Earthquake cover for a US state government entity
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Background: A US state government entity with sizable property holdings across a wide area, is exposed to earthquake risk. It had previously not insured for this peril because the available limits did not come close to covering the exposure and the cost of a full traditional programme was prohibitive. To be eligible for post-event disaster assistance under the Federal Emergency Management Agency (FEMA), however, new regulations require a minimum amount of own insurance cover.
Protection buyer objectives: The primary objective for the buyer was to have sufficient post-event liquidity to manage the initial cash flow needs after a damaging shake, such as for emergency evacuations and to facilitate access for repair contractors. A second motivation was the new FEMA requirements, which incentivised public entities to purchase some degree of earthquake protection.
Risk-transfer solution: The entity purchased a multi-year parametric cover for earthquake events of minimum magnitude, the latter based on the US Geological Survey (USGS) ShakeMap grid for defined zip codes. The pay-out amount varies depending on the shake intensity level by zip code, which reduces the basis risk.
Benefits: The parametric cover provides quick access to emergency liquidity – within 30 days following a damaging earthquake – and also creates the minimum threshold to gain access to post-disaster FEMA funds.
In our newest sigma 05/17 "Commercial Insurance: innovating to expand the scope of insurability" you can read more examples of innovative insurance solutions we have developed to protect our clients from earnings and cash flow risks.
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