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Colombia Earthquake Insurance

Colombia's susceptibility to seismic activity is among the highest in South America, prompting steps to mitigate potential loss in a nation of low insurance penetration.

“Ever notice…” scientific author and academic Joseph LeDoux asks, “…how short-lived is the calm that eliminates a source of worry?”

Much has been written of the ostensible end to Colombia’s conflict, yet a dark cloud of a different sort waits in the wings. The simple and tragic reality is that millions of people across the world, Colombians included, are susceptible to unpredictable seismic forces.

And while the timing of a trembler cannot be determined, insuring against inevitable risk has recently merited increased attention. In short, many citizens and businesses are no more than one quake away from utter loss, which collectively can spell economic disaster. This idea was brought home, mercifully without losses, on the evening of September 14, 2016 when a 6.0 earthquake struck the nation.

However, despite significant advances made by the broader economy in recent years, insurance penetration remains alarmingly low. Awareness, therefore, is all, both for insured and insurer.

A working model

On February 22, 2017 the Financial Superintendence of Colombia approved the catastrophe modelling system of US firm RMS, also active across the region from Argentina, Bolivia, and Brazil, to Chile, Ecuador, Peru, and Venezuela. The resulting data is vital to setting the groundwork for insurers active in earthquake insurance, by enabling them to calculate potential maximum loss and average annual loss, and enabling effective capital reserve allocation. Furthermore, the earthquake modelling competencies of AIR Worldwide were also adopted in the same year.

That firm has fine-tuned the accuracy of its predictions for Colombia with a model based on the criteria of ground shaking, tsunami, and liquefaction.

Naturally, such models not only concern insurance for existing properties and real estate, but determine the quality of newly built projects, including public infrastructure. Disaster mitigation activities have continued with earthquake risk management Firm Miyamoto International making its first South American footfall in Bogotá in July last year. Those set to benefit from its systematic analysis, should the worst occur, are first responders.

A stronger bond

On February 7 of this year a record was broken as the International Bank for Reconstruction and Development, part of the World Bank, issued sustainable development bonds which collectively generated USD1.36 billion in earthquake coverage for Colombia, Chile, Mexico, and Peru. This marked the historic largest sovereign risk insurance transaction and the second biggest issuance ever in the catastrophe bond market.

The instrument was also the first of its kind for all four nations. This issuance also elevated the World Bank’s total amount of risk transactions facilitated to almost USD4 billion, thereby championing its member countries’ access to risk insurance by leveraging capital markets. The joint approach also curbed related legal and sundry costs incurred by four nations.

The so-called insurance linked securities involved are a lateral market response to heightened demand from sovereign sponsors such as municipalities for adequate risk mitigation, and a readiness to meet insurance and reinsurance needs. The issuance classes for Colombia, Chile, and Peru entail coverage for three years, while those for Mexico are for two years. Around 50 investors from numerous countries resulted in investor orders of close to USD2.5 billion. Colombia is to receive USD400 million, Chile USD500 million, Mexico USD260 million, and Peru USD200 million in risk insurance.

Astrophysicist Mario Livio notes that, “Human curiosity about natural phenomena has always exceeded what was merely necessary for survival.” And he’s right. Yet investing in something you hope never to need, clearly in this instance, takes it one step further.