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Despite the magnitude of the recent earthquake in Chile – in both physical and financial terms – it's unlikely to trigger a catastrophe bond payout. Catastrophe modeling firms AIR Worldwide and EQECAT offer a range of estimated insured losses of $2 billion to $8 billion, though the dust is still settling. According to insurance securitization blog Artemis.bm, "A similar quake in the right area of the U.S. or Japan would most certainly have triggered a cat bond."
Though there has been cat bond activity in Latin America, none have been issued in the region to cover earthquake risk. Low rates of insurance penetration are likely to keep what will already be a costly situation for insurers and reinsurers from being even worse -- i.e., because not much coverage has been written in Chile.
That said, insurance penetration is on the upswing in the region, which means that insurers and reinsurers will need to put more thought into disasters such as the Chile quake and how to offload catastrophe risk from their portfolios. Essentially, insurers will need to implement in South America the practices they use in the U.S., Europe and Asia.
Simply put, says Artemis: "That means that a catastrophe bond in Southern America cannot be far off."
Last year, insurers and reinsurers issued $3.4 billion in catastrophe bonds, exceeding the expectation of $3 billion for the year and far ahead of the $2.7 billion issued in 2008. As a result, 2009 became the third most active year in the history of the cat bond market. This year, cat bond action could reach $6 billion to $8 billion. Records will fall if the high end of the range is reached.
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