Increasing earthquake insurance coverage in California via parametric hedges

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Abstract

California has the highest earthquake risk of any state in the United States. The Federal Emergency Management Agency (FEMA) reported in 2017 that 73% of the nation’s annual losses to earthquakes were expected to be concentrated in California and the Pacific Northwest. California alone constitutes 61% ($3.7 billion out of an estimated $6.1 billion annual losses nationwide). Despite this overwhelming accumulation of risk, recent estimates of earthquake insurance coverage rates in California range from 10% to 13%. Few small businesses have coverage. Throughout the last 20 years, a variety of financial mechanisms have been developed in the industry as viable alternatives to traditional earthquake indemnity insurance. We explore how parametric hedges, a type of financial derivative used in the reinsurance industry, can be extended to the local California market in order to provide an influx of cash quickly and transparently after an earthquake event. Examples of how these solutions can be tailored to needs ranging from the individual homeowner, to businesses, and to public entities are presented.

Additional publication details

Publication type Conference Paper
Publication Subtype Conference Paper
Title Increasing earthquake insurance coverage in California via parametric hedges
Year Published 2018
Language English
Publisher Earthquake Engineering Research Institute
Contributing office(s) Geologic Hazards Science Center
Larger Work Type Book
Larger Work Subtype Conference publication
Larger Work Title Proceedings of the Eleventh National Conference on Earthquake Engineering
Conference Title Eleventh National Conference on Earthquake Engineering
Conference Location Los Angeles, CA
Conference Date June 25-29, 2018