Risk Insider: Michael Korn

Earthquake Cover: To Buy or Not to Buy?

By: | August 8, 2017 • 2 min read
Michael Korn is a Managing Principal and the Property Practice Leader for Integro Insurance Brokers. He oversees the firm’s property brokerage services including growth, placement, market relations and product development. Risk management is in Mike’s DNA — he’s the son of a career risk manager and the father of a broker and an underwriter. Mike can be reached at [email protected]

In high-hazard earthquake zones such as California, Japan, China, Australia and others, earthquake insurance is both tightly underwritten and high-priced.

The decision to buy or not to buy coverage can be a difficult one with varied approaches that range from buying as much as possible to not buying any at all. Specific approaches include:

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  • Buy as much as possible: A number of firms consider the probability and severity of a seismic event to be so potentially devastating to their livelihood that they purchase as much coverage as is available to them, be it from the traditional earthquake insurance market and/or from the growing capital market via Insurance Linked Securities – such as Cat Bonds and the evolving Parametric Trigger products.
  • Set a budget and buy to that: Some firms set a specific premium budget and stick to it. In a soft-market, a premium of $500,000 may buy $50 million of coverage for a specific risk, while that same $500,000 buys only $30 million in a hard-market. A number of firms only purchase earthquake insurance where they are required to per lease agreements containing such stipulations.

Lease requirements can vary from referencing “modeled PML” to “what is reasonably available” and anywhere in between.

  • Buy to the modeled PML: Ubiquitous in the industry now, models are utilized by individual buyers, brokers, insurers, reinsurers, banks and rating agencies. These models factor characteristics such as fault location, release of energy, soil type, building height, construction type, and local codes. Based these geographic and site-specific factors, models estimate the Probable Maximum Loss (PML) for an entire portfolio, as well as (though less statistically accurate) a single location. Many Risk Managers use the PML to set the limit they will purchase. These models represent the best technological estimate of the probability and damageability of seismic events.
  • Only buy what’s required per leases: A number of firms only purchase earthquake insurance where they are required to per lease agreements containing such stipulations. Lease requirements can vary from referencing “modeled PML” to “what is reasonably available” and anywhere in between.
  • Engineer out the risk: Some firms approach seismic risk through a combination of physical and operational strengthening, rather than, or in conjunction with, purchasing insurance. Instead of paying an annual premium, this approach invests would-be premium dollars into seismic retrofitting. They may also invest in business resiliency measures like having alternate facilities remote from the seismically exposed locations, or contingent contracts to strengthen their supply chain.
  • Don’t buy any: There are firms that either due to price, confidence in their physical and operational resilience, or their ability to financially assume the risk, do not purchase any earthquake insurance. They may assume the risk through a captive; special financial instrument designated for seismic recovery; or reliance on cash or loans at the time of loss.

While there are other philosophical approaches regarding whether or not to purchase earthquake insurance, the considerations noted above are the most common. Matching your company’s physical and operational ability to survive an earthquake along with coverage price and availability will help shape your approach to buying seismic coverage.

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As risk manager for a cloud computing and software company, Laurie LeLack knows that the interconnected economy and cyber security remain top risks.
By: | December 14, 2017 • 4 min read

R&I: What was your first job?

One of my first jobs was actually at a local insurance agency when I was a high school student, before I had any idea I was going to get into insurance. After college, I was a claims analyst at Sunbeam.

R&I: How did you come to work in risk management?

I fell into it after college, where I studied international business. I had a stack of resumes, and Sunbeam came to Florida from Rhode Island, so I applied. I interviewed with the director of risk management and just stuck with it and worked my way up.

R&I: What is the risk management community doing right?

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Getting a holistic view of risk. Risk managers are understanding how to get all stakeholders together, so we understand how each risk is aligned. In my view, that’s the only way to properly protect and serve our organizations.

R&I: What could the risk management community do better?

We’ve come a long way, but we still have to continue breaking down silos at organizations. You also have to make sure you really understand your business model and your story so you can communicate that effectively to your broker or carrier. Without full understanding of your business, you can’t assess your exposures.

R&I: What was the best location and year for the RIMS conference and why?

Being on the East Coast, I like Philadelphia.

Laurie LeLack, Senior Director, Corporate Risk and Americas Real Estate, Citrix Systems Inc.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Organizations understanding their cyber risk exposures and how this line of insurance can best protect them. Five to ten years ago, people shrugged it off as something just for technologies companies. But you can really see the trend ticking up as a must-have. It was always something that was needed, but people came to their own defining moments as we got more involved in electronic content and social media globally. Cyber risk is inherent in the way we do business today.

R&I: What emerging commercial risk most concerns you?

The advent of security and contractual obligations. These are concerns as we all play a part in this big web of a global economy. There’s that downstream effect — who’s going to be best insulated at the end of the day should something transpire, and did we set the right expectations?

R&I: Is the contingent commission controversy overblown?

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I think so. At the end of the day, it’s all about the transparency you’re getting from the people you work with. I think some best practices in transparency came out of the situation, but we were working on a fee basis, so it wasn’t as much of an issue for us as it may have been for other companies.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

I’m cautiously optimistic. We seem to be stable in terms of growth, and I’m hoping that the efficiencies and the economies of scale we achieve through technology will benefit us. But I’m also worried about the impact that could have on the number of jobs globally.

R&I: Who is your mentor and why?

Robert O’Connor, my former director when I was first on-boarded at Sunbeam, gave me so many valuable tidbits. I’ll call him to this day if I have an idea I want to bounce off him. He’s a good source of comfort and guidance.

R&I: Of what accomplishment are you most proud?

I have two very empathetic, healthy and happy boys. Eleven and soon-to-be 14.

On the professional side, there were a lot of moments during my career at Citrix where we were running a very lean organization, so I had the opportunity to get involved in many different projects that I probably wouldn’t have had in other larger organizations.

R&I: What is your favorite book or movie?

My favorite movie is Raiders of the Lost Ark.

R&I: What’s the best restaurant you’ve ever eaten at?

A place in Santa Barbara called Bouchon.

R&I: What is the most unusual/interesting place you have ever visited?

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Caverns in Gatlinburg, Tennessee. They were interesting. It was cool to see these stalagmites and stalactites that have been growing for millions of years, and then just above ground there are homes from the 1950s.

R&I: What is the riskiest activity in which you’ve ever engaged?

Riding on the back of my husband’s Harley.

R&I: What about this work do you find the most fulfilling or rewarding?

I like educating people and helping them find their ‘aha’ moment when you highlight areas of risk they may not have thought about. It allows people to broaden their horizons a little bit when we talk about risk and try to explore it from a different angle. I try not to be the person who always says “No” because it’s too risky, but find solutions that everyone is comfortable with given a risk profile.

R&I: What do your friends and family think you do?

I tell my kids I protect people and property and sometimes the things you can’t feel or touch.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]