BY MICHAEL KORN
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In high-hazard earthquake zones such as California, Japan, China, Australia and others, earthquake insurance
is both tightly underwritten and high-priced. The decision to buy or not to
buy coverage can be a dif;cult one.
Speci;c approaches include:
• Buy as much as possible:
Some ;rms consider the probability
and severity of a seismic event to be
so potentially devastating to their
livelihood that they purchase as much
coverage as possible, be it from the
traditional earthquake insurance
market and/or from the growing
capital market via Insurance Linked
Securities – such as Cat Bonds and the
evolving Parametric Trigger products.
• Set a budget and buy to that:
Some ;rms set a speci;c premium
budget and stick to it. $500,000 may
buy $50 million of coverage for a
speci;c risk in a soft market, but only
$30 million in a hard-market.
• Buy to the modeled PML:
Models are utilized by buyers, brokers,
insurers, reinsurers, banks and rating
agencies. They factor in characteristics
such as fault location, release of energy,
soil type, building height, construction
type, and local codes to estimate the
Probable Maximum Loss (PML) for an
entire portfolio, as well as (though less
statistically accurate) a single location.
These models represent the best
technological estimate of the probability
and potential damage of seismic events.
• Only buy what’s required per
leases: A number of ;rms only purchase
earthquake insurance where they
are required to per lease agreements
containing such stipulations. Lease
requirements can vary from referencing
“modeled PML” to “what is reasonably
available” and anywhere in between.
• Engineer out the risk: Some
approach seismic risk through physical
and operational strengthening, rather
than, or in conjunction with, insurance.
Instead of paying premiums, this
approach invests would-be premium
dollars into seismic retro;tting. They
may also invest in resiliency measures
such as alternate facilities remote
from seismically exposed locations,
or contingent contracts to strengthen
their supply chain.
• Don’t buy any: Some ;rms,
due to price, con;dence in their
physical and operational resilience, or
their ability to ;nancially assume the
risk, decline earthquake insurance.
They may assume the risk through a
captive; a special ;nancial instrument
designated for seismic recovery; or
reliance on cash or loans at the time of
While there are other philosophical
approaches regarding whether or not
to purchase earthquake insurance,
the considerations noted above are
the most common. Matching your
company’s physical and operational
ability to survive an earthquake along
with coverage price and availability will
help shape your approach to buying
seismic coverage. &
MICHAEL KORN is a Managing Principal
and the Property Practice Leader for
Integro Insurance Brokers. He oversees
the firm’s property brokerage services
including growth, placement, market
relations and product development.
Mike can be reached at Michael.korn@