Back in January we wrote that the government in Israel were looking seriously at catastrophe bonds as a mechanism to prepare their finances for the possible economic shock of a major earthquake. A study undertaken by their National Economic Council concluded that Israel’s government finances were not prepared for a 1 in 250 year earthquake event.
The recommendations which emerged from the study suggested the creation of a sovereign fund which would be available to help the country recover from a serious earthquake and specifically mentioned catastrophe bonds as a potential layer of that reinsurance.
In the wake of the Japan earthquake disaster two meetings have taken place in government circles in Israel to discuss better preparing the country for the financial shock of major earthquakes. A plan about financial preparedness in the event of earthquakes was submitted to the National Economic Council and is soon expected to be submitted for Cabinet approval. The main recommendation was to establish a forum to investigate the overall potential damages from an earthquake hitting Israel. At the moment the information is sparse and needs combining with professional risk analysis to work out the best way to manage the economic risks.
One of the problems the initial study uncovered was that government facilities are in the main well covered but some other infrastructure owned by private companies was not and in the event of a major disaster the financial costs could end up being pushed onto the government as well. So part of the process is to ensure private insurance and reinsurance is in place as well as a safety net for the government.
Catastrophe bonds are still being considered as part of a reinsurance facility to cover an earthquake which caused in excess of $10 billion in economic losses and according to our sources are seen as a sensible idea by some members of the Israeli government.
It’s likely to be a slow process as Israel puts in place the structures and risk management plan which allows them to financially protect the government from the risk of earthquakes.