For insurance to play its full potential in mitigating and transferring earthquake risk in the Middle East, insurers need better earthquake models. Mr Trevor Maynard of Lloyd’s and Dr Mohammad R Zolfaghari of CATRisk Solutions draw a bespoke seismotectonic source model for accurate assessment of earthquake risk in the region.
Businesses and communities are becoming more vulnerable to natural hazards such as droughts, floods, storms and earthquakes.
The Middle East has a history of earthquake activity. Between 1900 and 2014, the region has been affected by 200 moderate to large earthquakes. These have killed almost 250,000 people and affected 10 million others. Today, almost one fifth of the population (about 30 million people) in the countries is at risk from earthquakes.
The Lloyd’s City Risk Index estimates that US$85 billion of potential economic output of the region’s 22 leading cities could be at risk from earthquakes over the next decade.
Due to the serious consequences of earthquake damage, it is important to understand earthquake risk in the region better. To do this, insurers need more earthquake models as there are relatively few that cover the Middle East.
The increasing prospects of Nat CAT losses in the Middle East mean many countries in the region are facing greater challenges in financing disaster recovery and reconstruction from current government budgets. Financial authorities in such countries are looking for approaches to transfer risk responsibility to households and businesses in exposed areas through insurance mechanisms.
Many countries in this region are taking their lead from international trends and considering risk financing measures through market-based CAT risk insurance. However, the level of understanding of CAT risks in the Middle East is relatively low. Consequently there is a need for model-based risk assessments in order to facilitate sustainable risk-transfer solutions.
CAT modelling for risk assessment
Essential to efforts towards any sustainable Nat CAT risk management, in particular risk transfer mechanism in the form of insurance, is a reliable assessment of the severity and frequency of potential future CAT risk. CAT risk models are a key element for such assessments in today’s insurance and reinsurance market. The accumulation of large sum insured value and the increasing concern of damaging earthquakes in some cities in this region highlight the need for detailed seismic loss modelling using the latest seismological and engineering information.
Insurers use risk models to make reliable assessments of the severity and frequency of CAT risk. This, in turn, helps them create and price CAT insurance products.
Open CAT modeling framework
Over the past few years, CAT loss models have grown in sophistication and have now become a critical part of pricing risk and managing solvency across the market. The existing model vendors have served the market well, based on currently available technology and data, and will continue to do so.
However, for some time Lloyd’s has also supported the concept of an open framework for modelling, and has done this by supporting the Oasis Loss Modelling Framework (Oasis LMF).
To explore the potential to drive innovative solutions in the CAT model space, and inform risk understanding, Lloyd’s Corporation has facilitated the development of a model. The new model, developed by CATRisk Solutions in partnership with the Lloyd’s market, helps fill this gap in Middle East earthquake modelling.
The study introduces the CATRisk Solutions’ Middle East earthquake model, and provides an overview of the latest seismological and engineering information in the region by highlighting the hazard, exposure and vulnerability for 11 countries.
It covers earthquake risk in Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the UAE and Yemen.
Latest data and techniques
The model uses the latest data and new modelling techniques to provide a much needed, additional earthquake model for the region that is different from others on the market.
This model could help insurers design earthquake insurance products that are specific to the region and provides them with a greater understanding of the exposure risk across their portfolios.
Innovations in new model
The model has a number of innovative features that distinguish it from other earthquake models for the region. It is based on a bespoke seismotectonic source model that generates thousands of simulated earthquake events for the Middle East, on a site-by-site basis. This gives a more detailed view of earthquake risk in the region than existing models.
The model covers the entire Middle East region as it includes data from all earthquakes that have occurred there since 400BC. This is an important and unique feature of this model as earthquake damage can be caused by tremors that lie outside a modelled country.
The model includes damage metrics that can produce estimates for each simulated earthquake event in the 10,000-year catalogue the model is based on, allowing insurers to assess potential losses on a site-by-site basis, and across their entire portfolio.
It applies a unique probabilistic approach to hazard uncertainty that allows insurers to see the aggregation of losses in all the countries covered by the model.
The model is based on the latest information on past seismicity, regional tectonic deformation, location and activity of active faults and, where available, slip rate measured from recent GPS surveys.
Data from all earthquakes that have occurred in the wider Middle East region is included, and more countries may be added as the model develops and further scientific hazard assessments are made available.
Further development
There are several ways in which this model and the new approach to building it could be developed further.
Better quality exposure data from future scientific studies could be added to give a fuller picture of earthquake risk and where it would impact the region.
The model’s modular design means it can be updated as new scientific information becomes available.
A better understanding of where damage could occur and the resultant losses could be gained by adding more infrastructure vulnerability metrics.
Application to other Nat CATs
The approach used by the model could be applied to model design for other earthquake-related hazards, such as tsunamis and landslides. This would allow insurers to gain a more complete picture of the risks posed by earthquake-related hazards.
New models for perils such as wind and flood could be created using the approach used to design the model. This could create a detailed assessment of other potential threats in the region.
Insurers can access a greater choice of models in multiple regions, making it much simpler for them to obtain multiple views of a single risk. This reduces their dependency on just one or two models, meaning they can form a deeper understanding of risks and their impacts around the world. They can then use this information to fine-tune and more accurately price insurance products. M
Mr Trevor Maynard is Head of Innovation at Lloyd’s and Co-Chairman of OASIS, an open modelling platform for catastrophe models. Dr Mohammad R Zolfaghari is Director of CATRisk Solutions Ltd, a UK-based catastrophe loss modelling firm.