Israel looking at catastrophe bonds for earthquake risk

by Artemis on January 19, 2011

Israeli government finances are not prepared for the potential shock of a huge earthquake concluded a piece of work by their National Economic Council. The business sector has insurance in place but residential insurance is not so well prepared and the government finances themselves are said to be less capable of withstanding the shock of a $20-$50 billion earthquake (said to be roughly a 1 in 250 year event in Israel).

The work concluded that an earthquake of that magnitude would severely impair the banking and capital markets in Israel resulting in shrunken tax revenues and depreciating value. As such Israel is looking to possible solutions to provide it with a financial backstop and enable it to hedge its earthquake risks. Another factor the government are considering is that as many as 45% of private apartments are uninsured and so the government needs to have a contingency fund to help much of the population recover from any disaster.

One issue in countries such as Israel is that governments often have no idea of the actual value of property, business and finance that could be destroyed or interrupted by an earthquake. Therefore the estimates of $20-$50 billion are just that, estimates. The government believes they could finance an earthquake event of up to $10 billion, and event of $10-$25 billion would need to be financed by a fund of sorts and events of $25 billion and up would need to be financed by reinsurance.

The Council has recommended raising a sovereign fund to prepare for earthquake events and specifically mention utilising catastrophe bonds to provide some of that funding. The establishment of a catastrophe fund for Israel is said to be a top priority for the government and they are looking to move quickly to get protection in place. Could Israel be the source of the next MultiCat catastrophe bond transaction or is their economy strong enough to issue a cat bond without the help of the World Bank.

More details available in the The Marker from Haaretz.

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