The Value of Seismic Sensor-Based Parametric Insurance Coverage for Earthquakes 

 

Ask any public entity risk manager in California about earthquake capacity, and you will receive the same answer: capacity is dwindling while costs are increasing. Given this, it is no surprise that underinsurance for the earthquake peril is an incessant challenge, leaving public entities and other owners of real estate significantly financially exposed.  

 

While the capacity for traditional earthquake insurance has been shrinking for nearly a decade, the demand for earthquake insurance has increased at a feverish pace due to:

• Continued growth in earthquake zones.
• The dramatic increase in construction costs from the pandemic, pushing replacement costs higher even when no new construction is built.

Incessant demand and shrinking supply have led to continuous upward price pressure. Further, risk analysis and modeling tools are improving every year, allowing both public entities and their insurers to better understand the seismic risks that are faced within their real estate portfolios. This has sharpened the difference between what would be viewed as an acceptable level and the cost of risk between them.  

 

Because of the challenges affecting the earthquake insurance market, earthquake insurers, brokers and risk managers have been forced to think outside of the box for ways to implement alternative risk financing solutions.

 

The Answer: Seismic Sensor-Based Parametric Insurance Coverage

While parametric earthquake insurance has been available for the past decade, carriers today are partnering with new technology service providers to refine their offerings.  

 

What is a Parametric Program?

A parametric insurance solution is a policy that provides limits of coverage based on the occurrence of a predefined triggering event. In the case of parametric earthquake coverage, this is defined as shaking intensity. This approach is in stark contrast to traditional insurance programs that rely on the assessment and calculation of actual property damage and business interruption resulting from an earthquake event. With respect to earthquakes, the triggering event is ground motion, rather than the actual physical loss to property or profit. Buyers and sellers are becoming increasingly comfortable with this approach as physical damage is strongly correlated with ground motion.

 

Parametric insurance programs have been in place for hundreds of years. In 1817, the Hamburger General-Feur-Kasse (Hamburg Fire Office) was the first insurance company to offer a supplement for a fire loss to cover the loss of revenue from rent. Property owners did not have to necessarily prove rental loss, as the Fire Office understood that rental loss is strongly correlated with fire.

 

According to a study on The History of Business Interruption Insurance, industry risk managers in the 1800s knew that insuring the physical assets of a business or public entity was not enough coverage to keep them in operation.  Because of this, they wrote that it would require a supplemental coverage capacity “To fully protect a business from significant losses, often financial ruin following a fire, storm, lightning, hurricane, tornado, tsunami, or the myriad of other perils covered by insurance.” Much like a parametric policy, early business interruption claims were made based on the trigger event of a fire, flood or hurricane, regardless of the damage caused. The event itself was the trigger for the coverage.

 

The Future of Seismic Parametric Programs

Seismic sensors have been continuously advancing for several decades as engineers and geologists study plate tectonics. At the forefront of this change, SafeHub, a technology company, offers a revolutionary state-of-the-art sensor that can be easily installed at buildings to:

• Continuously monitor for seismic activity.
• Measure and record the Peak Ground Acceleration (PGA) in an earthquake event.
• Immediately transmit shake data to risk managers, insurance carriers, brokers and first responders in real-time.

Further, insurance carriers now consider the SafeHub seismic sensor reliable to utilize for parametric insurance programs. SafeHub’s easy-to-install, smartphone-sized seismic sensors provide an advanced way to manage earthquake risk by combining the latest parametric and technological developments.

 

Recently, Alliant has brokered parametric programs for clients utilizing SafeHub’s advanced seismic sensor technology throughout multiple large entities in California. Sensors are placed strategically within the building to measure site specific ground movement, specifically P PGA. When an earthquake occurs, the shaking data is collected and combined with a pre-defined damage table to trigger an immediate payout. No deductible is associated with coverage, and in many cases, these parametric insurance policies are paid out in a matter of hours or days, as opposed to traditional insurance program payouts requiring weeks or sometimes months.

 

In addition, traditional earthquake insurance requires assessment of the damage to the property as well as the cooperation of adjusters, operators and insurance personnel to assess the damage. Along with that, risk managers have to also navigate large deductibles, lower-than-required limits as well as a lengthy claims process.

 

Another great benefit of Alliant’s parametric program is the flexibility of which your payout can be used  Rather than being required to repair the specifically damaged property or business interruption, insureds are free to utilize the payout for any expense associated with that triggering event. Payouts from the triggered event can be utilized as a deductible buy-down to supplement coverage in a traditional program or pay for:

• Emergency response and relief efforts
• Supply chain disruption
• Loss mitigation
• Contract penalties
• Any expenses used to minimize the financial impact to your organization, staff or citizens from the earthquake.

 

Most of these expenses are not insurable under a traditional program, especially once they evolve away from repairing direct physical damage to property.

 

The technology used to monitor and report the PGA can also be an extremely effective risk management tool. The measured shake intensity is delivered to applicable personnel through on online dashboard within minutes and includes all building sensors affected and the intensity. This information can be used to prioritize the response for buildings with damage potential based on the PGA. Because the intensity of the shaking is reported in real time, risk managers and on site first responders can utilize the data to pinpoint specific buildings that need to be inspected for damage as well as alert them to begin any emergency response efforts post event. Alliant clients have also reportedly planned to use the payout from the earthquake to immediately implement loss prevention measures and ensure the safety and well-being of the people within their facilities. 

 

Call to Action for Public Entity Risk Managers

• Risk Assessment: First, work with your Alliant broker to assess your current risks and the coverages you have versus the coverages you need. Knowing that capacity for California earthquakes has been steadily receding for years, periodic risk assessments are needed to ensure you have enough coverage and the ability to minimize the impact. Viewing both traditional and parametric insurance simultaneously is your best opportunity to ensure your organization is protected.
• Improve Data Quality: The quality of the data proposed to insurance carriers is pivotal in retaining favorable terms and conditions. This data includes building construction and critical seismic conditions such as the existence of soft stories, adherence to building codes that change over time, automatic sprinkler protection sway bracing, flexible couplings and seismic safety shutoff valves for natural gas lines. If the underwriter is unaware of your specific data, then modeling programs are designed to assume the worst-case scenario, and the policy will reflect the uncertainty with constricted coverage. 
• Mitigate Exposures: It's important to work with brokers who are fully aware of these hazards as well as the mitigation strategies that will protect your facilities from a catastrophic loss and how to prioritize them. At Alliant, we dedicate our time to ensuring that our clients have a thorough understanding of the exposures faced by their organization regarding a major seismic event. The implementation of any property loss prevention strategy must start with a prioritized and streamlined plan of action to reduce exposure.
• Review and Implement a Parametric Program: The procurement and implementation of a parametric insurance program for seismic coverage may be the opportunity to fill coverage gaps after the completion of a thorough and collaborated risk assessment of:
  • The earthquake coverage needs of your entity.
  • The risk appetite of your organization.
  • Your budgetary constraints.

 

Reach out to your Alliant broker today and review the options that could be leveraged to protect the infrastructure, livelihood and harmony of your organization.