Japan earthquake risk has increased since Tohoku quake

The risk of Japan suffering another major earthquake has increased since the M9.0 Tohoku quake of March 2011 according to research from risk modeller AIR Worldwide. In a report published yesterday AIR discuss the way the energy released by the massive quake last year has put stress on other areas of fault lines throughout the country changing the risk of earthquakes in many areas. Some area have seen stress released from their faults and so earthquake risk lessen, while others including Tokyo have increased.

The Japanese seismic landscape has changed significantly since the M9.0 event last year. AIR staff conducted a detailed analysis of whether and where the stresses relieved by the Tohoku earthquake have been transferred to other neighbouring faults under and around Japan.

Some areas close to where last years quake occurred have seen significant reductions in stress levels according to the report  and as a result are less likely to see a major quake, however other areas further from the epicentre of Tohoku have seen increases in stress levels on faults and as a result increased probability of major quakes.

Worryingly one area that AIR Worldwide highlight as having an increased risk of major quakes is the Tokyo region. The Kanto Plain which runs beneath the Tokyo region has, according to AIR’s analysis, seen a large increase in stress levels. AIR says this could result in an increase in the 30 year probability of a M6.7 or greater quake in the Kanto Plain region could have increased from 72% to between 81% and 93%. Similar increases in probability were seen in some of the fault zones in the ocean to the south of Tokyo region too. Maps showing the location of all increases are available in the report.

The changes and increases in the probability of major earthquakes has led AIR to publish some changes to their modeled industry loss estimates for earthquakes in japan. This is particularly of interest to Japan earthquake catastrophe bond investors as it may suggest which way the next version of the AIR earthquake model will go (along with risk models from other firms). Increases in modeled industry losses at certain return periods would translate into a riskier view on some existing Japan quake cat bonds which could in turn lead to rating changes as we saw with the new RMS hurricane model.

AIR Worldwide’s report says; “The insurable, or ground up, industry losses for all of Japan increased on an average of about 15% for return periods between 1 and 30 years; and about 2% for return periods between 100 to 250 years. Using the upper bound alone, the maximum change in ground up losses for return periods up to 30 years is about 25%.”

AIR point out that the increase in modeled insured losses for these return periods should not be taken as an indication of the next version of their Japan quake model, due in 2013, however the industry will be looking at them closely. AIR say it’s also worth noting that these are industry wide estimates and any particular portfolio may deviate significantly from industry results. It will be interesting to see if the other modelling firms come out with similar results and increases.

So, judging from AIR’s assessment Japan is at a higher risk of earthquakes, particularly in some of the most densely populated regions, and this translates into a higher expected loss at certain return periods. Should Japan quake cat bond investors be worried? Not if they have been actively looking using risk models to assess the riskiness of their portfolio of bonds and ensuring that they are well diversified. They should however be aware of the potential increase in losses at certain return periods and bear that in mind when making investment decisions.

Access the full report from AIR Worldwide here.