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China's earthquake risk is one for the record books, modelers

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Companies expanding into China, particularly insurers, have to carefully consider the potential impact that a major earthquake would have on their operations.

China has been hit by some of the strongest and most devastating earthquakes in history. In 1976, a magnitude 7.5 to 7.8 earthquake in the city of Tangshan killed more than 240,000 people and destroyed 78% of commercial buildings in the northeast China municipality.

In January 1556, the deadliest earthquake in recorded history occurred in Shaanxi province in central China. With a magnitude estimated at 8.0 to 8.3, the quake caused damage across 10 provinces and killed some 830,000 people.

China is vulnerable to earthquakes because it is an area of intense seismic activity, experts say.

Beijing, the political capital of China with more than 15 million people, is particularly vulnerable since it is in a zone of higher seismic activity, according to Boston-based AIR Worldwide Corp., which launched a model of China earthquake risk in 2004.

Shanghai is an important business center, but has lower earthquake risk being in the southern region of the country, said Jayanta Guin, vp of research and modeling for AIR in Boston. Earthquake risk is generally higher in western and northwestern parts of China while the south and east are relatively less exposed to earthquake hazards, except for Beijing, he said.

An earthquake in Beijing would be economically devastating, although insured losses from the northeast China event would be relatively limited. A reconstruction of the 1679 magnitude 8.0 quake that occurred 50 kilometers east of Beijing--the largest ever recorded in the area--by Newark, Calif.-based Risk Management Solutions Inc. predicted that a similar temblor today would cause estimated economic losses in Beijing of about 445 billion renminbi ($57.5 billion) with insured losses of 25 billion renminbi ($3.2 billion).

The insurance industry, while growing rapidly, is not fully developed in China, so insurance risk related to earthquakes would be vastly different from pure risk, Mr. Guin noted. "As more insurers are going in, the risk profile in China is going to evolve more rapidly than stable, developed countries like the U.S. and Japan," he said.

Insurers in China are seeking catastrophic modeling tools to evaluate and quantify their earthquake risk. Beijing-based PICC Property & Casualty Co. Ltd., which has a property portfolio that represents 50% of the Chinese insurance market, last year became the first insurer to license AIR's earthquake model.

Earthquake models for China must go beyond major metropolitan areas such as Beijing to assess risk in other regions that are likely to be sources of future development, said Domenico del Re, Asia Pacific senior model manager for RMS in London. "We are definitely seeing a trend in China of companies setting up further and further inland as the cost of land and the cost of living is increasing in coastal areas," Mr. del Re said.

Engineering and construction risk is a key exposure as China's economic expansion accelerates and insurers have to factor in the vulnerability of projects as they are being built, which will be different than for already completed buildings, Mr. Guin said. AIR engineers analyzed construction at each phase for a wide range of buildings to properly model this risk. "It's a major risk for the large buildup of property and infrastructure," he said.