Quake Tech

What advantage does parametric coverage offer in comparison to traditional earthquake policies, particularly in California, which has the highest risk in the United States?

Parametric insurance can fill gaps in insurance coverage. For example, in developing countries it can bring coverage where there is no coverage at all, and in mature markets such as the U.S., it can complement traditional policies. The advantages of a parametric policy are that the loss payment is very quick and it’s simple and transparent. Parametric insurance solutions have a predefined threshold in coverage, and if the threshold is met, the policyholders receive payout. Generally, it can be integrated with broader coverage, such as indirect economic losses or business interruption, that sometimes are not covered by traditional policies. It is also flexible because it can be tailor-made depending on the client needs.

It is important to stress that parametric insurance is not a replacement for traditional coverage—it serves to complement traditional insurance, as a first relief cash payment to defray expenses, in this case, that occur after an earthquake. Generally, the speed of payment can be between a week or two, depending on the complexities. With traditional policies the payments can take more time due to the loss adjusting period.

Tell me about the parametric policy with the University of California system.

The University of California was our first U.S. client for this product. Through our parametric policy, they benefit from the sensor-based technology and all the services that accompany that. Safehub is providing services to manage real time information when an earthquake occurs.

The university can integrate it into their emergency response and their business continuity plan. In terms of triggers, the policy is based on peak spectral acceleration (a measure of earthquake intensity at ground level) at the University of California properties statewide. They are deploying 180 sensors throughout their campuses that will trigger a payout in the event of an earthquake that meets the predefined requirements.

The University of California is the initial U.S. client. What are the expansion plans?

In the U.S. we believe there are many public and private entities that would benefit from a sensor-based parametric earthquake solution. In addition to the benefits of the parametric solution ensuring the policyholders are financially protected in the event of an earthquake, the sensor-based technology can support crisis management in the aftermath, aiding recovery and informing the response from emergency services. This is a very great advantage.

Prior to partnering with the University of California, the sensor-based coverage was first introduced in Mexico and the Caribbean. What has the experience been there?

We have a few clients in Mexico and in the Dominican Republic where we built policies in the same way as for the University of California. The process begins by analyzing the optimal locations for placing the sensors for the parametric product. During this process for a client in Mexico an earthquake occurred, and the product was able to manage the payout successfully. This real-life case study demonstrated the benefit of the solution to the client. With the level of potential shaking in Mexico City, there is a real interest from clients in buying this coverage. Feedback from customers in these regions has been positive so far, highlighting the benefits of quick payouts and the accuracy of the sensor data.

We believe that the solution could be very beneficial in a lot of countries in Latin America (LatAm) and the Caribbean. However, it will require education about parametric coverage and how it can be beneficial for clients, as the parametric insurance market is less mature in these regions. That being said, parametric coverage is beginning to be more and more popular in LatAm and the Caribbean. The U.S. parametric insurance market is more developed, and buyers are more familiar with parametric products and their benefits.

What advantages does site-specific, sensor-based coverage offer instead of, say, using a magnitude trigger over a wider area or United States Geological Survey (USGS) ShakeMap data on ground motion and shaking intensity after earthquakes?

The sensors inside the location have the advantage of providing localized and accurate information. They are installed inside the insured properties and capture the specific seismic activity on the ground at the location where the sensor is installed. The underlying basis risk is reduced compared to broader coverage based on the magnitude of an earthquake or the USGS ShakeMap.

Site-specific sensors reduce the risk that the payout does not match the actual loss, by providing data that directly reflects the conditions on site rather than relying on broader, regional data. In some areas, the USGS ShakeMap lacks a sufficient number of sensors. Even in California, we have observed that there is more variability (in intensity) captured by the sensors. Safehub has more than a thousand earthquake events in its database, and their sensor data can enhance available regional data.

Site-specific sensors can be used to develop and refine business continuity plans, too. By understanding the specific vulnerabilities and potential impacts at different sites, organizations can create more robust and effective disaster recovery strategies. The data from site-specific sensors can be used to identify patterns and trends in disaster impacts. This can help organizations improve their risk management and better prepare for future events.

Does the site-specific data help in disaster response and recovery?

Yes, because the sensor brings site-specific data that is sent in near real-time to the clients. With the sensors in place, clients can see where to send emergency crews and firefighters first, and which buildings must be evacuated. One of the main advantages of the service provided by the implemented sensors is the ability to really see where the impact is the greatest. In addition, it is easier to understand the vulnerability and the potential impact on all the insured sites.

This is particularly important in areas where ground motion can vary significantly over short distances. There is a misconception that ground motion is directly proportional to distance from the epicenter. This is not exactly the way it works. In some cases, damage is worse further from the epicenter.

This summer, we had two small earthquakes in Los Angeles, California, that we have studied with Safehub. We analyzed our data alongside the USGS ShakeMap, which provided valuable insights into the enhanced understanding of variability captured by the sensors.

It is important for us to be able to work with Safehub on a solution that closes the insurance coverage gap to protect entities from earthquakes. But for us at Liberty Mutual Re—and we can speak for Safehub here, too—it is more than that. We genuinely care about people. Beyond offering (re) insurance, our solutions assist in managing post-earthquake crises. Our sensors facilitate timely evacuations by identifying priority areas for evacuation. We are very happy to collaborate with the University of California to enhance the safety of their employees and students.

Parametric policies are often meant to fill in until traditional coverage kicks in; what kind of limits are being offered and what is the speed of payment?

It depends on the client; we offer small and larger limits. Small limits are between $1 million to $5 million at a location and at a policy level, but it is also possible to have large policies at $100 million or more.

As every solution is tailor-made, clients can choose to be paid out in the event of a small earthquake. It is a matter of tailoring solutions to client needs at an appropriate policy price. Generally, clients buy a trigger that could be met with a bigger than a magnitude 4 event.

Safehub also provides regional data using their own sensor network. These damage heat maps can be used to trigger parametric policies for insurers to complement their traditional reinsurance program, and depending on their underlying exposures, to assess the potential damages as well.