Puerto Rico considers catastrophe bonds to transfer risk of earthquakes

Puerto Rico faces considerable risk of earthquakes and in the last 500 years has faced five quakes which had a magnitude greater than seven on the richter scale, three of those earthquakes generated tsunamis. Now the island nation has been reassessing the risks and looking at ways to manage and mitigate earthquake risks.

A recent hearing for the Puerto Rico Planning and Infrastructure Committee analysed new Senate Joint Resolution 700 which is a piece of research leading on to legislation looking at what protection Puerto Rico would need from various areas such as the financial markets in the event of a major earthquake.

Research into earthquakes in Puerto Rico has found that the metropolitan area could be at much greater risk of severe earthquake than originally thought. As a result the government are seeking ways and advice to help them make the best risk management preparations they can.

One member of the government, Senator Larry Seilhamer Rodríguez, has called for the establishment of an interagency committee who would lay the groundwork for the creation of an insurance policy to protect all government property against specific risk of earthquakes. Talks have also included representatives of the utilities such as the Electric Power Authority who favor joining forces to create a robust risk management plan.

The discussions with the Senator raised the concept of catastrophe bonds and they were recommended as an ideal way to transfer the risk of earthquakes to the capital markets and secure sufficient reinsurance for Puerto Rico. It’s possible that Puerto Rico could issue catastrophe bonds in a similar way to the MultiCat Mexico transaction.

Puerto Rican hurricane risks have been included in catastrophe bond transactions in the past but never earthquakes as for as we’re aware.

Source: PrimeraHora.com