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Regulation of Catastrophe Risk in Colombia: Country Experience

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 2,3. 2003. PROLOGUE. Insurance Regulation. Catastrophe Risk Management.

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Regulation of Catastrophe Risk in Colombia: Country Experience

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  1. 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 2,3. 2003

  2. PROLOGUE Insurance Regulation Catastrophe Risk Management

  3. Seismic Plates Afecting Colombia CARIBBEAN COCOS SOUTH AMERICAN NAZCA

  4. Exposure Zones According to Mercali’s Scale

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

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

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

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

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

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

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

  12. REGULATION Solvency Margin • Based on fixed factors model, as the higher between premiums or claims. • 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.

  13. 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

  14. 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

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

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

  17. RISK MANAGEMENT Measurement Private sector: Mortgaged Loans (more than 700.000), buildings as credits guarantee, common areas, buildings belonged by supervised entities, are required to be insured against earthquake

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

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

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

  21. BOGOTA SEISMIC MICRO – ZONES MAP

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

  23. RISK MANAGEMENT

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