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Original Risk: A Society for Change Agents

Napa earthquake could cost insurers $2.1B, but cat bonds likely safe


Estimates of the insured loss from Sunday mornings M6.0 earthquake which struck the South Napa, California area are rising, with the highest estimate now calling for an economic loss of $4 billion or more and an insurance industry loss of $2.1 billion.

That’s much higher than the $1 billion plus economic loss estimate from the USGS and the $500m to $1 billion insured loss estimate from risk modeller EQECAT, demonstrating the uncertainty inherent in a catastrophe event like this.

The estimate for a $2.1 billion impact to the insurance and reinsurance industry comes from Kinetic Analysis Corporation, a provider of models, impact forecasting and risk assessment for catastrophe events. Kinetic said that it expects the economic loss to be about double the insured loss, with levels of insurance penetration low among homeowners in California.

The insurance industry loss estimate is not a precise science, hence some of the risk modelling firms have stepped back from providing these services early after events, preferring to wait to assess the damage before suggesting any economic or insurance impacts.

However, the early estimates are useful in providing a guide as to the extent of the damage, the expected level of claims to come to insurers and what, if any, the impact could be to the reinsurance industry, catastrophe bonds and collateralized reinsurance.

So the insured loss estimates currently range from $500m, at the lower end of EQECAT’s estimate, to $2.1 billion as Kinetic Analysis predicts. We will keep you updated should more estimates emerge over the coming days.

It is the commercial loss and any resulting business interruption claims which are expected to be the unknown factor in calculating an insurance industry loss from this event. Many of Napa’s wineries are shut after the quake and the extent of claims and lost business makes estimating the leakage from BI very difficult for the modellers.

The catastrophe bond market is expected to be safe from any impact from Sunday’s Napa earthquake. Even at the upper level of insurance industry loss estimates, of $2.1 billion, cat bond triggers should not be breached as they typically provide protection for earthquakes much more severe than a magnitude 6 event, as this was.

The cat bonds covering California earthquake would typically require something greater than an M7.0, with an epicenter nearer to a major city such as San Francisco to be troubled. However, that’s not to say that with the rise of the indemnity trigger we couldn’t one day see a weaker quake threaten a cat bond if unexpected, perhaps unmodelled, losses arose.

Swiss-based insurance-linked securities investment manager Plenum Investments AG said in an update that it did not feel there was a threat to the cat bonds it holds in its portfolio, even with industry losses of $1 billion; “Industry losses around the high end of this estimate are far from where we would anticipate first pay-outs of CAT bonds and therefore there will be no material impact on the performance of the Plenum CAT Bond Fund.”

Even at $2 billion of insured losses an impact to catastrophe bonds would not be expected from this earthquake. However, should the insured loss creep that high then the reinsurance industry will bear more of the claims burden, which in turn would likely mean some exposure for certain ILS or reinsurance linked funds, perhaps retrocession backed by third-party capital too.

But even if the eventual insurance industry loss is around $2 billion it would not be expected to make a serious dent in any ILS or collateralized reinsurance fund which had exposure, as the fund manager or underwriter would be expected to have maintained sufficient diversification to ensure a relatively minor (in terms of what California could expect to see) earthquake such as this does not severely impact an ILS managers performance.

Read our article from yesterday on this earthquake and the early loss estimates that emerged.

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