Financial instruments integrated with engineering risk assessment for earthquake disaster reduction

Financial instruments for earthquake disaster reduction are dealt with in this paper. In general, there are two kinds of instruments to reduce earthquake disaster, one is engineering mitigation measures and the other is referred to as non-engineering countermeasures. The former contributed a lot in disaster prevention for many years, and the latter has been emphasized in these years as the economic structure in urban areas is getting more and more complicated. The financial instruments, e.g. earthquake insurance and catastrophe bonds (cat bonds), are adopted to disperse the risk. The main point of earthquake insurance is to set the rate rationally and correctly. A seismic risk assessment based method of setting the rate for earthquake property and personal insurances with two kinds of deductibles is presented in detail in this paper. Cat bonds have been one of the most active catastrophe insurance derivatives nowadays to supply catastrophe insurance. Since the middle of the 1990s, some insurers have become insolvent or on the edge of insolvency from catastrophes. A framework of setting the annual coupon rate for earthquake cat bonds is also built, in which the probability of earthquake catastrophe occurrence from seismic risk assessment, the yields of reinvestment, the principal protected ratio and the issuance fee ratio are designed as the four factors. Finally, some further ideas to improve the integration of the financial instruments with the engineering seismic risk assessment are discussed briefly.