“FINANCING THE RISK OF NATURAL DISASTERS”
“REGULATION OF CATASTROPHE RISK IN COLOMBIA, A COUNTRY CASE”
With the aim to share our country experience in this matter, following we will refer
both, the regulation ruling the private insurance and the experience and efforts
carried out by different public offices in the field of risk management of natural
catastrophes.
Prologue
According to ITEC1: Earthquakes occur as a consequence of internal forces of
Earth. This forces are originated in thermal processes whose dynamics are only
partially known. The slow rise of magmatic material as a result of the changes of
temperature between the internal and the external sides of Earth, produces
movements on the surface of the planet, mobilizing the so-called tectonic plates.
The global tectonics theory, submitted to the consideration of the scientific
community towards the end of the 1960’s, gives a coherent explanation of the
occurrence of earthquakes, the presence of volcanoes, and the formation of
mountains. In the areas where these plates converge, energy is stored up slowly,
and sudden liberations of this energy occur in unknown periods of time.
The liberation of energy conforms a phenomenon which has been known as
earthquakes, quakes or seisms. All three mean the same. One of the areas of
greatest seismic activities in the planet corresponds to the so-called circumPacific
belt which extends from the extreme south of South America, up to Alaska on the
north, passes along Japan, and reaches New Zealand .
The Nazca Plate is moving in a general West to East direction at a relative speed
which, on average may be of 60 mm/year. The South America Plate is moving in a
general East to West direction at an average speed of from 10 to 20 mm/year. The
Caribbean Plate has a relatively lesser movement in a general West to East
direction within the area of interest even though it varies in its limits. The rotation
component of the Caribbean Plate possibly generates compression against the
northern part of the South America Plate along the coast of the Caribbean Sea.
General Aspects Of Recent Earthquakes In Colombia, The Seism Of The “Coffee Growing Region” On
January 25, 1999, And The National Insurance Industry In The Face Of Future Earthquakes That Might Affect
The Cities Of Bogotá, Medellín, Cali And Bucaramanga. Study Prepared For The Federacion De Aseguradores
De Colombia (“Colombian Association Of Insurers”) Fasecolda. Ingeniería Técnica Y Científica, Itec.
Ingenieros Asesores y Consultores. Bogotá, Colombia, June, 1999.
1
Colombia is located in a zone of high seismic risk influenced by four tectonic
plates. Colombian territory is mainly subject to the forces of the Caribbean, Nazca
and South America plates.
The exposure and potential losses from earthquakes worsens when considering
that more than 80% of the Colombian population (Bogota, the called coffee axis,
Medellín and Cali) is located in the andean mountains.
Bogota (8 million) groups about 20% of the population, and including Medellín and
Cali, they generate 80% of the whole premiums of the country.The coverage level
varies according to the region to be analyzed. In the urban centers, this percentage
is considered between 30% and 40%, This is due to the obligatory nature for the
mortgages loans (around 700,000) which must be covered by earthquake
insurance as guarantee.
In the Pacific Coast the earthquake risk is increased by the exposure to tidal wave
or Tsunami. Other exposures are hurricaned winds and flood in the Atlantic coast,
affecting important population centers as Cartagena and Barranquilla. Derived
losses of seasonal threats as floods, and the phenomenon of "el niño", although
they are significant, are not easy to measure as they affect very ample and varied
sectors with low density of insurability. Other risk as avanlanches, use to affect
urban areas occupied by poor population with no acces to private insurance.
Some statistics shows that in Colombia during the period 1993 – 2000, at least 4
million people were affected by natural disaters.
Regulation applicable to private insurance
Decree 839,1991, established the technical reserves regime as well as the
investment regulation to be applicable by insurance companies, requiring, among
others, a deviation claims reserve for the earthquake insurance. This corresponds
to 40% of the retained net premiums. This reserve is cumulative until completition
of an equivalent to at least the double of of the PML in the seismic zone of greater
exposure.
Decree 2272, 1993, defines the PML for earthquake as 15% and no local company
is able to assume a greater value to 10% of its admited capital. Any excess is
required to be reinsured. This PML is higher than the used by other Latin
American countries with earthquake exposures (Mexico). A proposal aimed to
reduce it is under study. This proposal is based on micro zonification analisys for
seismic events carried out in different Colombian cities.
The Colombian insurance market operates earthquake as an independent
bussines line. The coverage offered by this policies includes both earthquakes and
volcanic eruption. Floods are covered by means of an additional premium but
insured properties are located in urban centers with low exposure. In terms of
premiums issued, this is the fourth one after auto, fire and compulsory auto.
Reinsurance is characterized by the use of proportional and nonproportional
contracts jointly, being the proportional average cession 60%.
The Statute of the Financial System (Decree 663,1991), requires as a guarantee
for the mortgage loans, the goods received as guarantee and the buildings
pertaining to the organizations supervised by the Banking Supervision, to be
insured against fire and earthquake. Even this norm has increased the level of
insurability, the 1999 earthquake happened under circumstances of an economic
recession and the rise in the interest rates. This generates a difficult situation as
credit loans turned out to be greater than the real value of the buildings.
Decree 2272,1993, established the obligation for the insurance companies to
inform the supervisor on a yearly basis its distribution of accumulations, the form in
which they are protected and the list of reinsurers used.
As a consequence of the Popayán earthquake on March 31, 1983, a first attempt
to establish a minimum set of rules about construction characteristics was issued in
june 1984 by means of decree law 1400, which conformed the Colombian Code of
Seismic Resistant Constructions SRC. In 1997 this law was modified by decree 33
and a year later the Seismic Resistance Norm, NSR-98 was issued to enhance
and update the SRC.
As a consequence of problems derived from infra insured values registered in
1999, Law 675, 2001, demands that common areas of the coproperties must be
also insured against earthquake.
Among the modifications to be introduced in the calculation of the solvency margin
required to insurance companies, is the acceptance of the deviation reserve as
part of their admited capital. In the 1999 earthquake (the coffee zone), companies
were allowed to use these resources to cover their retention, with the obligation to
restitute such resources in a four years lapse. Even the norm is clear when
determining the maximum limit, did not establish in which cases could be used.
This is something to be ruled in a new technical reserves regimen to be modified.
But not just the earthquake insurance of goods is ruled, Law 100, 1993, which
established the Social Security System, ordered the creation of a special account
aimed to cover the victims of natural disasters.
Program established by the National Government for the Risk Management
of Natural Disasters
Theory indicates that a program for risk management includes in general terms the
following aspects:
Identification
Measurement
Risk Control and
Monitoring
Next we will display a brief description of the efforts that in this matter have been
carried out in Colombia.
After the Popayán earthquake (1983) and the avalanche that destroyed Armero
(1985), the National Government conscious of the difficulties in the delayment in
his programs of economic development, created by means of law 46, 1988, the
National System for the Attention and Prevention of Disasters (SNPAD), whose
responsibilities, organizacional structure and coordination mechanisms at national,
regional and local levels were regulated in 1989.
SNPAD is constituted by public and private organizations, and is responsible for
prevention and mitigación of risks, emergencies attention and rehabilitation of
zones affected by natural or non intentional human disasters. One of the most
important characteristics of this system is decentralization and allocation of
responsibilities to local authorities, whose must include these aspects when
adopting their territorial plans.
Risk Identification: SNPAD counts with technical support of more than 15 public
and private organizations, which facilitate the identification of the natural and
antropics threats at national level. This system counts with maps of risks for
catastrophic events like earthquake, volcanic eruptions, tsunamis, erosion, slidings,
avalanches, floods, hurricanes and storms, in addition to a map for agricultural
risks like frosts, hail and other events.
Even for the oil and energy sector exists a contingency plan against the
hydrocarbon spill and dangerous substances, there is a lack of regulation on
handling of radiation sources and the transport of polluting substances.
In the matter of earthquake, with the support of local universities and Mexican and
Colombians consultants, different projects have been carried out for seismic
microzonificación in the country’s main cities. These studies are aimed to optimize
the insurability conditions and to evaluate the availability and destination of
resources in emergency case.
Measurement: In spite of counting on an ample base of risk identification, the
process of losses quantification is incipient. It is esteem that 70% of State owned
buildings count on insurance policies against earthquake,
infrastructure of the country is more exposed.
whereas the
At regional level, it is demanded for the administrators to make reference in their
territorial plans, about the form in which all the resources under their responsibility
are protected.
In the private sector the mortgage loans or the propierties on which some type of
guarantee is constituted to endorse credits and the common areas of all the
coproperties or condominiums, must be insured against earthquake.
Control: The strategy for risk control includes measures as:
 An ongoing improvement of knowledge about natural risk.
 Including of risk management in regional planning.
 Institutional reinforcement of SNPAD
 Improving of educational programs and disclosure of measures
 Financing
The goals, activities, responsibles, supporting entities and schedule is shown in an
annex.
In September 2002 it was given to the National Planning Department by the Andes
University, a study on "Retention and Transference of Seismic Risk" which was
financed with the World Bank resources. This study makes reference to the various
alternative financial programs to be used by the national government. They refer to
self retention programmes, catastrophe bonds and securitization
One of the most effective techniques in loss prevention is estructural
reinforcement, as this mechanism reduce the exposure to damages and reduce
premiums costs. By the nature of their use, hospitals and schools are considered
as a priority in this program.
Micro zonification studies for seismic purposes have been carried out in several
cities. This is part of the ongoing improvement of knowledge of risk.
Monitoring
It was established a committee conformed by delegates of the Minister of Political
Affairs, the National Planing Department and three others from techical entities
which responsibility is to monitor the general development of this project, by means
of performance indicators and periodical assesments.
Important Earthquakes in Colombia.2
* Pamplona: occurred on January 16, 1644, at 6 o’clock in the morning. Many
people were buried under the debris.
* Popayán: took place on February 2nd, 1736; caused severe damages to the
temples and to private houses.
* Bogotá: happened on October 18, 1743 and caused severe damage. The Ermita
of Monserrate fell.
* National Territory: took place on July 12, 1785 and was the strongest earthquake
of the 18th century in this country; it was felt from Popayán to Pamplona. Its
epicenter must have been relatively near Bogotá.
* Honda and Mariquita: occurred on June 16, 1805. More than a hundred deaths
and a lot of damage in Honda, a few in Bogotá where it is supposed to have been
superficial.
* Tame: happened on July 12, 1806; caused damages to the temple of Tame and
27 houses of the same town. A tempest and hurricane were reported following the
earthquake.
* Atlantic Coast: took place on February 26, 1825 and caused severe damage in
Santa Marta and, even though information is not clear, it seems there was also
damage in Cartagena.
* Bogotá: occurred on June 18, 1826 and caused severe damage; replicas
happened almost an entire year.
* National Territory: happened on November 16, 1827; was very strong; caused
damages in several cities of the country and in Bogotá it was said to have lasted 8
minutes. It was reported that 250 persons died in Neiva. The Suaza River was
damned for 55 days. The most affected towns were: Bogotá, Neiva, Popayán, and
Pasto. There were several aftershocks. Neiva, presently with 300,000 inhabitants,
is located in the area of influence of the system which caused this earthquake, and
which will break again in the future, city which suffered severe damage.
* Sibundoy, Putumayo: occurred on January 20, 1834. Caused severe damages.
There were replicas over several days. The epicenter of this event must have been
in the Valley of the Sibundoy River if one takes into account the descriptions.
2
Itec. Ingenieros Asesores y Consultores (Op. Cit).
* Cúcuta: took place on May 18, 1875. Destroyed the city; caused the
demonstrated death of 461 persons, which was equivalent to 10% of the total
population. Some accounts mention up to one thousand deaths. The duration of
the earthquake has been estimated between 40 and 50 seconds. The towns of San
Luis, Arboledas, Salazar de las Palmas, Gramalote, Bochalema and San Faustino,
in Colombia, suffered damages. In Venezuela, the towns of San Antonio, San
Cristóbal, La Mulata, La Grita and Colón were affected. This earthquake was felt in
Caracas and in Bogotá.
* Tumaco: occurred on January 31st, 1906 and has been catalogued as one of the
strongest earthquakes in history; there were 4 foreshocks. It is said that in Tumaco
the length was estimated between 3 and 5 minutes. There were people drowned
by the seaquake; fragmentary data mention 400 deaths, almost all of them
drowned; there was a rising of the coast estimated at 1.6 meters.
* Bogotá: occurred on August 31st, 1917 and caused light damages to many
buildings in the city. There were 6 deaths caused by the destruction of the temple
of Chapinero.
* South of the country: on December 13th, 1923, and following days a series of
earthquakes happened which caused destruction and death. Between 200 and 300
persons lost their lives in Colombia and Ecuador.
* Center of the country: a strong seism occurred on February 4, 1938 with
epicenter in Caldas and focus 130 kilometers deep. This earthquake was felt in all
of the nation. Two deaths in Manizales.
* Arboledas: occurred on July 8, 1950; caused 106 deaths and severe damages.
* Center of this country: took place on July 30, 1962 and caused some 20 deaths,
and destroyed parts of the cities of Pereira, Manizales, and Sonsón.
Huila: occurred on February 9, 1967. It was given a magnitude of 6.7 with MM
intensities of ten in some places. It caused material damage estimated in 300
million pesos, and 98 deaths.
Bucaramanga: happened on July 29, 1967, the same day as the earthquake of
Caracas. The first accelerogram of this country was obtained with the
accelerograph located in the National Museum of Bogotá. The seism’s epicenter
was far away from Bucaramanga but was mistakenly called the Bucaramanga
earthquake.
* Old Caldas: it took place on November 23, 1979. Magnitude: 6.4; caused 55
deaths and great destruction in the cities of Manizales, Pereira, and others, and in
towns along the Old Caldas Department.
* Colombian South Pacific: took place on December 12, 1979, with a magnitude of
7.8; its toll of victims reached 500 counting deaths and disappearances. There was
a huge seaquake and enormous destruction in Tumaco and in other villages along
the Pacific Coast in the Departments of Nariño and Cauca.
* Popayán: it happened on March 31st, 1983, with a magnitude of 5.5. It caused
almost 300 deaths and nearly 1500 seriously injured. Material damage surpassed
three hundred million US dollars. It had a very superficial focus, with maximum
local intensities of level IX in the MM scale. It had many replicas.
* Tragedy of El Ruiz: it occurred on November 13, 1985, and even though it was
not caused by a seism but by the explosion of a same named volcano, it should be
mentioned because it had its origin in the same internal forces of Earth. Some
22,000 deaths, many injured, and direct material damages for an amount above
two hundred and ten million US dollars.
* The Murindó Earthquakes, in the Urabá Region of Antioquia, took place on
October 17 and 18, 1992. The first with a magnitude of 6.6 and the second one of
7.2. They caused serious damage to small villages. Affected many uninhabited
areas. In Medellín, located some 150 km. away from the epicenter, damages
reached the sum of fourteen million US dollars even though the acceleration peak
registered in an instrument located in that city only reached 0.03 g. The one of
October 18 was felt for several minutes in the soft and very thick soils of the
Savannah of Bogotá, some 400 kilometers away from the epicenter. In the
epicentral area, one river was damned because of changes of levels and
accumulation of wood trunks that were left from the destroyed forest. There was
abundant liquation of granular soils. This seism revealed the very poor control on
the quality of some constructions in Medellín. In spite of the fact that the national
compulsory Construction Code was already obligatory, many had not complied
with it.
* Arauca Earthquake (Puerto Rondón) on July 22, 1993, with epicenter at 6.40ºN
and 71.13ºW, magnitude of Mb = 5.9 and a replica of magnitude 4.9 on that same
day. Focal depth of some 10 kilometers. An important seism because it occurred
more to the east than was presumably expected within the seismotectonic
knowledge. It caused damage to nearby villages and generated abundant areas of
liquation.
* Páez Earthquake on June 6, 1994, with epicenter on the slopes of the Nevado
del Huila, in the limits of the Departments of Cauca and Huila. It had a magnitude
of 6.4 and a focus 10 km. deep. It caused enormous landslides on the slopes
which in turn caused great avalanches in the rivers. In some cases, the levels rose
30 meters above the one they had at the moment of the earthquake. These
avalanches were co-seismic and obliterated villages with a total of one hundred
deaths and more than one thousand disappearances.The volcanic origin of the
soils that slide confers on them a specially high sensitivity; the slopes are very
slanted and the area had been through a long season of rains. Consequently, the
strong quake unleashed the slide of masses of soils whose static equilibrium must
have had a very low factor of safety.
* Tauramena Earthquake on January 19, 1995. With epicenter along the border of
the Departments of Boyacá and Casanare it is of particular importance within the
context of this study. It had a magnitude of 6.5 with a plane of rupture whose dip
confirms the neotectonic evidence of the epicentral region. Inverse type
mechanism. In Bogotá it was felt with maximum intensity of VI in the MM scale. It
was able to cause damage on very flexible constructions. The epicentral intensity
of this seism is notoriously low. With a focal depth of 20 km it should have caused
much more damage.
* Calima Earthquake on February 8, 1995. It occurred with epicenter near the town
of Trujillo, Department of Valle, with a focal depth of 90 kilometers. The
acceleration levels registered were very low, in all cases below 48 gals.
Nonetheless, it caused important damage in Pereira in dividing walls and façades
of many buildings and the breakdown of two old buildings caused several deaths.
Structural damages detected in this city were much less.
* Coffee-Growing Area Earthquake on January 25, 1999. With epicenter near
Armenia, it had a magnitude of 6.2, a focal depth of approximately 15 kilometers,
and generated dominant local seismic intensities of level IX in the Mercalli scale in
several villages, with punctual intensities that in some points could have been
similar to those corresponding to level X.
SUMMARY OF THE MERCALLI INTENSITY SCALE
Level Grade and Gross Description of Effects
I
II
III
IV
V
VI
VII
VIII
IX
X
XI
XII
Insignificant Only detected by instruments
Sensitive Felt by very sensitive people. Hanging objects oscilate
Light Small vibrations
Moderate Felt indoors. Noise from small objects moving
Slightly strong Most people felt it. Some fear. Small damages
Strong Damage to non seismic resistant structures
Very strong People run. Damage to quality construction and severe damage
to adobe walls and adobe houses
Destructive Severe damage to constructions
Ruinous Severe damage to quality constructions. Almost total destruction of
non seismic resistant buildings
Disastrous Only seismic resistant construction resist
Very disastrous General panic. Almost total destruction. Cracking of the
ground
Catastrophic Total destruction
Bibliography
CONPES National Board for Social and Economic Policy. Document 3146. 2001.
General Aspects Of Recent Earthquakes In Colombia, The Seism Of The “Coffee
Growing Region” On January 25, 1999, And The National Insurance Industry In
The Face Of Future Earthquakes That Might Affect The Cities Of Bogotá, Medellín,
Cali And Bucaramanga. Study Prepared For The Federacion De Aseguradores De
Colombia (“Colombian Association Of Insurers”) Fasecolda. Ingeniería Técnica y
Científica, Itec. Ingenieros Asesores y Consultores. Bogotá, Colombia, June, 1999.
"Retention and Seismic Risk Transference in Colombia" Preliminar assesment of a
posible financial strategy and potential market. Universidad de los Andes,
Departamento de Ingeniería Civil y Ambiental. Cederi, Centro de Estudios sobre
Desastres y Riesgos. September 2002. This Project was submitted to the National
Planning Department and financed by the World Bank.
Statute of the Financial System, Decree 663,1991.