Recent earthquakes trigger standard payouts in China and Japan

Two recent earthquake events in Asia have triggered payments under standard insurance policies, demonstrating the valuable protection that a well-regulated frontier operator can provide. Standard covers have been backed by global reinsurers, as we understand, which are often the counterparties to such arrangements providing their experience with parametric triggers and structuring effective protection against natural disasters using parametric technology.

The most recent occurrence of a frontier product being operated and propelled was in Yunnan Province in southwest China.

Yunnan Province was hit by a series of earthquakes on May 21st and 22nd, but a magnitude 6.4 struck Yangbei County, Dali Prefecture, which we understand was the event that triggered this standard insurance policy.

Yunnan has been one of the pilot areas for China’s development of a disaster insurance system, and we understand that the provincial government first took out an earthquake insurance policy in 2015, and renews it every year after that.

We are told that this M6.4 earthquake breached the parametric trigger and resulted in a payout of CNY 40 million, roughly US$6.3 million at today’s exchange rate.

We were told that along with these payments to the county government’s Standard Insurance, there were also payments under the Daly County Agricultural Property Insurance Scheme, which has so far paid just over $7 million to policyholders, based on a parametric trigger index being compromised.

It is not clear whether the policy of the Yunnan provincial government supports the agricultural ownership scheme with reinsurance capacity, but it is encouraging to see parametric catalysts that provide benefits at both the government and individual levels.

Another standard payment that has emerged recently is an example shared by global reinsurer Swiss Re, which explained that one of its customers in the Japanese manufacturing industry was paid out on its earthquake insurance policy after the earthquake in February.

As previously explained, the Magnates 7 earthquake hit the Fukushima region of Japan on February 13, 2021, and was seen as having the potential to cause more than $1 billion in insurance and reinsurance market losses.

As mentioned later, claims paid by Japanese insurance companies related to this earthquake approached $900 million by April.

Swiss Re explained that the goal of the manufacturing client is to complement traditional earthquake insurance and cover deductible expenses, benefit from the rapid payment of a modular solution and flexibility in how the funds are used.

The customer’s modular insurance structure provided dynamic payments that would increase based on the intensity of the vibration, using data from the Japan Meteorological Agency (JMA)-Shindo seismometer.

The Shindo scale runs from 0 to 7, which is a measure of the intensity of local ground shaking and in this case, the thrust was based on a Shindo level 6 and above.

A Swiss Re client had physical damage to its buildings and business interruptions after the February earthquake.

The reinsurer said the earthquake launched the standard insurance policy and the customer is eligible to pay partial compensation, three days after the level of Shindo was confirmed by the JMA, that is, 44 days after the event.

A spokesperson for a Swiss Re client commented, “The standard insurance offered by Swiss Re Corporate Solutions gave us a different perspective on earthquake insurance coverage, due to the flexibility it offers. The ease and speed of payment delivered just 3 days after JMA confirmation at Shindo level enabled us to Resuming our business operations quickly. Parametric insurance really pays off.”

A spokesperson for broker Aon added, “Parametric insurance was an innovative solution that our client found attractive as it gave them the ability to complement traditional earthquake insurance. From the way insurance was structured and the speed with which payment was made, Standard insurance provided the client with the flexibility they needed when the earthquake struck. As a broker It showed us the benefits of standard insurance.”

As parametric trigger technology advances, thanks to better data, trigger inputs and use of more advanced technology, the benefit of parametric coverage continues to improve and therefore more covered events will be reported as the use of this responsive form of insurance expands.

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