Oklahoma shows ambition to establish earthquake reinsurance pool

A Senate panel has passed a bill allowing the State of Oklahoma to establish an earthquake reinsurance fund, similar to that seen in California, ensuring the region has access to earthquake insurance following coverage inadequacy.

The new law enables the Insurance Commissioner to establish a state-backed reinsurance programme should there be a lack of available earthquake insurance in the region, ensuring residents have access to vital protection.

Oklahoma sits within the New Madrid Seismic Zone and is therefore highly susceptible to earthquakes, with reports claiming that in recent times it has experienced an increase in the severity and frequency of tremblors.

In an effort to offset future market disruption in the Oklahoma insurance market, and to ensure residents can access affordable earthquake protection, Senator Clark Jolley has introduced the new bill.

Which states; “Upon a finding that there is a lack of adequate earthquake insurance coverage available to residents in the state of Oklahoma, the Insurance Commissioner is hereby empowered to create an earthquake re-insurance program, to be administered by the state.”

A similar programme exists in California with the California Earthquake Authority (CEA), a publicly managed residential earthquake insurance provider, which utilises reinsurance and insurance-linked securities (ILS) solutions as part of its reinsurance programme.

According to Jolley a number of constituents in Edmond, a city in Oklahoma, are concerned they will lose their homeowners insurance, “and or that their insurance companies will cease to offer earthquake coverage.”

“This bill simply allows for them to have the comfort and assurance of knowing that if insurance companies were to leave Oklahoma completely and totally, that the state of Oklahoma would adopt a California-model earthquake reinsurance market,” added Jolley.

How closely an Oklahoma earthquake risk reinsurance pool would follow that of the CEA remains uncertain, but it’s possible that it could seek the capacity and structures of the ILS market as well as the traditional reinsurance sector, something the CEA does to reduce its risk transfer costs while also increasing the amount of protection it benefits from.

The use of catastrophe bonds has become a common feature of the CEA in recent times, contributing a significant portion of its earthquake reinsurance programme, and should the Oklahoma pool follow suit, it too could benefit from the efficient and effective solutions and features of the ILS space.

Furthermore, the creation of a fund in a region that’s vulnerable to earthquake activity could bring new risks to the global re/insurance and ILS landscape, a benefit to market participants at times of low profitability and pressured rates.

While the aim of the bill is to enable the creation of an earthquake reinsurance fund should there be a lack of available coverage, the use of a variety of risk transfer solutions within its programme could also reduce costs, ultimately resulting in cheaper, more effective protection for the end consumer.

So the opportunities are there for insurers, reinsurers, ILS players, and the Oklahoma reinsurance pool itself should it ever come to fruition.

Senator Gary Stanislawski did oppose the bill, citing that it’s a solution for a problem that hasn’t happened yet, “and to give authority to an agency when it is not needed at this point I think is not good publicly policy.”

Adding that he feels “the state is not in the business of doing insurance.”

However, the bill comes into effect November 1^st 2016, and should a fund ever be established it could provide the re/insurance and ILS sector with an opportunity to access new risks, while also ensuring the residents of Oklahoma have access to affordable, adequate earthquake protection while living in such a quake-prone area.