Swiss Re Insurance-Linked Fund Management

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No Chile earthquake impact expected to CS Iris Low Volatility fund


Insurance linked investment manager Credit Suisse Asset Management has reported that despite having some small Chile earthquake exposures in its CS Iris Low Volatility Plus fund it does not expect any impact from the recent earthquake in Chile.

The CS Iris Low Volatility Plus fund is the master fund to the DCG Iris London-listed ILS fund, so there is also no impact expected to DCG Iris at the current forecast insured loss levels of under $1 billion, according to Credit Suisse.

Credit Suisse noted that Chile has a relatively high level of insurance coverage, with a large amount of the insured value ceded into the global reinsurance market due to strict regulatory requirements and limited domestic risk appetite. That suggests that some of the losses from the quake event may find their way into the reinsurance sector.

Much of the insured value is related to earthquake risks but this is concentrated away from the region the recent earthquake struck. Also notable is Chile’s strict building codes, meaning that many are unlikely to have been affected by this quake.

Despite this lack of impact to the CS Iris Low Volatility Plus fund, we cannot confirm whether Credit Suisse’s higher-risk strategies, such as the CS Iris Enhanced ILS fund. That fund has a higher risk profile and with Credit Suisse reporting it has some exposure to Chile earthquake in the Low Volatility fund, it is possible that the Enhanced strategy also has an exposure. However, at an insured loss of under $1 billion it is unlikely that even the Enhanced fund would be hit by this event.

No catastrophe bonds have any exposure to Chile earthquakes, so Credit Suisse’s exposures to earthquake risks in the country will be through private fully-collateralized reinsurance transactions.

The full report from Credit Suisse is repeated below.

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A magnitude 8.2 earthquake occurred off the coast of Northern Chile on April 1, 2014 at 6.46pm local time. The epicentre was located 95km (59 miles) northwest of Iquique (Chile) at a depth of 20.1km (12.5 miles). A tsunami warning was issued along the Northern Chilean and Southern Peruvian coasts and waves reaching 2.5 meters later flooded low-lying areas of Iquique. Strong aftershocks, including a magnitude 7.6 aftershock late on April 2, are still affecting the region.

Initial reports show damage to infrastructure and property with several highways blocked by rockslides and the airport control tower in Iquique damaged. The tsunami has also flooded a clinic and bus terminal in Iquique. At least five people were killed. A large blaze ignited in Central Iquique and electricity and water supply are disrupted. Iquique is a key port, close to Chile’s main copper mines, but mining did not appear significantly interrupted.

Along the Peru-Chile trench, which runs along most of Chile’s Northern and Central coastline, the Nazca plate is being subducted beneath the South American plate. This trench has produced some of the largest earthquakes in the world including the magnitude 9.5 earthquake in 1960, the strongest earthquake ever recorded. In February 2010, the magnitude 8.8 “Bio Bio” earthquake and the following tsunami killed several hundred people and caused $8 billion in insured losses.

Chile has a relatively high level of insurance coverage compared to other countries in South America. A large share of the insurance values is ceded to the international reinsurance market due to strict regulatory requirements and limited domestic risk appetite. The majority of commercial values are insured against earthquakes, but more than half of these assets are concentrated around the areas of Santiago and Valparaiso which were not affected by the recent earthquake. Given the country’s long history of destructive earthquakes, strict building codes are enforced.

Insurance losses from the recent earthquake will be significantly lower compared to the 2010 quake as the recent quake was less severe and the epicentre was located far off the centres with high insurance values in Santiago and Valparaiso. Based on a preliminary analysis, with the information available shortly after the event, insurance losses will likely end up below $1 billion.

The CS IRIS Low Volatility Plus Fund has some smaller exposures to earthquake risk in Chile but we do not expect an impact on fund performance at the currently estimated industry loss level.

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