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GEM is developing a financial risk model for earthquakes for China. As part of the process, the GEM Secretariat is collaborating with GEM sponsors to test and validate the model against industry standards. Importantly, the model will represent the GEM Secretariat’s view of risk, not a consensus of the sponsors.

The first version of the model will provide physical damage and financial loss metrics due to earthquake ground shaking hazard for scenario events and probabilistic risk assessment. The risk model will be made available for commercial use through the Nasdaq Risk Modelling for Catastrophes Service and the AIR Touchstone Platform. The new model will also be available in its native OpenQuake (OQ) format. The model should be available for commercial use by the end of the year.

The new China model will fill a gap in GEM’s global suite of earthquake models. In 2018, GEM released its first Global Earthquake and Risk Model, which contained hazard and risk results using the 2015 China EQ Hazard model developed by the China Earthquake Administration (CEA), translated into GEM’s OpenQuake format. The CEA granted GEM permission to use the model to produce results for the global model, but not permission to release the underlying OQ model.

The China model hazard component incorporates both fault and area sources. Fault activity is constrained by the present-day tectonic movements of major faults, as well as historical seismicity. Area sources are characterized by distributed seismicity constrained by historical seismicity.

The risk model provides estimates of risk to residential, commercial and industrial buildings using GEM’s vulnerability models appropriate to Chinese construction practice. GEM has also developed an exposure model that can be used to estimate total losses to the building stock in addition to portfolio losses.

In order to test and validate the new model to insurance risk modelling standards, GEM established a task force made up of GEM sponsors with an interest in converting GEM OQ models into industry formats.

GEM sponsor representatives from Hannover Re (Jörg Steffensen), Swiss Re (Michael Ewald, Beat Aeberhardt), Guy Carpenter (Matthew Eagle), Partner Re (Paul Della Marta), and NTU Singapore (T-C Pan), are helping GEM to establish a model testing and validation process. They are also using industry loss and exposure data where relevant and are evaluating the models against their own portfolios in order to better understand the models and provide advice for Secretariat consideration.

The new model is being tested against GEM’s version of the 2015 CEA model. The final model will be the GEM view of risk, informed by industry expertise and data. It will not be a model based on a consensus view. Industry partners may prefer to modify the resulting GEM model to form their organization’s view of risk.

In the model-conversion process, the OpenQuake engine is used to generate hazard foot prints (i.e., a catalog of hazard events, each with a map of ground motion intensity values). The hazard footprints are converted to industry formats, and vulnerability curves are generated for industry occupancy classes. Ground-up losses are input to the financial module to compute (re)insured losses. Oasis Loss Modelling Framework and AIR Touchstone modelling frameworks are being used for that purpose. Following this process, GEM has already released loss models through Nasdaq and AIR for Colombia and, more recently, South Africa.