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In The Public Eye: A Different Way to Manage and Finance California Earthquake Risk

By Alliant Specialty

According to the long-term records kept by the National Earthquake Information Center, we should expect about 16 major earthquakes in any given year. While discussions often focus on the "Big One," models suggest that smaller earthquakes are much more likely to cause serious damage. Carleen Patterson and Shadi Jalali, Alliant Public Entity, sit down with Alex Kaplan, Amwins, to discuss different ways to manage and finance California earthquake risk.

Intro (00:00):
Welcome to the Alliant In The Public Eye Podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here are your hosts Carleen Patterson and Justin Swarbrick

Carleen Patterson (00:17):
Welcome back to another episode of In The Public Eye. A few weeks ago, we talked with Ali Syed about catastrophe modeling. During that podcast, we discussed how commercial and residential development has increased anticipated losses from catastrophes, where we're building is causing our anticipated losses to be much higher, whether its windstorm, wildfire or even earthquake. And according to our long-term records that are kept by the National Earthquake Information Center, we expect about 16 major earthquakes a year. And while everybody keeps talking about a repeat, like the great 1906 San Francisco earthquake, recent studies and models have suggested that smaller earthquakes are actually going to be more likely to cause serious damage. So, today we've invited Shadi Jalali from Alliant and Alex Kaplan from Amwins to talk about some of the different ways to finance and manage the California earthquake risks. But before we get started, I thought maybe the two of you could give a little bit of your background and tell us a little bit about yourselves and your roles at your respective firms.

Shadi Jalali (01:25):
Sure, Carleen and thanks for having us, a little background about myself. I am an associate producer at Alliant Insurance. I began my career at Alliant in 2012, working with the public sector exclusively for cities, hospitals and higher education. I am a California resident born and raised. And part of growing up in California means dealing with earthquakes. I can remember exactly where I was during the North Ridge earthquake and exactly how I felt in that moment. I think the best thing we can do to mitigate the impact of these incidents, whether it be as an individual or as an entity is to prepare. I'm excited to be here today and tell you a little bit more about what we've been working on.

Alex Kaplan (02:12):
Thanks Shadi, and thanks Carleen, and thanks for giving me this opportunity. So, my name's Alex Kaplan, I'm executive vice president for alternative risk with Amwins group. I've been with Amwins for about 18 months. And before that I spent a dozen years at Swiss Re in a unique group that allowed me to operate at the group level, both on the treaty side and on the primary insurance, side as well, but only operating in the governmental space. So, working with sovereign countries, sub-sovereign entities, as well as the supernational level, and only really looking at uninsured risks. So, by nature of there being uninsured risk in the government space, obviously, there's not really going to be very good underwriting data. So, that led to a lot of focus in the development of parametric insurance. So, every solution we ever developed was specifically designed for that particular use case in that particular scenario. And before my time at Swiss Re, I was in government, I live in Washington, DC still. I was a political advisor to the treasury secretary during the financial crisis. So, every day since then has been better than that but a great experience. So, now I'm with Amwins and I spend probably 90% of my time focused on building and promoting parametric structures and their use case.

Carleen Patterson (03:28):
Yeah, living in the DC area. You can almost not avoid the political realm. So, it's a fun area to have lived in. So, let's talk a little bit about the solution. It's quite an interesting name. When I heard it, I started laughing because it's a little bit self-explanatory, but shake and pay. So, what is it and why was it developed?

Shadi Jalali (03:50):
Shake and pay is a parametric solution that we develop for our California clients. We do have the authority to look at Oregon and Washington risks as well, but this was really created for our California client base. A traditional earthquake policy requires physical damage as a high deductible and lots of exclusions. We developed, shake and pay to be different. The coverage is first dollar. There's a much lower entry point with limits starting at 50,000 in the payout side to the event itself. The loss adjustment process is super easy.

Carleen Patterson (04:26):
Shadi. It sounds really interesting, but I think before we get into a lot of the specifics of the shake and pay coverage, maybe we should back up a little bit and talk more about what exactly is a parametric cover. And Alex sounds like from your history, you'd be the best one to explain it what it is.

Alex Kaplan (04:45):
Yeah, sure, happy to. So, parametric structures as Shadi kind of illustrated are fundamentally different than traditional indemnity coverages, right? What you're doing with a parametric is you are underwriting the probability of an event or a certain set of circumstances from occurring in a particular geography, right? So, you're not necessarily underwriting a specific portfolio of assets. You are underwriting the geological or meteorological occurrences that would happen in that particular geography. So, for example, for a hurricanes, you might say, we're going to do a parametric structure based upon the speed of the wind. Obviously, there's a strong correlation between the strength and intensity of wind and its impact that it has on the ground and buildings in the community. The same applies for earthquake. So, you might take the intensity of how much the ground is shaking as a proxy for the impact it might have on it, an insured, or a community and parametrics have been around in some form or fashion since basically the early mid-nineties, really started in the weather space.

So, you can do it if it's too hot, too cold, too much rain, too little rain, too much sun, not enough sun, that kind of thing. And I think a lot more entities are realizing that there's a much broader application and there's a role for them to play, in a traditional insurance purchase or thought process. And, let me share with you sort of the three key benefits of parametrics as I see them. Number one is because you are using real-time environmental or scientific data. The claims can be paid very quickly, oftentimes in less than 30 days, right? And they often say particularly in the public sector realm is that the quality of recovery is dictated by the speed of recovery. So, having that cash infusion is paramount to a successful recovery, that's number one. Number two is because again, you're underwriting the event and not the specific portfolio of assets.

You have the maximum flexibility in how you use the proceeds. So, you might use it for physical damage, but you also don't need to suffer physical damage. You might have other financial losses associated with that event. So, if you're talking about earthquake, you might have a scenario where you, the municipality has no physical damage to your city owned buildings, but 90% of your tax paying homeowner base buys no earthquake insurance. And so, they may have to move out of their homes and move out of the jurisdiction and you lose tax revenue. That would be an insurable loss under this scenario, right? So, it's designed to cover nearly any direct or indirect financial loss. And then the third piece, which I think is, equally important is the transparency. Because you're using third party data, very oftentimes government data to determine the level of impact it would've had in a particular area. And that is the determining factor of whether that structure is paying or not.

Carleen Patterson (07:35):
Okay. So, is the shake and pay product or a parametric product meant to replace traditional insurance or is this product something that's meant to dovetail and Shadi maybe you can answer how it works with our client's traditional insurance.

Shadi Jalali (07:55):
So, right now we're actually saying the most interest from insurance who have the traditional earthquake policy in place. The reason being that shake and pay is a little bit different. Shake and pay can be used as a mechanism to actually fund your traditional earthquake deductible. So, one of the things that a traditional earthquake policy has is a percentage deductible and the shake and pay product can actually be used to fund those percentage deductibles or buy down the percentage deductibles and give you a sort of cash injection at the time of the incident.

Carleen Patterson (08:32):
So, under a traditional insurance policy you guys have both said, there's direct physical loss. So, what actually triggers the shake and pay policy?

Shadi Jalali (08:43):
There are essentially two things that need to occur in order for the policy to be triggered. First, a magnitude 6.0 earthquake has to occur, and the epicenter can be anywhere. It can be in the middle of the ocean. It can be in a nearby state, but the magnitude 6.0 earthquake has to occur. Second, we take the max PGA or peak ground acceleration, registered within your county to calculate the payout percent. Anytime there's a 6.0 magnitude quake, just like Alex is saying, USGS will automatically produce a shake map showing PGAs for all impacted counties. So, we would take their report and pull the max PGA registered within your county. And if it's above a certain threshold, the policy pays out. Alex, maybe you can talk to us a little bit about what max PGA really means.

Alex Kaplan (09:36):
Yeah, sure. So, I think we all sort of grew up with the, the concept of the Richter scale, right? And the Richter scale when they talk about magnitude is simply a measurement of the energy being released from the event. And isn't a really good proxy for how it affects the ground and the things that are on the ground. And so, the US Geological Survey over many years and sort of peer reviewed scientific processes have developed other metrics for determining the impact that an earthquake would have on the ground. And so, one of those methodologies is peak ground acceleration. So, it really means is how quickly is the ground moving as a result of that energy flowing through it. And I kind of equate it to like a car race between a Ferrari and I don't know a VW bug.

They're both going to start their race at the exact same second when that flag drops and that Ferrari's going to throw you back in your seat as it accelerates forward. And the VW bug, you may not even notice the acceleration. And so, that acceleration that Ferrari is giving, that intensity and shift in gravity is what creates the impact on the ground. So, it's really that shifting in the gravitational field effectively, which is causing the impact on the ground and it's well correlated with the actual impacts. So that's, how it's represented in the structure. And, to Shadi’s point, its not just taking the maximum ground shaking at a particular location. It's taking the max ground shaking in an entire county, which I think is incredibly relevant to a public entity that may not just be concerned with the viability of its own assets, but actually the entire community, which supports it.

Carleen Patterson (11:18):
And Shadi, you mentioned it had to do with the county that you're in. So, from what I've read, Southern California is more likely to experience quakes than Northern California is. So, the way the parametric works, it's based on geography or how it does it actually work. As far as pricing goes.

Shadi Jalali (11:40):
The underwriting basis is really just your covered county. Remember the coverage isn't tied to any particular locations or building you're picking a county or multiple counties to cover in order to get a quote. You really just need to send me a few pieces of information, the entity's name and mailing address, the effective date and the coverage county.

Carleen Patterson (12:02):
You mentioned that it was a first dollar coverage. Are there deductible options? Are there no deductible options? I mean how is the coverage structured?

Shadi Jalali (12:10):
The coverage is first dollar mean there's no deductible options at all. Really, the intent of this policy is to give an entity, a cash injection or insurgent at the point of an incident. So, the intention is almost to move it down and use these funds as almost a deductible for your other coverage line.

Alex Kaplan (12:30):
Yeah. And Carleen, maybe if I could just add to that, right. So, there is no monetary deductible to these structure. I think one way to maybe look at it is, if any event which occurs, which is below the trigger of the ground shake intensity, which does create losses that is effectively your retention. But if that triggers hit and if it exceeds a certain should, right? The amount of aggregate that is being that is tied to that level of shaking is available for use, and it is a first dollar cover. So, there's no monetary deductible whatsoever.

Carleen Patterson (13:06):
Okay. So, when you're talking about the payout and you're saying that a public entity can use its funds, however it wants. So, if it does not have any kind of a direct physical loss to any of their buildings or anything, they could use it for something to better serve the community, like maybe access roads that were damaged, or power lines coming down or whatever it is, anything to expedite services, that's how they can utilize the funds.

Alex Kaplan (13:36):
Yeah. And there's plenty of case studies historically, either loss experiences or claim scenarios. I think about specific to California, I think about the wildfires over the last couple of years, right. Public entities are obviously not going to be able to recover any lost revenue if they didn't suffer physical damage. And that revenue wasn't tied to the assets that were impaired, but you have a much broader societal impact or communal impact, which leads to decreased tax revenue. And we all know that tax revenue is the underpinning of civil society. So, all of their capital obligations are tied to revenue, right? So, in the absence of some recovery mechanism, these public entities find themselves in a very precarious situation of trying to access the capital markets with diminished revenue capability. And that's kind of the position you don't really want to find yourself in.

And there's other good cases where for example, Haiti, the poorest country in the Western hemisphere actually had a parametric earthquake policy in place in the 2010 event. And that coverage triggered, it triggered the full aggregate limit of the policy and that insurance payout made up 50% of all foreign capital to flow into Haiti in the first 10 weeks after the disaster. And Haiti ended up using the funds to pay the police overtime. So, it's interesting because sometimes these scenarios happen and you really don't know what you're going to need the money for. And you need that flexibility, particularly if you're a governmental entity, right. And so having that infusion, having that flexibility is of absolutely of utmost importance.

Carleen Patterson (15:12):
So, everybody's talking about the property market and how the property market is really hard. We’re seeing increases across the board, we're seeing clients who are getting pushes on their retentions and deductibles to raise those, whether it's a percentage on earthquake or whatever it is. So, that just kind of dovetails in there and fills in that gap, is that how they do it once they have their renewals in place, then approach this product to fill in that gap? Is that how you do it?

Alex Kaplan (15:41):
You certainly could do it that way. We all know, I think there's all kinds of signaling as terms of how renewals are shaping up and, and what you oftentimes find is that entities will say, clearly we need to change our coverage and how it is implemented. And, in order to facilitate that change and not dramatically change our risk exposure, we might include a parametric. We've seen entities say, all right, we're going to move our deductible from 3% to 5%, we'll take the premium savings and we'll use it to buy a parametric to effectively buy down that exposure, but also cover all those uninsured exposures. I would never say that a parametric is a complete replacement for traditional indemnity coverage, right? It is very complimentary in nature. It's designed to cover all those things that would otherwise be excluded or sublimed within other coverages. And again, specifically to public entities, when we think about specifically tax revenue, FEMA will come in and FEMA will help rebuild your bridges, your roads, your buildings, etcetera, but they will not replace $1 of lost tax revenue and neither will traditional indemnity insurance. Right. And so, I think at least in this context, that's probably the most important point.

Carleen Patterson (16:54):
Okay. So, the quote process is not intensive Shadi. It sounds like, there’s just some data that they need. Is the support already there from the market, are we dealing with AM Best Rated Companies or is this, something that is underwritten on an annual basis? Or what's the structure like?

Alex Kaplan (17:13):
Yeah. I'm happy to take that one. They are a “A” rated carriers, AM Best Rated, financial category, 15 size carriers. And like Shadi mentioned, the process for quoting in California specifically is incredibly fast and can do it in 10 minutes, really. If we have the right pieces of information, and we talk about the fact that limits are available between $50,000 and 5 million, we can certainly go larger than that, but that's a few more steps involved. And we like to provide option. Don't try to boil the ocean, maybe right out the gate. Maybe you don't have the available budget to sort of do everything you hope to do, but do something, right. Because even if you make a small purchase, there's still value in having again that cash infusion and that that's also part of the education process is you dip your toe in the water and get a sense of how these structures work and how they add value to your program and how you might think about changing your renewal strategy in the future and grow it over time. And that's exactly how many, many buyers approach it.

Carleen Patterson (18:15):
And, we talked about California and Shadi, you mentioned earlier, we can look at other geographies, is that right?

Shadi Jalali (18:23):
So, right now we're set up to quote California through the portal. Like Alex was saying, we can turn quotes very quickly. We're promising quotes back in 48 hours, but for our Oregon and Washington risks, we do need to underwrite those outside of the portal. So, they'll take a couple extra steps. There may be some extra questions as well, but we do have authority to find in those dates as well.

Carleen Patterson (18:47):
Okay. Any pieces of advice or anything else that we didn't touch on that either one of you would want our listeners to know before we close?

Alex Kaplan (18:56):
I would simply add, as we think about risk, we shouldn't just be thinking about in the context of property, public entity owned buildings, right. We have to think about the communal risk and the intricacies and the economic web of these communities and how they interplay, which is why I think this structure's particularly interesting, again, from a public entity perspective, because we don't just care about what happened at your specific location, but what happened to the broader economic region that we all depend on. And so, when you think through your exposure, don't just think about, again, the value of your buildings. Think about what would a sizeable earthquake do and how would the economic knock-on effects impact your ability to operate, your long term capital planning, your ability to access capital markets, what it might do to your insurance rates in the coming years, post-event right. And think about from a quantitative perspective, how large that exposure is, it's much bigger than just your TIV.

Shadi Jalali (19:55):
I'll just add to that we're in a hard or tightening market right now, depending on the line of coverage. And one of the opportunities that comes out of a hard market is the ability to think a little bit more creatively and to take a hard look at the programs we've put together in the past and how we can build them now to stay dynamic and carry us through the future.

Carleen Patterson (20:18):
Okay, well, we sure do value the relationship that we have with Amwins and Alex, you're working with us on this program. And so, what's the easiest way to get more information about this. So, if one of our client answer prospects is listening in and wants to give some more information about it. What's the easiest way to get the information.

Shadi Jalali (20:39):
I think the easiest way to get the information is to either email myself Shadi Jalali or visit us at Public Entity.

Carleen Patterson (20:51):
Thanks very much. Thanks to both of you for your time today. It's a great time to be in public entity risk management, and you're right. We're looking for innovative solutions and hopefully this will peak some interest. Please reach out if you do have any questions about shake and pay. Thanks very much. And talk to you guys next time.

Outro (21:12):
Thank you for listening. And for more information, go to


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.