The Client and Its Challenge
This client, a major aerospace manufacturing company, has a large critical facility in Oakland, California. Its property insurance is handled via a large global program and is brokered by Marsh UK. Included in its global insurance program is earthquake coverage, which was obtained via the European markets, but was based on limited engineering data.

In past years, the premium costs for the earthquake coverage were evenly allocated across all of the client’s North American facilities. Prior to the recent property insurance renewal, the client’s risk management department decided to allocate the entire premium associated with the 2004-2005 earthquake coverage to the Oakland facility, as its the only North American facility that is exposed to serious earthquakes. This resulting premium increase is estimated at almost $500,000.

The Oakland facility approached Marsh for assistance in answering three specific questions associated with its major premium increase:

1. Are we able to obtain the same amount of coverage at a lower premium by going outside the global property insurance program?
2. Can we reduce our premium by purchasing a lower limit of coverage?
3. If we stay within the global insurance program, can we obtain a lower premium by demonstrating that the Oakland facility is well-designed and protected for earthquakes?


The Risk Consulting Solution
Marsh consultants reviewed the available loss control reports for engineering data on the Oakland facility. Unfortunately, a specific loss expectancy (LE) for the earthquake exposure had never been calculated. The earthquake coverage provided by the global program was assuming an LE equal to a total loss of the facility. Marsh quickly recognized that it would be difficult to obtain cheaper earthquake coverage based on the lack of engineering data. It was also impossible to recommend a lower limit of coverage because the exposure could not be accurately quantified.

The Marsh consultants recommended a formal earthquake analysis to gather the necessary data and quantify the exposure. They also recommended a site visit by a local Marsh consultant to analyze the earthquake risk and quantify the loss estimate (LE) due to earthquake and existing facility conditions. Upon completion of these activities, the Marsh property broker will have the data necessary to properly market the earthquake risk, and advise the client regarding an appropriate limit of insurance.

Results
The client is in the process of approving the earthquake study and the associated site visit. Recognizing the approaching May 1 renewal date, the Marsh property broker is working to identify the best potential markets for the earthquake coverage. With the additional engineering and market information, Marsh expects to be able to locate adequate earthquake coverage with a significant reduction in premium.