Insurance linked securities (ILS) investment manager Credit Suisse Asset Management has estimated that the insured loss from Sunday’s Napa, California earthquake will come in around the $1.5 billion mark.
At this level of insurance industry loss, the ILS manager said that it does not expect any impact to its CS Iris Low Volatility Plus Fund, despite the fund having what it terms a “meaningful allocation” to California earthquake risks.
Earthquake risks in California is one of the major risk classes in the reinsurance industry, and as a result in the ILS fund industry, explained the Credit Suisse ILS team in an event update for the DCG Iris London-listed ILS fund, which acts as a feeder to CS Iris.
The Credit Suisse ILS team explained:
On 24 August 2014 a magnitude 6.0 earthquake occurred 80km north of San Francisco, California, at 3:20 am local time. The epicentre was located 8km south-southwest of Napa, a center of the California wine industry, at a depth of 11.3km, as reported by the U.S. Geological Survey (USGS). The epicentre lies between two major traces of the San Andreas fault system. This was the largest earthquake to hit the San Francisco Bay area since 1989, when a 6.9 earthquake killed 63 people and caused $6bn economic loss at that time.
Sunday’s earthquake only caused injuries but no fatalities. Initial reports show damage to several buildings and infrastructure, especially in downtown Napa. Several gas and water lines were broken as a result of the earthquake, and power outages impacted around 10,000 households. Additionally, the earthquake caused damage to local wineries, with thousands of bottles broken and barrels toppled.
Based on its preliminary analysis, using information available shortly after the earthquake event struck, the Credit Suisse ILS team said that it expects insurance industry loss will come in around the $1.5 billion mark, with a significant share of this expected to come from the local Napa wineries which have been badly impacted by the quake.
Kinetic Analysis Corporation has also published an estimate, saying that the economic loss could be around $4 billion while the insured loss could be as much as $2.1 billion.
It’s expected that the majority of ILS funds will be in a similar position to Credit Suisse, of having a significant exposure to California earthquake risks, but little to no impact from this particular event due to the expected level of insurance industry losses. There remains a possibility that some writers of collateralized covers could experience minor losses, but unless the estimates rise significantly higher than the range currently on offer, impact to the ILS or collateralized space will be minimal.