A large Tokyo earthquake is many reinsurers' worst nightmare. Tom Larsen provides the modelling perspective on this earthquake prone region, otherwise known as the Pacific Rim of Fire.

The island chain of Japan is located along the Pacific Rim of Fire, a virtual perimeter of the Pacific Ocean which coincides with the boundaries of tectonic plates and has been the source of some of the most devastating earthquakes in recent history. The most recent is the Great Hanshin Earthquake disaster of 17 January 1995, an approximate magnitude 7 event occurring near Kobe, Japan. EQECAT has estimated that the direct damage from this event exceeded Y13trn ($110bn), or in excess of 2.5% of the gross domestic product.

Earthquake modelling in Japan

Japan lies within one of the most complex tectonic regions of the world, where the Philippine Sea, Pacific, Eurasian, and the North American crustal plates converge. The island chain owes its origin to the tectonic and volcanic processes active at this plate boundary zone, the same processes that result in high seismic hazard throughout the region. Although this region is tectonically complex because of the interaction of these crustal plates, it has been the subject of scientific study by both Japanese and foreign researchers for over 120 years.

Advances in seismo-tectonics and natural catastrophe modelling have led to better models for understanding earthquake risk in Japan. The Japanese Government has recently released a new national seismic model. The model includes the first seismic hazard maps and covers all aspects of seismic hazard in Japan, including source modelling, earthquake frequency modelling and ground motion modelling, including site amplification.

Physical damage to structures during an earthquake can be produced by various earthquake characteristics, including ground shaking, fault rupture, landslides, liquefaction, inundation (tsunami and seiche) and fire. Ground shaking, or earthquake tremors, produces scattered but widespread damage and is responsible for a large portion of building damage. Fault rupture is typically not a major agent of damage due to its extremely localised nature. Liquefaction and landsliding produce local concentrations of structural damage. The agents of damage can best be categorised as ground shaking, fire following earthquake and tsunami/seiche.

Ground shaking - Age of construction, soil and foundation condition, proximity to the fault, and type of structural system are major determining factors in the performance of structures, as highlighted by the 1995 Great Hanshin event. Damageability is worst in the areas bordering a port or streams and rivers - loose and soft soils amplify ground motions in comparison to bedrock, especially ground motions within a certain frequency range. The duration of shaking also tends to be longer on such soils.

The first building code in Japan was introduced in 1926 after the 1923 Great Kanto Earthquake and ensuing fire devastated Tokyo. The regulations have been reviewed and amended several times over the years as the result of damage during subsequent strong-motion earthquakes. Bridge codes and codes for civil engineering-type structures (eg quay walls) have undergone similar changes over the years. Since the 1926 code, Japan's seismic codes have typically been as advanced as any in the world.

Most of the heavily damaged wood-frame buildings in the Great Hanshin earthquake were traditional one- or two-story residential or small commercial buildings of "Shinkabe" or "Okabe" construction. These buildings normally have very heavy mud and tile roofs (which are effective at preventing typhoon damage), supported by post-and-beam construction. Foundations are often stone or concrete blocks, and the wood framing is not well attached to the foundations.

Traditional wood-frame construction had the most widespread damage throughout the region, resulting in the largest number of casualties. Failures in these buildings were typically caused by large inertial loads from the heavy roofs that exceeded the lateral earthquake load-resisting capacity of the supporting walls. The relatively weak bottom stories created by the open fronts typically collapsed.

Fire following earthquake - Large fires following strong earthquakes have long been considered to be capable of producing losses comparable to those resulting from earthquake tremors. The risks are particularly high in Japan because of high population densities; very narrow streets and alleys, which cannot act as fire breaks; numerous old wood-frame smaller commercial and residential buildings mixed in the commercial zones of towns; unanchored or unprotected gas storage tanks or heaters; and a mix of collapse-prone old buildings in built-up areas.

These risks were most recently exhibited in the large fire that destroyed much of the town of Aonae on the Island of Okushiri during the 12 July 1993 Hokkaido Nansei-oki Earthquake and in Kobe following the Great Hanshin earthquake (1995). Many Japanese municipalities, and particularly Tokyo, have long considered earthquake-generated fires to be very high risks, and various risk management programmes have been started in Japan. Kobe has specially constructed underground cisterns for fighting fires if parts or all of the distribution water lines failed. However, whatever measures had been taken in Kobe were overwhelmed following the 17 January earthquake.

Tsunami - A tsunami is a series of waves created when a body of water, such as an ocean, is rapidly displaced on a massive scale. Tsunamis are common throughout Japanese history. Because the earthquakes that generate tsunami are generally offshore, it is rare to observe both great tsunami damage and ground shaking damage in the same location and some of the great tsunami damages in Japan have been from earthquakes occurring off the coast of Alaska (US). The Hokkaido Nansei-oki earthquake (1993) caused both shaking and tsunami damage to the island city of Aonae, with the sea-level southern tip suffering near total destruction of buildings. The area was completely surrounded by protective, 4.5 metre tsunami walls. They were ineffective in preventing the destruction although they probably moderated the height of the run-up which was 10-15 metres high.

Assets at risk

When modelling insured earthquake loss exposure in Japan, it is easiest to distinguish property insurance providers in Japan as non-life companies and co-operative (kyosai) companies.

Non-life companies offer earthquake endorsements to residential properties and this risk is ceded to a national pooling arrangements (the Japan Earthquake Reinsurance scheme) that retrocedes the risk back to the originating insurers. By regulation, this risk must be retained in Japan. A limited fire cover endorsement is offered (earthquake fire expense insurance) that is strongly sub-limited (at 5% of the fire sum insured with monetary limits as well). Non-life companies offer earthquake endorsements to non-residential properties (commercial and industrial) and these can be ceded outside of Japan. Commercial and industrial policies have a mix of "reduced indemnity" coverages (a proportional cover) and "first loss" policies.

The kyosai offer a variety of earthquake endorsements. The Zenkyoren kyosai is one of the largest, and offers a policy with specific damage threshold triggers for payout with payouts on a proportional basis. The bulk of the earthquake loss exposure in Japan is concentrated in CRESTA zones 5, 6 and 8 (figure 1). The exposure aligns well with the population of Japan as well as the location of the highest seismic risk.

Evaluating earthquakes

Evaluating natural catastrophe risk requires the calculation of key statistical measures. More than 40% of the earthquake average annual loss (AAL) in Japan is derived from CRESTA zone 5, which includes Tokyo, Chiba and Kanagawa prefectures (districts). Tokyo is situated atop the intersection of four active earthquake plates. CRESTA zones 4, 5, 6 and 8 contribute more than 80% of the country-wide AAL. The earthquake risk in Japan is not evenly distributed geographically but concentrated in the middle of the country.

The statistical measure tail-value-at-risk can be used to decompose the extreme loss risk in Japan. Losses at a frequency of 2% per year and lower (the largest events in the country) are principally derived from two earthquake sources: The Nankai Trough and the Sagami Trench. These two sources are located on sloped-ramp subduction zones which extend underneath central eastern Japan. These fault zones are the topic of significant ongoing research.

The technology available to quantify risk in Japan is continually advancing and the ability to understand the nature of key risk sensitivities is constantly improving. Scientific understanding of the nature of the fault system offshore of eastern central Japan is helping to better understand the risk. Improved building codes and societal responses are reducing the vulnerability to damage and disruption from earthquakes, while population and wealth increases are increasing vulnerability to damage. Better risk modelling is helping society produce better disaster management plans for the inevitable occurrence of great earthquakes.

- Tom Larsen is senior vice president of EQECAT.