(Coliseo, Guatavita, Cundinamarca, Colombia. Photo credit: Romain Bréget.)
As part of an effort to protect the solvency of its domestic insurance industry, Colombia’s insurance regulator, the Superintendencia Financiera de Colombia, has approved castrophe modeling firm AIR Worldwide’s (Boston) earthquake model for Columbia for use by domestic insurance companies in managing their earthquake risk.
The Colombian government has worked for several years to develop new policies that protect the solvency of the domestic insurance industry while making the reserving process more transparent. As with Solvency II, Colombia has adopted the best practice of tying reserve capital to an analytical measure of a company’s exposure to catastrophic loss from earthquakes. With the passing of several regulatory decrees, the Colombian Ministry of Finance and the Superintendencia Financiera require companies to use an approved catastrophe model to calculate the maximum probable loss and pure risk premium associated with each company’s portfolio.
“With this new approval, local insurers can work directly with AIR Worldwide and obtain expert modeling services and direct access to the models to satisfy regulatory requirements while giving companies a distinct advantage in preparing for the next earthquake in the region,” comments Rob Newbold, executive VP, at AIR Worldwide.
Insurers will be able to take advantage of AIR’s recently updated model for Colombia, which incorporates what the vendor characterizes as the latest scientific data and says is the first to provide an integrated view of loss due to ground shaking, tsunami, and liquefaction. The model features new damage functions for high-value industrial facilities, builder’s risk, and public infrastructure to provide a comprehensive view of risk, and it allows for the remodeling of historical events such as the 1999 earthquake that caused significant damage to the city of Armenia in Colombia’s coffee growing region.
Protecting South America’s Insurance Markets
“To continue to protect the strong growth of South America’s insurance markets, regulators are largely moving to establish model-based capital requirements more reflective of the actual risk faced by the region,” adds Newbold. “AIR’s innovative approach to modeling earthquake risk in South America has now been approved by two regional regulators, having been first approved by the Peruvian insurance regulator, Superintendencia de Banca y Seguros, in December of 2015. The AIR model can now be used in Colombia to better manage risk and satisfy regulatory requirements that base capital reserves on probabilistic loss estimates.”