Risk modellers’ research in China highlights earthquake risk to reinsurers by Suzie Mayes

China, according to a recent GR Benchmarking Club survey, is about to hit the big time. 83% of respondents agreed it would become the world’s largest reinsurance market in the next 25 years.

However the country does have an extensive natural catastrophe history, particularly when it comes to earthquakes. This will be of major concern to the global reinsurance market which is still smarting from the affects of an over-active North Atlantic hurricane decade.

AIR Worldwide Corporation (AIR) has recently addressed this issue, by teaming up with the Beijing Institute of Architectural Design (BIAD) to better understand the vulnerability of buildings in China.

BAID has researched and analysed seismic response of building types common to China. These findings will be used to enhance AIR’s China earthquake model.

Dr Bingming Shen-Tu, earthquake project manager at AIR Worldwide said: “A significant portion of building inventory in China is buildings and facilities under construction. The take up-rate for insurance for these on-going construction projects(construction all risks/erection all risks, or CAR/EAR) is relatively high, therefore the vulnerability of CAR/EAR is of particular interest to insurers and reinsurers in China”.

China is situated in one of the most seismic regions in the world. Since the 20th century, more than 800 earthquakes of over magnitude 6 have occurred. The 1976 Tangshan earthquake damaged 78% of the industrial buildings and 93% of the residential buildings, whilst earthquake Shaanxi in 1556, the deadliest earthquake worldwide, destroyed a 520-mile area.

The direct loss from the Tangshan earthquake has been estimated at around $10bn. A report by RMS shows that if it were to happen today, the loss would be around $100bn, thanks to increases in building and population density, even though the seismic resistance of buildings is improved.

According to industry estimates, the economic loss from a 1-in-250 year event in China could be in the order of $100bn to $150bn, representing between 4% and 6% of China’s GDP.

Dr Weimin Dong, chief risk officer of RMS said: “As cities across Asia have rapidly increased in commercial development, a much greater proportion of the population now lives in cities like Beijing. It is only a matter of time before an earthquake strikes one of these cities, potentially leading to devastating effects.”