Many countries in Asia are developing rapidly, with their cities mushrooming. They are also in some of the most hazard-prone parts of the world, warns Domenico del Re.

This year, for the first time, the number of people living in urban centres globally will exceed those living in rural areas. The trend towards a greater urbanised population is driven by the development of large cites, and topping the growth leagues are Asian cities. For example, Jakarta’s population grew from 4.8 million in 1975 to 13.2 million in 2005, while Beijing’s jumped from 6 million to 10.7 million, and Mumbai’s leapt from 7.1 million to 18.2 million, becoming the fifth largest city globally and second in Asia behind Tokyo.

While the expansion of current “megacities” is expected to slow, six cities with over ten million inhabitants are predicted to continue growing above the global average rate of 1.9%. Five of these are in Asia and each one is exposed to natural catastrophes. Dhaka, Karachi and Delhi are all in seismically active regions, Jakarta is exposed to severe flood risk and Guangzhou in southern China is vulnerable to typhoons and the associated heavy rainfall.

As the insurance and reinsurance industry increasingly looks for new opportunities in the emerging markets, their risk is likely to be concentrated in these commercial and industrial centres. And because of the radical changes these cities are undergoing, assessing and quantifying catastrophe risk – particularly the devastating affects of large infrequent earthquakes – requires new modelling techniques that go far beyond examining the losses from past events.

Vulnerability of megacities

The potential for high losses in megacities is a result of the incredible concentration of economic value and close spatial correlation between the typical footprint of a natural catastrophe and the area of a large metropolis. This is especially true for windstorms and earthquakes.

It is the city’s vulnerability to hazards that determines the true material impact, both financially and in terms of casualties. Past earthquakes in cities such as Kobe, Japan in 1995 have shown that the delicate factors that allow a city to function can be disrupted beyond the scale of a catastrophic event: hospitals reach full capacity, busy and narrow streets make emergency services access more difficult, and damage to transport and communication hubs cause long-term disruption.

The methodology used to measure a city’s capacity to withstand extraordinary events must take into account the pressures of rapid growth and how these affect vulnerability. Land reclamation, occupation of flood-prone areas, increased rainwater run-off and a lack of quality control for construction all affect a city’s vulnerability to catastrophic events. It is crucial they be taken into account in loss models. At the same time, the models must capture the beneficial affects of the implementation of the latest international codes of safety in the construction of new buildings and infrastructure.

“Because of the radical changes these cities are undergoing, assessing and quantifying catastrophe risk requires new modelling techniques

Modelling earthquake risk

Earthquake risk models increasingly use an “engineered” approach to vulnerability assessment of buildings, which is particularly useful for cities that have undergone a recent construction boom.

The engineered approach uses computer simulations of how buildings would respond to an earthquake in order to estimate potential damage. High-rise buildings, which are common in Asia’s new commercial and residential districts, have a distinctive response to ground motions, making them particularly suited to this approach. Using the engineered approach means there is less reliance on the limited data from actual earthquakes, and model output can be used more confidently.

Challenges remain in understanding the erratic response to ground shaking of reinforced concrete buildings that were not designed to withstand earthquakes. These buildings tend to collapse due to sudden, brittle failure, usually leading to total collapse. This was the case, for example, in Ahmadabad, India in 2001 and Izmit, Turkey in 1999.

Research into this type of building collapse, and similar issues that cause large humanitarian crises, is being carried out by a host of urban risk mitigation programmes such as the United Nations’ newly launched Global Platform for Disaster Reduction, the Earthquake Megacities Initiative and the RADIUS (Risk Assessment Tools for Diagnosis of Urban Areas Against Seismic Disasters) project. The findings of these initiatives will be increasingly relevant to the insurance industry, as the share of the industry’s liability grows in high-risk Asian megacities.

worst case scenarios

While the latest generation of earthquake models contain the outcomes for tens of thousands of seismic events, the most dramatic scenarios are often used to demonstrate the potential impact on megacities.

“Historically, earthquakes in China have been the deadliest globally due to the vulnerability of the buildings

RMS recently examined the implications of a historical 1679 Beijing earthquake recurring today. The event, estimated to be of magnitude 8.0, occurred on a Saturday morning, devastating the two cities of Sanhe and Pinggu and damaging large parts of Beijing. The epicentre lays 50km east of the Forbidden City, but 30km from the capital airport and the edges of this expanding metropolis. The new RMS China earthquake model was used to generate the losses to property and the casualties from the event.

Historically, earthquakes in China have been the deadliest globally due to the vulnerability of the buildings. For example, the 1976 Tangshan earthquake caused almost 250,000 fatalities. Since 1976, the risk in Beijing has diminished as many masonry buildings have been replaced or strengthened. Most modern mid- and high-rise buildings built with reinforced concrete in the Beijing region are seismically resistant. If an earthquake were to occur, a significant portion of the damage would be from the non-structural masonry infill walls and the façade materials. Comparatively heavy damage to residential, commercial and industrial properties would also occur in areas with poor soil conditions subject to liquefaction.

Figure 1 shows the recent construction boom in commercial properties, with over 20% of exposure coming from high-rise properties built since 2000. Taking into account the recent building developments, a repeat of the 1679 earthquake in modern-day Beijing would cause between 35,000 and 75,000 fatalities and would cost around RMB800bn ($100bn) in economic losses, of which RMB445bn ($57bn) would be in the Beijing municipality alone. This estimate is based on a total value of the buildings in Beijing municipality of over RMB570bn ($75bn) for residential properties and RMB920bn ($120bn) for commercial and industrial properties.

Based on market statistics on premium earned and the assumption that 15% of all property policies have earthquake extension, only 4.5% of the property loss would be the liability of the insurance industry. However, if the Asian insurance market grows at the rate predicted by Global Reinsurance readers in a survey on China’s insurance market earlier this year, this figure would increase significantly, sending shockwaves throughout the industry.

The analysis addresses losses to buildings alone, and is therefore just the first step of a more complex task. This involves assessing the broader ramifications of a large earthquake on a megacity. Research in this area would help the insurance industry to better understand how business interruption and contingent business interruption amplify the insured losses from an earthquake in a megacity.

Domenico del Re is Asia Pacific model manager at Risk Management Solutions.