Using Probabilistic Models to Appraise and Decide. Ley-Borrás and Fox a defined scenario event, e.g., the 2010 Chile earthquake; whereas probabilistic analyses attempt to capture the impact of all of the possible natural hazard events that could affect a given region. While deterministic event analyses can provide valuable information to risk decision makers, they inherently contain no information about the likelihood that the given event could happen (only its potential impact); however probabilistic analyses allow decision makers to understand the likelihood of the full range of possible impacts of natural hazards and they can also model events over a broad time horizon (well in excess of the length of historical records).

# **Inputs**

Sophisticated catastrophe models are typically composed of four components: a hazard module, an exposure module, a vulnerability module and a loss module. The hazard module itself is formed of two elements: a stochastic event set, and a local site model. The stochastic event set is a catalog of simulated natural hazard events which are characteristic of the observed or scientifically‐modeled events in a region and contains information about their location, size (e.g., earthquake magnitude) and associated probabilities of occurrence. The local site model represents the small‐scale impacts of the large‐scale natural peril; for example, in the case of earthquake risk this element allows the prediction of the ground shaking intensity at a given location, due to the occurrence of an earthquake of given size and location some distance away.

The exposure module is a database of the physical characteristics of the assets (buildings, infrastructure etc.) at risk to the specific perils in the hazard module. As well as cataloging their economic replacement cost and geo‐referenced location, sophisticated catastrophe models typically represent assets in terms of their usage (e.g., residential, commercial, industrial etc.), construction type (e.g., adobe, wood, concrete etc.), age and height (number of stories).

The vulnerability module characterizes the damageability of the assets in the exposure module to the natural perils in the hazard module. Essentially this component is a database of mean damage ratio relationships (and their associated uncertainty parameters) between local hazard intensity and the physical damage to structures in the exposure module. The vulnerability module of robust catastrophe models will demonstrate sensitivity to the various characteristics in the exposure database (as listed above) highlighting the need for accurate, high‐resolution exposure data collection and collation. There is also a geographical element to the information in this module that requires capturing, as regional construction practices and building code enforcement will typically vary across a country.

# **Outputs**

The final component, the loss module, is where the financial calculations are performed and rely on the process and outputs of the previous three modules. Conceptually, the first part of the hazard module describes the occurrence of an event with an annual rate of occurrence while the second part of the hazard module calculates the local intensity of the event for every asset under study (i.e., all the assets in the exposure module). The vulnerability module generates damage estimates based on the local intensity of the hazard and the characteristics of the assets at risk, which are translated into economic loss (e.g., 10% damage to a property with a US $100,000 replacement cost would equate to an economic loss of US $10,000). In order to calculate the total loss for a single event, then the aggregate loss from all of the

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