Nat Hazards (2013) 65:15591571

DOI 10.1007/s11069-012-0425-9

ORIGINAL PAPER

A probabilistic approach for earthquake risk assessment

based on an engineering insurance portfolio

Wen-Ko Hsu Wei-Ling Chiang Qiang Xue Dung-Mou Hung

Pei-Chun Huang Cheng-Wu Chen Chung-Hung Tsai

Received: 23 August 2012 / Accepted: 22 September 2012 / Published online: 16 October 2012
Springer Science+Business Media Dordrecht 2012

Abstract This paper presents the construction classification of the existing engineering
covers in Taiwan. The exposure profile and variable vulnerability during different con-
struction phases are established for some kinds of classes of construction. Finally, we
present a method and framework to estimate the probable maximum loss of engineering
insurance portfolio during an earthquake with consideration of the dynamic nature of
structural changes and exposure values during a construction project.

Keywords Probable maximum loss  Engineering insurance  Vulnerability  Exposure

1 Introduction

The unique geographical environment of Taiwan comprises a variety of unique beautiful

landscapes, changeable climate and numerous precious natural tourist resources. However,
the special geographical location is also the main reason for the frequent occurrence of

W.-K. Hsu  D.-M. Hung

Research Center for Hazard Mitigation and Prevention, National Central University,
Jhung-li, Taoyuan, Taiwan, ROC

W.-L. Chiang  P.-C. Huang

Department of Civil Engineering, National Central University, Jhung-li, Taoyuan, Taiwan, ROC

Q. Xue
Civil and Hydraulic Engineering Research Center, Sinotech Engineering Consultants, Inc.,
Taipei, Taiwan

C.-W. Chen (&)

Institute of Maritime Information and Technology, National Kaohsiung Marine University,
Kaohsiung 80543, Taiwan
e-mail: chengwu@mail.nkmu.edu.tw

C.-H. Tsai
Department of Leisure Business Management, National Pingtung Institute of Commerce,
Pingtung, Taiwan

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1560 Nat Hazards (2013) 65:15591571

natural disasters. Recently, Taiwans government has actively promoted various plans to
increase visitor numbers and encourage citizens to boost the tourism industry. To make full
use of natural resources, tourism investors often choose to build hotels and tourist facilities
in beautiful scenic spots, such as in mountainous and coastal areas. However, because of
frequent natural disasters in Taiwan, in addition to the disaster-prone characteristics such
as highly crowded hotels and large numbers of tourists during holiday periods, Taiwans
hospitality industry is plagued by an extremely high risk of natural disasters (Tsai and
Chen 2010). Natural disaster hot spotsa global risk analysis, a paper issued by the World
Bank in 2005 (World Bank 2005)warn that over 90 % of the land area and population in
Taiwan are simultaneously exposed to the threat more than two natural disasters, making it
top ranked in the world for this type of danger (Table 1). From this description, it is
obvious that functioning of the hospitality industry in Taiwan is characterized by extremely
high risk of natural disasters.
Even with the fast development of tourism, the surge in the numbers of tourists and the
urgent demand for natural environmental resources, many hotels in Taiwan will experience
major losses due to natural disasters each year. Even worse, these accidents are not only
occurring ever more frequently year by year, but also have the tendency of turning into
major disasters. On September 21, 1999, an earthquake with a magnitude of 7.3 on the
Richter scale caused the collapse and damage of 86 hotels in Taiwan, leading to a great loss
equivalent to 3.3 % of the GDP for the year. The earthquake which occurred on March 11,
2010 (magnitude 9.0), in Japan caused direct losses of nearly 300 billion US dollars at the
time and is still seriously affecting the economic development of tourism in Japan.
In Taiwan, there is a total of six billion NT dollars worth of underwritten engineering
insurance premiums per year, about a quarter of that for underwritten commercial fire
insurance premiums. Most of the insurance policies are multi-year covers. It can provide
protection if earthquakes occur during the construction phase. The aggregate liabilities
could reach a hundred-billion NT dollars, although this would transfer to the overseas
insurance market. If a major earthquake occurs, it would have tremendous impact on the
property insurance industry in Taiwan. The ChiChi Earthquake in 1999 caused around 3.3
billion NT dollars loss of engineering insurance in Taiwan as shown in Table 2.

Table 1 Percentage of land

Country Percentage Percentage
and population simulta-
of total area of population
neously exposed to risk of
at risk in areas at risk
more than two types of natu-
ral disasters
Taiwan 90.2 95.1
El Salvador 51.7 77.7
Costa Rica 38.2 77.1
Philippines 45.6 72.6
Dominica 70.8 71.1
Antigua and Barbuda 46.2 69.5
Guatemala 28.8 69.5
Japan 23.2 69.4
Dominican Rep. 33.7 66.0
Jamaica 40.5 58.8
Data sources The World Nicaragua 4.4 42.7
Bank & Columbia University Indonesia 4.4 40.1
(2005)

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Nat Hazards (2013) 65:15591571 1561

Table 2 Chi-Chi earthquake

Policy type # of claim Claim amount (NT$)
insurance loss in 1999
Industrial/commercial fire risks 1,549 21,446,846,000
Residential fire all risks 380 39,832,629
Commercial fire all risks 1,096 108,248,649
Car risks 4 5,239,670
Engineering risks 991 3,269,182,000
Commercial goods risk 14 16,287,727

The targets of fire property insurance are existing properties and are invariable in terms
of the exposure and vulnerability during the period of insurance. However, most engi-
neering insurance policies, for example, construction all risk (CAR) or erection all risk
(EAR) policies, possess the dynamic feature of structural changes and changes in exposure
values during a construction project; standard catastrophe risk models are not adequate for
quantifying risk to this kind of property insurance. The existing commercial catastrophe
risk models assume a completed structure, and the vulnerability is invariable. This is not
the case in construction risk because the risk of damage varies in each phase of the
construction and may be more or less susceptible to damage than upon completion. In
general, a construction project will pass through several distinct phases, such as founda-
tion, construction, fit-out, testing and handover. Each phase should have its own dynamic
exposure profile and different vulnerability characteristics.
Taiwan is located in the Pacific Ocean earthquake zone at the boundary between the
Eurasian Plate and Philippine plates. There are more than 200 detectable earthquakes every
year in Taiwan. The average annual loss due to 83 disastrous earthquakes since 1900 has
been about NT$19 billion dollars which equals to 0.7 % of the GDP. Earthquake risk, a
long-time concern in Taiwan, is increasingly being recognized as a concern in the insur-
ance industry and government.
The existing commercial catastrophe risk models assume a completed structure and a
vulnerability that is invariable, but this is not the case in construction risk, as the sus-
ceptibility to damage differs in each phase of the construction and may be more or less
susceptible to damage than upon completion. In general, the construction project will pass
through several distinct phases, such as foundation, construction, fit-out, testing and
handover. Each phase should have its own dynamic exposure profile and different vul-
nerability characteristics (Mike 2007).
An increasing number of novel methodologies have been proposed to overcome the
problems of hazard risk analysis and preparedness (see Raaijmakers et al. 2008; Haque and
Etkin 2007; Chen 2009, 2010a, b, c, d, 2011, 2012a, b, c; Hsu 2011, 2012; Lin 2012a, b, c, d;
Shih 2012; Tsai 2010, 2011a, b; Tseng 2011, 2012; Tseng et al. 2012; Yang 2012 and the
references therein). A proper enterprise risk management program can not only eliminate or
reduce the severity of unfavorable consequences, but can also reduce the amount of
financing required after an event occurs (Lauras et al. 2010). A general program includes
risk control and risk transfer measures (Zhou et al. 2010). In recent years, many artificial
intelligence models have been proposed to solve all kinds of practical engineering and
management problems (Chen 2004; Hsiao et al. 2005a, b; Chen 2006; Tseng et al. 2012).
Hsu et al. (2011) develop a probabilistic model based on historical events which can be
used to assess flood risk in Taiwan. There are four separate modules in this model,
including a rainfall event module, a hydraulic module, a vulnerability module and a

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financial loss module. Assessment is made to predict possible economic loss from different
financial perspectives such as the total loss, insured loss and loss exceeding probabilities.
The assessment results can be used as a reference for making effective flood risk man-
agement strategies in Taiwan.
Hsu et al. (2012) have reviewed formal methods that are commonly used in risk and
uncertainty analysis in planning and conclude with a critical assessment of the advantages
and disadvantages of different priority setting methods. The focus is a preliminary proposal
for developing an efficient probabilistic approach to facilitate design optimization that
involves probabilistic constraints.
In Lin (2012a), the Kalman filter model is utilized to assess the occurrence of debris
flows from computed indexes, to verify modeling errors. Comparisons are made between
two models to determine which one is better in practical applications. The efficiency of
the Kalman filter decision system has been proved, showing smaller average relative
error and correspondingly larger ratio of success on debris flow assessment when
compared to the neural network model. Lin (2012b) also uses data from Taiwans Mao-
Lo-Hsi Bridge to model the bridge structure, using the established alarm valueaction
value for the formulation of guidelines for bridge maintenance. The maximum dis-
placement for different sections of the bridge is compared, and statistical regression
analysis is used to explore the correlation. Hence, information for bridge safety
assessment is proposed, which can mitigate loss of property and lives due to bridge
failure. Furthermore, Lin (2012c) developed a fuzzy-rule-based risk assessment model
for debris flows and to verify the accuracy of risk assessment so as to help related
organizations reduce losses caused by debris flows. The database is comprised of
information from actual cases of debris flows that occurred in the Hualien area of
Taiwan from 2007 to 2008. The established models can assess the likelihood of the
occurrence of debris flows using computed indicators, verify modeling errors and make
comparisons between the existing models for practical applications. Lin (2011) uses
geographic information system (GIS) and remote sensing (RS) techniques to identify the
exact spatial locations of drought risk-sensitive areas and then quantitatively evaluate the
degree of drought risk based on this spatial information.
Tsai (2010) provides a practical mechanism for earthquake disaster risk assessment
and management for the tourism industry, focusing on insurance and prevention. This
paper integrates the relevant earth sciences, engineering and insurance data with the
concepts of disaster risk management, taking into consideration the characteristics and
sources of earthquake-related risks. Then, Tsai (2011a) explores various theories related
to different kinds of natural disaster risk analysis mechanisms, with the goal of estab-
lishing a rapid risk assessment model suited to the tourism industry that can be used to
quickly analyze disaster-forming characteristics and risk weaknesses in local regions.
Furthermore, this work incorporates an expert weighting process for assigning weightings
for natural disaster risk index assessment. This method can help tourism asset owners
prepare for the worst and be capable of responding appropriately if and when such an
event occurs. Good planning can effectively reduce the loss and risks associated with
natural disasters and allow recovery work to commence sooner. Meanwhile, Tsai (2011b)
considers the damage characteristics in relation to Taiwans hotel industry using modern
conceptualizations of risk management; the characteristics of natural catastrophe risks are
analyzed and then integrated with relevant national and international research methods,
such as fragility curve studies regarding catastrophes, flood potential analysis and so on.
In addition, a case study is carried out using data from hotels in the Hualien Area. Based
on the results, this paper presents a mechanism for typhoon and flood risk assessment

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Nat Hazards (2013) 65:15591571 1563

and management for the local hotel industry. Tseng (2011) describes a critical assess-
ment of the risk control decision model from a methodological perspective and identifies
major shortcomings with the employment of enhanced formal evaluation and decision-
making methods. Several aspects of risk and uncertainty are discussed within the context
of an economic utility-constrained maximization model with a major focus on the
importance of risk and uncertainty in research evaluation, and how the strategy deter-
mines the insurance and risk control plans. Then, Chen and Tseng (2012) described how
risk-based risk control allocation models work. For a probability model for risk control
decision making under uncertainty and risk, this paper proposes a model involving
stochastic total-loss amount constraints with respect to various tolerable default levels.
The main objective is to develop a method that will allow shaping of the risk associated
with risk control outcomes. The direct and indirect losses caused by simulated disasters
can be estimated using an engineering and financial analysis model. This model can
generate an exceeding probability (EP) curve and then calculate how much of the loss
can be eliminated or transferred to other entities should funds be allocated to risk
control. Tseng et al. (2012) construct a preliminary proposal for developing an efficient
probabilistic approach to facilitate design optimization that involves probabilistic con-
straints. The focus is on natural disaster management in an area in which direct risks are
posed by the physical effects of natural disasters such as floods, droughts, tsunamis and
rising sea levels. Yang (2012) believed that the mixed material transport phenomenon is
not systematic and simply included it in the procedures for the elaboration of hazard
analysis. The consequence is the risk of losing prediction accuracy and of underesti-
mating hazard impacts. The phenomenon of open channel junction flow such as in
irrigation ditches and at wastewater treatment facilities is an important aspect of
hydrological engineering. The results are believed to provide hints for the consideration
of the effects, induced by mixed material transport, in the elaboration of hazard analysis.
Chen (2012a) presents an extended framework for analysis of economic effects for
natural disaster risk management. It also attempts to define and evaluate the optimal
insurance arrangements. The purpose of this study is to establish a strategy for deter-
mining an insurance and risk control plan in which consideration is given to balancing
the economic effects (e.g., decrease in costs due to damage) affected by disaster miti-
gation. Furthermore, these values are compared with risk control actions for the purposes
of prioritization, to provide data to help evaluate the benefit of each risk control action.
The optimal strategies aim at determining the best applicability and balance between risk
control and insurance capability for the enterprise manager. Elicitation methods are used
in decision making with respect to risk hazards to allow a researcher to infer the sub-
jective utilities of outcomes from the observed preferences of an individual. A ques-
tionnaire method is presented by Chen (2012b), which takes into account the inevitable
distortion of preferences by random errors and minimizes the effect of such errors. Also,
Chen (2012c) presents a review of issues surrounding natural disaster risk control and
insurance in Taiwan. It proposes the use of background information concerning risk
control strategies as well as earthquake, typhoon and flood insurance in Taiwan.
This work presents the construction classification of the existing engineering covers in
Taiwan. The exposure profiles and variable vulnerability during the different construction
phases are established for some kinds of construction classes. Finally, we present a method
and framework to estimate probable maximum loss due to earthquake for an engineering
insurance portfolio with consideration of the dynamic nature of structural changes and
changes in exposure values throughout a construction project.

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2 Issues of engineering insurance covers

Property insurance for fires is targeted at existing properties so they are invariable in terms
of exposure and vulnerability throughout the period of insurance. However, most engi-
neering insurance policies, for example, construction all risk (CAR) or erection all risk
(EAR) policies, possess the dynamic features related to structural changes and different
exposure values during the period of a construction project. Standard catastrophe risk
models are not adequate for quantifying risk for this kind of property insurance. The
existing commercial catastrophe risk models assume a completed structure and that vul-
nerability is invariable, which is not the case with construction risk. Risk varies with each
phase of the construction project and may be more or less susceptible to damage than upon
completion. In general, a construction project will pass through several distinct phases,
such as foundation, construction, fit-out, testing and handover. Each phase will have its
own dynamic exposure profile and different vulnerability characteristics.

3 Construction classifications

The purpose of the construction classifications is to classify construction projects which

have similar catastrophe damage characteristics and behaviors. Based on the classification,
we can build vulnerability data for different construction classifications for catastrophe risk
assessment. If the classifications are too many, it will be difficult to establish the vulner-
ability curve. On the other hand, if the classifications are not enough, the analysis results
will be unrepresentative. Therefore, how to select a suitable classification is important for
catastrophe risk assessment (RMS 2007 and Shinozuka et al. 2000).
At present, the classifications of the construction all risk (CAR) have 61 items in
Taiwan. In this research, we reclassify by the type of construction, materials and structural
system (refer to FEMA (1997), ATC-13 (1985), Hsu (2000)). The new engineering con-
struction classifications have eight items and 38 subitems as shown in Table 3.

4 Construction phase and aggregate exposure

The definition of construction phases is used to calculate the structure damage, which
refers to vulnerability curve for each phase. For introducing the definition of construction
phases, we use the example of a benchmark building project provided by the Public
Construction Commission in Taiwan. The four phases can be defined as the following and
shown in Fig. 1:
1. Phase 1: The geotechnical construction is finished. In this phase, the main structure is
under foundation construction. The seismic vulnerability of this phase should be
smaller than other phases. The average aggregated exposure reaches 10 %.
2. Phase 2: The main structure has been half completed. The strength of the main
structure may be not enough. In this phase, the seismic vulnerability of this phase
should be greater than other phases. The average aggregated exposure reaches 35 %.
3. Phase 3: The main structure is completed. But decorations or water and electricity
construction are not finished yet. In the meantime, the seismic vulnerability of this
phase should be considered the same as the completed structure. The average
aggregated exposure reaches 70 %.

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Table 3 New engineering construction classifications

Item Material type Code Subitem description

Building Concrete RC1 Concrete moment frame

RC2 Concrete frame with unreinforced masonry infill walls
RC3 Concrete shear walls
RC4 Concrete shear (box)walls
Steel S1 Steel moment frame
S2 Steel braced frame
S3 Steel eccentrically braced frame
S4 Steel frame with concrete shear walls
S5 Steel frame with unreinforced masonry infill walls
S6 Steel light frame
SRC SRC1 Steel-reinforced concrete frame
SRC2 Steel-reinforced concrete frame with shear walls
Masonry M1 Masonry
Wood W1 Wood
Road Asphalt HRD1 Urban road
Concrete HRD2 Urban road
Asphalt HRD3 Highway
Concrete HRD4 Highway
Concrete HRD5 Railroad/rail
Bridge Concrete BRC1 Concrete bridgesingle beam
BRC2 Concrete bridgecontinuous beam
BRC3 Concrete bridgebox girder
Prestressed concrete BPC1 Prestressed concrete bridgesingle beam
BPC2 Prestressed concrete bridgecontinuous beam
BPC3 Prestressed concrete bridgebox girder
Steel BST1 Steel bridgebox girder
BST2 Steel bridgegirder
BST3 Steel bridgeframe
BST4 Steel bridgeprestressed
BST5 Steel bridgehuge bridge
Tunnel Concrete TU1 Cut and cover tunnel
TU2 Bored/drilled tunnel
Pipe Concrete P1 Pipe construction
Dam Concrete D1 Dam construction
Tower Concrete HT1 General tower construction
Steel HT2 High tower, power tower
Other OT1 Other construction

4. Phase 4: All construction is done. The seismic vulnerability of this phase should be
considered to complete structure. The aggregated exposure is to 100 %.
In Taiwan, insurance companies consider aggregated exposure according to linear
interpolation. This method cannot describe the variation very well under the process of the
projects. Therefore, we use the S-curve method to describe the variation of aggregated

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Fig. 1 Example of different construction phases and aggregated exposure

Fig. 2 Three S-curves of construction projects

exposure. A good S-curve can describe the relation between budget and time for a con-
struction project. Each construction project has its S-curve. It varies with work time,
location and construction method (Huang 2008). We also build three S-curves of bench-
mark construction projects provided by the Public Construction Commission in Taiwan. It
can be shown in Fig. 2.

5 Variable vulnerability during different construction phases

According to Sinozukas research in 2000, the vulnerability curve of a building could be

created by four methods such as (1) defined by experts, (2) analyzed using statistics and
design code, (3) numerical simulation in theory-dynamic numerical simulation based on
seismic response spectrum and (4) historical damage records. Among the above methods,
the forth method can describe the real damage condition better than others. Unfortunately,

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Acceleration

Time (sec)

Sa Floor
5

3
Max
2

Period (sec) 1
Story Drift Ratio
0
0 0.1 0.2 0.3 0.4

Max Story Drift Ratio Damage Ratio

0.06 100%
Normalized
80% Mean
0.045 Mean + STDV
60% Mean - STDV
0.03
40%
0.015
20%

0 Sa(g) 0% Sa(g)
0 1 2 3 0.0 0.6 1.2 1.8 2.4 3.0

Fig. 3 Procedure of building the vulnerability curve

it has been difficult to collect the real damage data in Taiwan especially for the targets of
engineering insurance.
Therefore, this research uses the third method to build the vulnerability curve for each
phase in a construction project. The analysis process can be described as in Fig. 3. First of
all, we select some representative acceleration records on the ChiChi and 331 earthquakes
in Taiwan. Then, using the sap 2000 software to perform the nonlinear dynamic time
history analysis, we obtain the response spectrum for each earthquake record. According to
spectrum acceleration value for the first mode of the building, we normalize each seismic
acceleration record and calculate the maximum story drift ratio. Finally, we can create the
vulnerability curve by calculating the probability of the damage state of the building using
the maximum story drift ratio.

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6 Framework for estimation of earthquake loss for an engineering insurance

portfolio

Our existing property earthquake loss model has four separate modules, the first being the
stochastic earthquake event generator. This module will generate a series of all possible
earthquakes in and around the island of Taiwan. The second module is the Hazard module.
This module will assess the intensity of ground shaking at any given location for any given
event. The third module is the vulnerability module. The vulnerability module will assess
possible structural and content damage with regard to the intensity of a predicted event at a
location. The final module is the financial module. This module will assess possible
economic loss according to different financial perspectives (i.e., total loss or insured loss).
The engineering earthquake loss model is built using the same framework as the existing
property earthquake loss model. Only the vulnerability module has some different processes.
As mentioned in the above section, an engineering portfolio should contain various con-
struction projects. Each project will be in a different construction phase at the specific
assessment time. For this reason, the framework of engineering earthquake risk assessment
should estimate the loss for each project in its construction phase. The framework, as shown in
Fig. 4, integrates the exposure analysis, hazard analysis, vulnerability analysis and financial
analysis. As can be seen in Fig. 3, the S-curve can be used to determine the exposed value
during the exposure analysis for each policy. The model uses the vulnerability curve for the
phase to determine the damage ratio by analyzing the shaking intensity from hazard analysis.
Finally, the earthquake event loss can be calculated using Eq. (1):
X
N
EventLoss = MinMaxEVi0 Dri  Dedi ; 0; Limiti  Dedi 1
i1

7 Results of analysis of the example portfolio

Because of concerns with commercial confidentiality, the exposure values are altered to
build a hypothetical example portfolio in this paper. We discuss two case studies. The one

Analysis Point
Exposure Analysis
Vulnerability Analysis Hazard Analysis
Damage Ratio %

Policy 001 Phase 2 EV1 Dr1 Phase 2

Intensity

I1
Phase 3
Damage Ratio %

Phase 3

EV2 Dr2
Policy 002
Intensity

I2
Damage Ratio %

Phase 1 Phase 2

Policy EV3 Dr3

Intensity

Phase 4 I3
%
Damage Ratio

Policy N EVN DrN Phase 4

Intensity

IN

2007 2008 2009 2010

Fig. 4 Framework to estimating engineering portfolio earthquake loss

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Nat Hazards (2013) 65:15591571 1569

5.0%

Event Loss /Total sum insured %

4.5%

4.0%

3.5%

3.0%

2.5% Case A
2.0% Case B
1.5%

1.0%

0.5%

0.0%
0 100 200 300 400 500 600 700 800 900 1000
Return Period (yr)

Fig. 5 EP curve analysis results for the case study

named Case A is analyzed using the existing property earthquake loss model. The other,
Case B, is analyzed using our new engineering earthquake loss model. The differences
between the two case studies are consideration of the construction phase and vulnerability
curves. In Case A, the construction phase of all policies is assigned to phase 4 which means
the building is complete. On the other hand, all policies in Case B consider the real
construction phase. The established engineering earthquake risk model is used to assess the
earthquake risk of the sample portfolio. The loss exceeding probability curves are shown in
Fig. 5. The loss exceeding probability curves are shown in the form of loss ratio versus
return period. The loss ratio is 3.5 % in case A and greater than 2.65 % in case B for an
event loss of 500 return periods.

8 Conclusions

In the past, earthquake loss for an engineering portfolio was often overestimated or
underestimated due to the consideration of the construction phases and changes in the
exposure value. A framework for estimating engineering portfolio earthquake loss is
created in this paper and used to modify the existed property earthquake loss model. The
new engineering earthquake loss model can estimate the engineering policies on different
construction phases at a specific time. So far, we have established the vulnerability curves
for different building construction periods. There is a lot of work that needs to be done to
find the vulnerability curves for other construction periods as shown in Table 3.
As a consequence of the concern for uncertainty in engineering models, the earthquake
loss assessment model can provide more information than the traditional method. For
example, the loss exceeding probability curve can help policymaker to determine the
earthquake protection capacity according to their tolerance of risk. On the other hand, the
traditional method only can give us a single value for the possible maximum loss after an
earthquake disaster.

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Acknowledgments The authors would like to thank the SINOTECH Engineering Consultants. INC and
National Science Council of the Republic of China, Taiwan, for their financial support of this research under
Contract Nos. 100-2221-E-022-013-MY2 and 100-2628-E-022-002-MY2.

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