Chile quake to be hugely costly but no risk to cat bonds

While the recent earthquake in Chile is going to be hugely costly to the Chilean economy and very costly to insurers it won’t have any impact at all on catastrophe bonds as none that have been issued cover that region for quake risk.

The level of insurance penetration in Chile is fairly low meaning that the economic losses won’t be fully covered by insurance. In turn this means that the insurance is less likely to be covered by reinsurance and therefore no-one has seen it as necessary to issue a cat bond to cover Chilean earthquake risks.

Latest estimates from risk modellers such as AIR Worldwide and EQECAT put insured losses at somewhere between the $2B and $8B mark. A similar quake in the right area of the U.S. or Japan would most certainly have triggered a cat bond.

As South American insurance penetration and coverage widens we expect to see reinsurers feel the need to hedge their risks there in the same way they do in the U.S., Europe and Asia. That means that a catastrophe bond in Southern America cannot be far off.