Turkish earthquake to grow as an ILS peril as insurance penetration rises

Earthquake insurance penetration in Turkey has risen strongly since the imposition of a law which made having a policy mandatory and has now reached 37%, according to data from the Turkish Insurance Association.

In 2012 a law regarding catastrophe insurance coverage came into force which mandated that in order to access home utilities the homeowner should have a catastrophe insurance policy from the Turkish Catastrophe Insurance Pool (TCIP).

Despite the obligation to insure the penetration rate has not risen perhaps as quickly as you might imagine however reaching 37%, which reflects a 65% increase in the number of policies sold, is a rapid increase showing the growing importance of the Turkish catastrophe insurance market.

As a result we can expect to see an increasing focus on Turkey as a source of reinsurance linked investment in the ILS space. We’ve already seen two catastrophe bonds with exposure to Turkish earthquakes, the 2009 Ianus Capital Ltd. deal and the 2013 Bosphorus 1 Re Ltd. and the peril features in collateralized reinsurance funds as well.

As we wrote last week, the Bosphorus special purpose insurance vehicle has very recently changed its name to Bosphorus Re Ltd., which may be a sign that another series of cat bond notes will be issued in the near future. There has been much discussion that the TCIP would look to the capital markets again, with an indemnity cat bond a possibility. TCIP executives also expressed an appetite to issue a second Bosphorus cat bond.

Turkey wants to increase the penetration of catastrophe insurance much further, aiming to get as many households covered as possible. The idea behind the push for insurance penetration is to reduce the reliance on government financing and to push the disaster risk into the private markets.

This is in contrast to the approach in some much more developed regions of the world where making catastrophe insurance mandatory has not been pursued. The U.S., particularly California, is a great example where homeowners are not forced to take out earthquake insurance cover even if they have a mortgage loan from a bank.

Turkey now has a significantly higher rate of earthquake insurance penetration than California, which is a quite amazing fact and shows that developing nations are now leading the way when it comes to disaster risk financing and ensuring resilience against the most catastrophic natural events.

“Insurance is a powerful means of strengthening the resilience against catastrophic events. The losses caused by natural disasters place a significant burden on the public sector and, ultimately, on the uninsured people and businesses,” commented Kerem Ozdag, Deputy Secretary General of the Association of Insurance Reinsurance and Pension Companies of Turkey, during a recent conference.

“This is a significant achievement, but, on the other hand, this rate of penetration is still low for a compulsory insurance. We consider the amendments introduced by the law a very important step for promoting the insurance option and covering losses in our country and we believe that there will be quick developments in increasing the level of coverage,” Ozdag added.

With Turkish catastrophe risk set to become a growing component of the reinsurance market, as the increased insurance penetration results in greater levels of risk transfer to both reinsurance and capital markets, we can expect to see more of it ending up in the ILS and collateralized space. Turkish earthquake risks provide a valuable diversifier for ILS funds and as a result any increase in reinsurance demand will likely be met with keen pricing.