additionally, you may not offer any part of the Service for sale or distribute it over any other medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Guy Carpenter. The Service and the information contained therein may not be used to construct a database of any kind. Nor may the Service be stored (in its entirety or in any part) in databases for access by you or any third party or to distribute any database services containing all or part of the Service. You may not use the Service in any way to improve the quality of any data sold or contributed by you to any third party. Furthermore, you may not use any of Guy Carpenter’s names or marks in any manner that creates the impression such names or marks belong to or are associated with you or imply any endorsement by Guy Carpenter, and you acknowledge that you have no ownership rights in and to any of these names or marks. You will not use the Service, the information contained therein or any of Guy Carpenter’s names or marks in unsolicited mailings or spam material and will not spam or send unsolicited mailings to any person or entity using the Service.

6. License

You acquire no rights or licenses in or to the Service and materials contained therein other than the limited right to utilize the Service in accordance with the TERMS.

7. Rights Reserved

All present and future rights in and to trade secrets, patents, copyrights, trade names, trademarks, service marks, databases, know-how and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, including rights in and to all applications and registrations relating to the Service (the “IP Rights”) shall, as between you and Guy Carpenter, at all times be and remain the sole and exclusive property of Guy Carpenter. All present and future rights in and title to the Service (including the right to exploit the Service and any portions of the Service over any present or future technology) are reserved to Guy Carpenter.

8. Disclaimer and Limitation of Liability

You agree that your use of the Service is at your sole risk and acknowledge that the Service and anything contained therein, including, but not limited to, content, services, goods or advertisements (the “Items”) are provided “AS IS” and that Guy Carpenter makes no warranty of any kind, express or implied, as to the Items, including, but not limited to, merchantability, noninfringement, title or fitness for a particular purpose or use. Guy Carpenter does not warrant that the Service is compatible with your equipment or is free of errors or viruses, worms or “Trojan horses” and is not liable for any damage you may suffer as a result of such destructive features. You agree that Guy Carpenter, its Suppliers and its third-party agents shall have no responsibility or liability for: (i) any injury or damages, whether caused by the negligence of Guy Carpenter, its employees, subcontractors, agents, Suppliers or otherwise arising in connection with the Service; or (ii) any fault, inaccuracy, omission, delay or any other failure in the Service caused by your computer equipment or arising from your use of the Service on such equipment. The content of other Web sites, services, goods or advertisements that may be linked to the Service is not maintained or controlled by Guy Carpenter. Guy Carpenter is therefore not responsible for the availability, content or accuracy of other Web sites, services or goods that may be linked to, or advertised on, the Service. Guy Carpenter does not: (a) make any warranty, express or implied, with respect to the use of the links provided on, or to, the Service; (b) guarantee the accuracy, completeness, usefulness or adequacy of any other Web sites, services, goods or advertisements that may be linked to the Service; or (c) make any endorsement, express or implied, of any other Web sites, services, goods or advertisements that may be linked to the Service. Guy Carpenter is also not responsible for the reliability or continued availability of the telephone lines and equipment you use to access the Service. You understand that Guy Carpenter and/or third-party contributors to the Service may choose at any time to inhibit or prohibit their content from being accessed under the TERMS.

9. Limitation of Liability


10. Representations and Warranties

You represent, warrant and covenant that you: (i) have the power and authority to enter into this agreement; (ii) are at least eighteen (18) years old; (iii) shall not use any rights granted hereunder for any unlawful purpose; and (iv) shall use the Service only as set forth in these TERMS.

11. Indemnification

You agree, at your own expense, to indemnify, defend and hold harmless Guy Carpenter and its employees, representatives, Suppliers and agents, against any claim, suit, action or other proceeding, to the extent based on or arising in connection with your use of the Service, or any links on the Service, including, but not limited to: (i) your use or someone using your computer’s use of the Service; (ii) a violation of the TERMS by you or anyone using your computer; (iii) a claim that any use of the Service by you or someone using your computer infringes any IP Right (as herein defined) of any third party, or any right of personality or publicity, is libelous or defamatory, or otherwise results in injury or damage to any third party; (iv) any deletions, additions, insertions or alterations to, or any unauthorized use of, the Service by you or someone using your computer; or (v) any misrepresentation or breach of representation, warranty or covenant made by you contained herein. You agree to pay any and all costs, damages and expenses (including reasonable attorneys’ fees) and costs awarded against or incurred by or in connection with or arising from any such claim, suit, action or proceeding.

12. Termination

Either you or Guy Carpenter may terminate this agreement with or without cause at any time and effective immediately. You may terminate by discontinuing use of the Service and destroying all materials obtained from the Service. This agreement will terminate immediately without notice from Guy Carpenter if Guy Carpenter determines, in its sole discretion, that you have failed to comply with any provision of these TERMS. Upon termination by you or upon notice of termination by Guy Carpenter , you must promptly destroy all materials obtained from the Service and any copies thereof. Sections 2, 3, 4, 5, 8, 9, 11, 12, and 13 shall survive any termination of this agreement.

13. Governing Law

These TERMS shall be governed and construed in accordance with the laws of the United States of America and the State of New York, without giving effect to conflicts-of-law principles thereof. You agree to submit to the personal jurisdiction of the state and federal courts located in New York County with respect to any legal proceedings arising out of this agreement and waive any objection to the propriety or convenience of venue in such courts. If any provision of the TERMS is found by a court of competent jurisdiction to be invalid or unenforceable, such provision shall be enforced to the maximum extent permissible and the other provisions of the TERMS shall remain in full force and effect.

14. Access Outside the United States

If you choose to access the Service from outside the United States, you are responsible for compliance with foreign and local laws. Software from the Service may be subject to United States export controls that prohibit downloading, exportation or re-exportation: (i) into (or to a national or resident of) Cuba, Iraq, Libya, Iran, Syria, Sudan, or any other country to which the U.S. has embargoed goods; or (ii) to anyone on the U.S. Treasury Department’s Table of Deny Orders. By using the Service, you represent and warrant that you are not located in, controlled by or a national or resident of any such country or on any such list.

15. Miscellaneous

You acknowledge that Guy Carpenter has the right to change the content or technical specifications of any aspect of the Service at any time at Guy Carpenter’s sole discretion. You further accept that such changes may result in your being unable to access the Service.

16. Official Correspondence

Official Correspondence must be sent via postal mail to: Guy Carpenter & Company, LLC, 1166 Avenue of the Americas, New York, NY 10036, Attn: Legal Department.