Mitigating potentially disruptive economic impacts of earthquakes

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Mitigating potentially disruptive economic impacts of earthquakes

Chile: Earthquake insurance programme

The challenge

Chile is one of the most seismically active countries in the world, experiencing some of the largest earthquakes ever recorded.

As part of a comprehensive risk management programme, Chile’s government took the decision to build up a layered financing scheme of ex-ante instruments to protect against the fiscal impact of strong earthquakes.

The solution

In 2023, Chile entered into a parametric earthquake agreement with the World Bank, who worked with Swiss Re and others to help transfer the risk.

Two separate placement formats were used to leverage the broadest possible risk appetite: Insurance-linked securities (catastrophe bonds) and derivatives (swaps), with both tranches using the same risk parameters and triggers. Payouts are triggered if an earthquake meets the pre-defined parametric criteria for location and severity.

The insurance programme protects Chile’s fiscal budget and reduces the potential need to mobilise debt in an event’s aftermath.

The impact

  • The Government of Chile is provided with USD 630m of earthquake insurance coverage, which covers the most extreme events in Chile’s risk management programme, with lesser events being managed by government funds.​

  • The programme provides three years of coverage, ensuring stability and assurance of government funds to support prompt recovery for the population after a severe earthquake.​

  • The deal was the largest single sovereign sponsored parametric transaction, syndicated in dual format to insurance-linked securities investors and (re)insurers, via the World Bank’s intermediation platform streams.​

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