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Nat Hazards (2012) 60:10551063

DOI 10.1007/s11069-011-9889-2
ORIGINAL PAPER

Natural disaster management mechanisms


for probabilistic earthquake loss
Chun-Pin Tseng Cheng-Wu Chen

Received: 13 June 2011 / Accepted: 27 June 2011 / Published online: 12 July 2011
Springer Science+Business Media B.V. 2011

Abstract High rates of urbanization, environmental degradation, and industrial development have affected all nations worldwide, but in disaster-prone areas, the impact is even
greater serving to increase the extent of damage from natural catastrophes. As a result of
the global nature of environmental change, modern economies have had to adapt, and
sustainability is an extremely important issue. Clearly, natural disasters will affect the
competitiveness of an enterprise. This study focuses on natural disaster management in an
area in which the direct risks are posed by the physical effects of natural disasters such as
floods, droughts, tsunamis, and rising sea levels. On a local level, the potential impact of a
disaster on a company and how much damage (loss) it causes to facilities and future
business are of concern. Each company must make plans to mitigate predictable risk. Risk
assessments must be completed in a timely manner. Disaster management is also very
important to national policy. Natural disaster management mechanisms can include
strategies for disaster prevention, early warning (prediction) systems, disaster mitigation,
preparedness and response, and human resource development. Both governmental
administration (public) and private organizations should participate in these programs.
Participation of the local community is especially important for successful disaster mitigation, preparation for, and the implementations of such measures. Our focus in this study
is a preliminary proposal for developing an efficient probabilistic approach to facilitate
design optimization that involves probabilistic constraints.
Keywords Hazard analysis  Dynamic financial analysis  Risk control 
Computer-aided assessment
C.-P. Tseng
Chung Shan Institute of Science and Technology, Armaments Bureau, Taoyuan, Taiwan
C.-W. Chen
Institute of Maritime Information and Technology, National Kaohsiung Marine University,
Kaohsiung 80543, Taiwan
C.-W. Chen (&)
Global Earth Observation and Data Analysis Center, National Cheng Kung University,
Tainan 701, R.O.C. Taiwan
e-mail: chengwu@mail.nkmu.edu.tw

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1 Introduction
There has been increasing interest in hazard analysis in recent years, such as GIS-based
distributed technique, multi-criteria analysis, and so on (for example, see Yi et al. 2010;
Raaijmakers et al. 2008; Haque and Etkin 2007, and the references therein). The insight
from the model can help enterprise managers in strategic planning to improve natural
disaster risk management (Bar-Hillel 1980; Zhou et al. 2010; Tsai and Chen 2010, 2011;
Tseng et al. 2011; Tseng and Chen 2011; Hsu et al. 2011). Natural disaster risk, which has
been a long-time concern for the insurance industry, is being increasingly recognized as an
important part of business strategies for risk control and enterprise management. Floods
and earthquakes can cause massive loss of life and infrastructure, resulting in business
interruption and heavy casualties. During the 1960s and 1970s, over 3 million people lost
their lives to natural disasters worldwide, and nearly 82 million more were severely
impacted (UN/ISDR 2002). Furthermore, many of the short-term developmental strategies
employed throughout the world have only served to exacerbate the impact of such
disasters. High rates of urbanization, environmental degradation, and industrial development in disaster-prone areas have all served to increase the extent of such catastrophes.
In the past, the design strategy for risk control for a natural disaster has been determined
based on the loss exceeding probability (EP) and the aggregate exceeding probability
(AEP) curve, calculated in accordance with economic effects related to disaster prevention.
The value of decreased risk in expected annual damage (annual benefit) is calculated using
the EP and AEP curves, then compared with the costs necessary for risk control for
analysis with respect to its economic effects. Generally, the earthquake loss assessment
procedure can be described by the diagram shown in Fig. 1. In this section, we focus on
how to assess damage caused to buildings due to ground shaking and the losses incurred,
including both direct and indirect loss. Our earthquake loss assessment procedure only
covers the red dashed line-framed area. The earthquake loss assessment and management
model is comprised of four main components: (1) a stochastic earthquake event generator,
which uses a collection of relevant inventory and analysis parameters for the development
of seismic damage assessment and loss estimation; (2) a hazard analysis procedure that can
be utilized to assess the intensity of ground shaking and maximum surface acceleration (the
attenuation function is dependent upon Taiwans soil conditions); (3) a vulnerability
analysis procedure that can compute the probability of different types of damage to
structures; (4) a financial analysis procedure for calculating losses, including both direct
and indirect economic loss. This model can also provide the loss exceeding probability
curve and dynamic financial analysis results. Figure 2 shows a diagram of the earthquake
loss assessment methodology, which illustrates the whole procedure. The primary components are discussed in detail in the following sections.

2 Stochastic earthquake event generator


A representative earthquake event set is an important component of any event-based
earthquake model. To compile this set, data on the historical distribution of the epicenters
of earthquakes that occurred in Taiwan between 1900 and 2004 were collected from
Taiwans Central Weather Bureau. This includes 43 seismic zones, 21 shallow seismic
sources, 7 deep seismic sources, and 15 subduction zone seismic sources (Cheng 2002).
There are also 42 active faults in the event generator (Taiwan Central Geological Survey,
MOEA 2000). The rate of occurrence of different magnitude events is estimated based on

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Fig. 1 Risk management cycle

the GutenbergRichter (exponential) frequencymagnitude relationship. The earthquake


occurrence rate is then modeled using the Poisson model (Fig. 3). There are 18,852
hypothetical earthquake events distributed across all sources in the generator. The
parameters required for the other analysis procedures, such as the location, depth, magnitude, occurrence rate, and rupture direction for each event, are included.

3 Hazard analysis procedure


The purpose of the hazard analysis procedure is to assess the intensity of ground shaking
for each simulated earthquake event, as described in the following diagram. The peak
ground acceleration (PGA) or spectral acceleration for a specific building location is
calculated. The hazard analysis procedure uses Lohs (2000) method to calculate the
attenuation for all crustal sources and Young et al.s (1997) for subduction sources. A
flowchart of the hazard analysis procedure is shown in Fig. 4. For the site effect, we also

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Fig. 2 Earthquake loss assessment methodology diagram (Hsu et al. 2011)

Fig. 3 Seismic zones (College of Earth Sciences, National Central University)

need to consider the soil classifications, whether rock, weak rock/dense soil, stiff soil, or
soft soil. A soil classification map is inferred from an analysis of records from Taiwan
Central Weather Bureau Free-field Strong-Motion Stations and a geological map from the
Taiwan Central Geological Survey, Ministry of Economic Affairs.
Geotechnical data is derived from geological maps published by the Taiwan Ministry of
Economic Affairs having 1:50,000 and 1:250,000 resolutions.

4 Vulnerability analysis procedure


Based on the results of the hazard analysis procedure, we can obtain the demand curve.
Then, using the Capacity Spectrum Method described in the diagram on the right, a specific

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Fig. 4 Hazard analysis flowchart (Hsu et al. 2011)

group (Sd, Sa) can be determined. Finally, we can obtain the probability of damage for
each building. To calculate the mean damage ratio and relative coefficient of variation to
buildings, contents, and the resulting loss of use, the following factors are considered:
construction class; occupancy class; year of construction; number of stories; and seismic
codes.

5 Financial analysis procedure


Before beginning the financial analysis, we must build an event loss table using the
procedures described above. Figures 5 and 6 show a flowchart of the procedure for creating
the event loss table, including event identification, annual mean rate, and mean loss for
each event. Using the above modules, the modeler can construct an annual exceeding
probability curve, which relates probability to the size of loss, and allows for the evaluation
of an insurance and reinsurance program.
According to the event loss table, the aggregate/occurrence of loss exceeding probability curves can be created as shown in Fig. 6.
The direct and indirect economic losses caused by the simulated earthquakes can be
estimated using the financial analysis procedure. Damage to assets is converted to monetary losses based on the ratio of repair/rebuilding cost. However, depending on the terms
of the policy, the loss can be shared by more than one party. This part of the modeling must
reflect the specifications of a policy or treaty. This is included as an integral part of the
overall modeling approach because of the intimate interaction between the insurance
structure and damage to the physical buildings or assets.
After the losses for all locations in a portfolio are calculated, the financial module
allocates these losses to the different participants, i.e., insured, insurer, and re-insurer
through various insurance and treaty structures. As there are many sources of uncertainty in
modeling (from attenuation, vulnerability, and incompleteness of data), the actual degree
of loss at a given location is treated as a random variable.

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Portfolio

Policy conditions
Deductible, Limit

18,852
hypothetical
earthquake
events

Fig. 5 Construction of the event loss table (Guy carpenter & company 2002)

Fig. 6 Construction of the aggregate/occurrence of loss exceeding the probability curve (Guy carpenter &
company 2002)

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Fig. 7 Exceeding probability


curve

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Aggregate Exceedance Probability

Nat Hazards (2012) 60:10551063

10%

8%

6%

4%

2%

0%
0

500,000

1,000,000

1,500,000

Loss (NT$ millions)


Ground-Up Loss AEP

Gross Loss AEP

Based on the event loss table, the aggregate/occurrence of loss exceeding probability
curves can be created as in Fig. 7. The curve shows the probability that loss exceed the
desired amount.
There are several scenario generators for projecting liabilities; for example, catastrophe
(CAT) modeling firms (e.g., AIR, Dames and Moore, EQE, RMS, and Tillinghast) estimate
catastrophic risks for losses incurred by earthquake and hurricane events. Monte Carlo
simulation techniques can then be derived from these estimates. The number of scenarios
must be large due to the rarity of the worst CAT events. Over 10,000 scenarios are required
for most studies.
Loss ratios for non-CAT lines of business are also modeled in the scenario generators.
In many cases, there is adequate historical data regarding the losses for estimates to be
calculated in a reliable fashion. The choice of timespan for measuring risk is arbitrary, with
the aim of capturing full cycles of risk.
We have created a dynamic financial analysis tool (DFA) that represents an enhanced
approach to the traditional planning function. It provides a far more effective tool for
forecasting future financial and operating conditions and information necessary to a risk
manager, than previous methods. There are two primary reasons: first, the interactions
between the underwriting and investment sides of the insurance business are formally
integrated. Second, this approach utilizes advances in computer technology and modeling
techniques to provide almost instantaneous feedback to decision makers, allowing for the
evaluation of numerous operating alternatives.
The specific innovations for planning processes that incorporate DFA modeling are as
follows (Fig. 8):
1. DFA provides a probability distribution of likely outcomes, rather than a single
expected value forecast.
2. DFA incorporates the correlations among different lines of business, between loss of
reserve adequacy and rate adequacy, and between the investment and underwriting
sides of insurance operations.
3. DFA models can be run utilizing the technology of personal computers and commonly
available software. Users can thus run the models many times under different
assumptions and different parameters in order to determine the effects that the changes
in the model or in operations can have on the results.

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Investment
Generator

Interest(CIR)
Generator

Catastrophe
Generator

Underwriting
Generator

Investment
Cash Flow

Underwriting
Cash Flow

Balance sheet Provider

Fig. 8 Dynamic financial analysis framework

6 Conclusions
Risk and uncertainty are inherent in each step of a planned project. In conducting a
planning study, the planner must recognize the issues of risk and uncertainty and provide
provisions for addressing them prior to initiating the study. Potential problems in each step
are described and specific suggestions made concerning how to address risk and
uncertainty.
The direct and indirect losses caused by the simulated disasters can be estimated using
the engineering and financial analysis model. Based on this model, we can generate an
exceeding probability (EP) curve. With risk control information and assumption, we can
then calculate how much loss will be ceased, eliminated or transferred to other entities, as
somehow spending budgets on risk control actions when funds allocated to risk control.
Optimal natural disasters risk control arrangement with probabilistic formulation is
explained in this chapter. Results from the proposed formulations are compared in case
studies. The model attempts to apply risk-based budget guidelines to risk reduction
measurement within a portfolio-based risk framework.

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