A new catastrophe bond has come to market which aims to provide coverage for workers compensation losses resulting from earthquakes. Golden State Re Ltd. is a Bermuda domiciled special purpose insurer set up to provide coverage to the California State Compensation Insurance Fund (SCIF) for claims they may have to pay resulting from major earthquakes. This unique deal, which links earthquake occurrence and severity to workers compensation loss amounts, should be well received by the market.
The SCIF provides workers compensation coverage to large and small employers in California meaning that they are liable for claims such as injuries and fatalities which could result from an earthquake damaging a place of work. So it makes sense that they would seek to transfer that risk to the capital markets.
Golden State Re Ltd. is seeking to issue a single tranche of Series 2011-1 Class A notes in this transaction with the aim of securing a source of index-based risk transfer via ISDA-based reinsurance agreement. The deal will provide protection to the SCIF on a per-occurrence basis over a period of just more than three years, with maturity scheduled for January 2015. The deal size is currently not available and likely won’t be until close.
This cat bond will use a modelled loss approach to calculate an index to determine whether an event has triggered the notes. It will use a notional portfolio of workers compensation risks, earthquake severity factors (ground motion) and interestingly time of day and the day of week an event occurs as weighting factors. This is a really interesting approach as workplaces are obviously busier during working hours so events outside of normal working hours will have a lower impact on the modelled loss calculation.
An index will be created with weighting of the above factors using RMS’ earthquake model (RMS are risk modeller and reset/calculation agent) and the notes will cover a pro rate share of losses from an attachment point of 1,000 up to an exhaustion point of 1,447. Losses will be modelled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters and will be modelled against the notional portfolio using the day/time weighting to determine an index value and notional modelled loss amount. Standard & Poor’s call this a parametric modelled loss trigger in their pre-sale report and note that this helps to reduce modelling errors and implies a lower level of modelling risk than industry loss or indemnity triggers.
Another interesting point worth noting about this cat bond is that the covered area means that a qualifying earthquake event can occur in any of the 50 U.S. States and the District of Colombia. This despite the fact that 99.99% of the exposures in the notional portfolio are in California but this means a really severe quake in neighbouring states would be covered and also any workers compensation claims resulting from covered workers travelling to other States could also be protected.
It will be interesting to see how large this deal is at close. Cat bond investors should be keen to invest in the notes given it offers some diversification when compared to a straightforward California quake cat bond.
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