Sun | Dec 3, 2023
- ADVISORY COLUMN: RISKS & INSURANCE

Cedric Stephens | Taking a proactive approach to disaster risk: The Chilean example

Published:Sunday | March 26, 2023 | 1:24 AM
In this February 27, 2010 photo, a  police officer controls the traffic aside of an elevated highway that collapsed in Santiago following a powerful earthquake in central Chile.
In this February 27, 2010 photo, a police officer controls the traffic aside of an elevated highway that collapsed in Santiago following a powerful earthquake in central Chile.

Today’s article will offer readers an example of a country in this hemisphere with about seven times Jamaica’s population that has taken responsibility for its vulnerability to natural disasters. Successive local administrations have ignored this...

Today’s article will offer readers an example of a country in this hemisphere with about seven times Jamaica’s population that has taken responsibility for its vulnerability to natural disasters.

Successive local administrations have ignored this idea for over 50 years until recently. The Minister of Finance for the Republic of Chile, Mario Marcel, is on the same page as Finance and Public Service Minister Dr Nigel Clarke. Earlier this month, he explained that the Chilean government saw the recently concluded negotiations about its US$630 million catastrophe bond and catastrophe swaps as examples of its desire to embrace ‘fiscal responsibility’ regarding natural disaster risk.

Dr Clarke concluded his reflections on Jamaica’s 60th independence anniversary in an article in this newspaper on fiscal responsibility that “taking responsibility for our vulnerabilities is an organising principle we take seriously … we will continue to pursue a path that keeps Jamaica resilient, robust, and strong so that our human, social, and physical development can advance even amid exogenous economic shock”. This was also a critical part of his contribution to the 2023-24 Budget Debate. Many people, I suspect, ignored that message.

Taking responsibility for Jamaica’s vulnerability to natural disasters presupposes implementing measures to minimise their impacts before these events occur – not afterwards.

Chile is an excellent example for Jamaica to emulate. It is one of the most earthquake-prone countries in the world. This is due to its location along the Pacific Ring of Fire, an area of intense volcanic activity and earthquakes. It is affected by droughts, floods, tsunamis, volcanic eruptions, forest fires, and earthquakes.

Chile experienced the most devastating wildfire emergency in its history in January 2017. Wildfires spread, affecting an estimated one million acres of vegetation. Rising sea temperatures and sea levels have disrupted the lives of those residing in Chile’s coastal areas and river basins. Chile invested in resilient infrastructure, early warning systems, and urban planning. This has prevented casualties in recent seismic events despite being hit by high-magnitude earthquakes.

Warning systems

The country has become more resilient to earthquakes. For example, in April 2014, a magnitude 8.2 earthquake struck near Chile’s northern coast, causing a tsunami and strong aftershocks. Because of its disaster-response preparations and tsunami-detection system, one million people were safely evacuated.

Early detection and disaster preparations result from the lessons learned from the 2010 earthquake and the subsequent tsunami. The 2010 Chilean earthquake was the second strongest in the country’s history and the sixth strongest globally. The 8.8 magnitude quake released 500 times more energy than the Haitian disaster and caused 500 deaths. The death toll from the Haitian event was 440 times bigger.

The Chilean government initially refused international aid but later reversed its decision. According to a 2017 Disaster Management Reference Handbook, Chilean society was forced to reflect on how the country should prevent, mitigate, prepare for, respond to, and recover from the impacts of disasters. Compliance with its strict building codes has effectively saved lives during disasters. This is in stark contrast to what happened recently in Turkey and Syria.

Chile is among the many disaster-prone countries that played a crucial role in formulating the Sendai Framework for Disaster Risk Reduction, a global plan for reducing disaster losses. In the three years following the 2010 disaster, Chile rebuilt or repaired approximately 87 per cent of what was destroyed or damaged in the earthquake, demonstrating its resilience as a nation and highlighting its path to reconstruction.

According to Chilean governance, its capital, Santiago, is prone to disasters due to climate-change impacts on the city. Santiago experiences inner-city flooding and urban fires. Six million or 90 per cent of Chilean residents live and work in Santiago. The city’s resiliency plan includes developing an early warning system to lower the risk of floods and wildfires and strengthen emergency relief efforts.

With the San Ramon fault line running along the city’s edge, the resiliency strategy implements plans to link emergency response efforts and sets up a system to monitor seismic activity. The focus also includes strengthening building regulations and implementing vulnerabilities into urban planning. The strategy, released as part of Santiago’s participation in the 100 Resilient Cities Initiative, utilises programmes already under way.

Rather than expose the country and its taxpayers to the potential burdens of debt issuances or a lack of liquidity after disasters strike, the Chilean government wants to have just-in-time capital on hand, which the parametric nature of the CAT bond and CAT swaps provide.

CAT instruments

A bond is a fixed-income debt instrument. It represents a loan made by an investor to a borrower – typically corporate or governmental. A bond can be viewed as an I.O.U. between the lender and borrower. A catastrophe bond, or CAT bond, has a specific function. It transfers a specific set of risks, typically catastrophes and natural disasters, from an issuer – which in the case of the Chilean CAT bond was the government – to capital market investors instead of insurers.

A CAT swap is a financial instrument traded in the derivatives market. It protects insurers against massive losses from natural disasters like hurricanes or earthquakes. These instruments allow insurers and others to transfer some of the risks they have assumed as an alternative to buying reinsurance or issuing a CAT bond to capital market investors.

The head of Chile’s Finance Ministry sees his country’s catastrophe risk-transfer arrangement as “demonstrating a desire to have better protected and more resilient public finances and considers the issuance to be part of a strategy towards fiscal responsibility”.

Dr Clarke summarised Jamaica’s natural disaster financing policy in more detail.

“We have capitalised a national disaster fund and launched the world’s first catastrophe bond, independently sponsored by a small country. These financing arrangements are designed to protect us from shocks from natural disasters. Similarly, we have agreed with the International Monetary Fund for the Resilience and Sustainability Facility and a Precautionary Liquidity Line to ensure that our development can proceed, continue, and increase even in the event of other possible external shocks,” said the finance minister.

“This is an engagement of choice. These are not arrangements that we had to make, but rather financings we are choosing to take advantage of to keep us strong, to build our economic and climate resilience, to create additional buffers, to expand our fiscal space, to broaden our options, and to help us prepare in advance for any adverse external developments that may arise,” he added.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com