Regulation of Catastrophe Risk in Colombia: Country Experience MSc. Jairo Alberto Pérez Muñoz Director of Insurance Supervision Colombian Banking Superintendency The World Bank, Washington, june 2,

PROLOGUE Insurance Regulation Catastrophe Catastrophe Risk Management

Seismic Plates Afecting Colombia CARIBBEAN NAZCA SOUTH AMERICAN COCOS

Exposure Zones According to Mercali’s Scale

Other Natural Risks Tidal waves Tsunami Hurricaned winds Vulcanic eruption Floods Slidings and avalanches

REGULATION Decree 839, 1991: Deviation Claims Reserve: 40% of net retained premiums Deviation Claims Reserve: 40% of net retained premiums Cumulative Cumulative Decree 2272, 1993 Probably Maximum Loss 15% Probably Maximum Loss 15% (under study)

REGULATION Coverage offered by insurance companies covers both earthquake and vulcanic eruptions Coverage offered by insurance companies covers both earthquake and vulcanic eruptions The fourth bussines line after auto, fire and compulsory auto The fourth bussines line after auto, fire and compulsory auto

REGULATION Reinsurance distribution: Retention 40% Retention 40% This retention is covered by XLCat This retention is covered by XLCat At least 15% as PML At least 15% as PML

REGULATION Decree 663, 1993 Compulsory earthquake insurance for: Mortgaged loans Mortgaged loans Goods received as guarantee Goods received as guarantee Buildings of entities supervised by the Superintendency Buildings of entities supervised by the Superintendency

REGULATION Decree 2272, 1993 Decree 2272, 1993 Insurance companies are requiered to inform their acumulations, their reinsurance agreements characteristics and their reinsurers Insurance companies are requiered to inform their acumulations, their reinsurance agreements characteristics and their reinsurers

REGULATION Decree 2779, 2001 Decree 2779, 2001 Regulates earthquake reserves investment Regulates earthquake reserves investment Titles issued or backed by foreign entities Titles issued or backed by foreign entities Asigned limits for diversification purposes Asigned limits for diversification purposes

REGULATION Solvency Margin Based on fixed factors model, as the higher between premiums or claims. Based on fixed factors model, as the higher between premiums or claims. No special treatment for earthquake No special treatment for earthquake Acceptance of deviation claims reserve as part of admited capital, to be considered as there is not a real obligation against third parties. Acceptance of deviation claims reserve as part of admited capital, to be considered as there is not a real obligation against third parties.

RISK MANAGEMENT After Popayán earthquake (1983) and Armero (1985), the National Goverment creates by means of law 46, 1998, the National System for Attention and Prevention of Disasters SNPAD After Popayán earthquake (1983) and Armero (1985), the National Goverment creates by means of law 46, 1998, the National System for Attention and Prevention of Disasters SNPAD

RISK MANAGEMENT Identification: There exists risk maps for: earthquakes, vulcanic eruptions, tsunamis, erosion, slidings, avalanches, floods, hurricanes, storms, and in the case of crops for frost, hail and others There exists risk maps for: earthquakes, vulcanic eruptions, tsunamis, erosion, slidings, avalanches, floods, hurricanes, storms, and in the case of crops for frost, hail and others

REGULATION Oil and energy sectors counts with contingency plans Oil and energy sectors counts with contingency plans There is no regulation for handling of radiation sources and for transport of polluting substances There is no regulation for handling of radiation sources and for transport of polluting substances

RISK MANAGEMENT Measurement An incipient process An incipient process State owned buildings: about 70% insured State owned buildings: about 70% insured Infraestructure: there is not a good estimation Infraestructure: there is not a good estimation Optimised by means of privatization Optimised by means of privatization

RISK MANAGEMENT Measurement Private sector: Mortgaged Loans (more than ), buildings as credits guarantee, common areas, buildings belonged by supervised entities, are required to be insured against earthquake

RISK MANAGEMENT Risk Control Estructural reinforcement: Estructural reinforcement:  Reduce exposure to damage and reduce premiums cost.  Hospitals and schools as priority Allocation of responsibilities at regional level Allocation of responsibilities at regional level

RISK MANAGEMENT Risk Control Risk Control Study on “Retention and Transference of Seismic Risk” Study on “Retention and Transference of Seismic Risk” Self retention Self retention Securitization Securitization Catastrophe Bonds Catastrophe Bonds

RISK MANAGEMENT Risk Control Risk Control Micro zonification Micro zonification Studies carried out in the main cities used as well as to optimize resources in emergencies. Studies carried out in the main cities used as well as to optimize resources in emergencies.

BOGOTA SEISMIC MICRO – ZONES MAP

RISK MANAGEMENT Monitoring: Monitoring: A committee was established to monitor by means of performance indicators and a schedule of activities A committee was established to monitor by means of performance indicators and a schedule of activities

RISK MANAGEMENT