Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.
This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 — Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.
Artemis blog says:
The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”
The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.
While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.
The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.
An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.
A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.
The report suggested that the losses would affect 15.6 million employees working during a major earthquake.