Mexico houses the largest number of UNESCO World Heritage sites in North America and the sixth largest in the world. These ancient monuments have been a mainstay of Mexico’s tourism business – a business responsible for more than 17% of Mexico’s gross domestic product in 2020 — employing more than 4.4 million workers and attracting both local and foreign visitors. But with multiple earthquake fault lines scattered under their locations, these landmarks are at constant risk.
Pioneering earthquake insurance in Mexico
After a series of earthquakes in 2017, the Mexican government realised that maintaining protection against these natural disasters in a traditional insurance format was too complex. They needed an alternative and more effective insurance solution to protect landmarks and make the tourism industry more resilient.
It is not a simple task to design insurance for thousand-year-old historical sites. Swiss Re’s team, led by Rubem Hofliger from Public Sector Solutions, knew a scientific approach would be needed for insuring the landmarks without breaking the budget.
“Data science was critical to getting this product right. We are looking at thousands of cultural assets in earthquake-prone areas. Once we got the math right, we could balance the complexity of the risks with an easy-to-understand, affordable product for the government.“
First, the team analysed the potential economic value of a given set of cultural assets. These assets could be temples, churches or other cultural artefacts. They then mapped so-called “shake intensity” data over these assets. This allowed the team to understand how much insurance cover could be created for target locations at a certain expected payout level.
Despite the complexities involved, the resulting insurance coverage is transparent and clear: it provides a rapid payout on a graduated scale based on the shake intensity at a given pre-defined location – up to the policy limit – which is also a pre-agreed, de facto claims settlement process. This parametric insurance product provides Mexico with funding for a rapid response following a natural disaster.
Parametric QUAKE
The insurance implemented in Mexico builds on Swiss Re’s QUAKE solution, developed by Corporate Solutions’ Innovative Risk Solutions unit. QUAKE, a parametric, rapid-payout earthquake insurance product, is unique, as each policy is tailored to closely mirror the insured’s likely experience during these natural disasters.
The solution uses the United States Geological Survey’s ShakeMap, a service which details how strongly an earthquake was felt on every point on the globe. The stronger the earthquake was felt, the higher the damage at the insured location. QUAKE insurance can be applied to assets for which replacement values are hard to determine and which the traditional risk transfer market cannot accommodate. This includes archaeological sites or natural assets such as coral reefs.
“Our parametric QUAKE insurance immediately appealed to clients because it’s an affordable solution that gives them more coverage and flexibility. The protection provides liquidity for a fast recovery of these magnificent sites should disaster strike and helps reduce the financial impact on the tourism sector“, says José Antonio Izaguirre, Structurer Risk Solutions, Latin America.
The policy gives the government fast funding to enable recovery if an earthquake strikes.
Swiss Re’s Public Sector Solutions team provides innovative risk knowledge and risk transfer solutions for governments, including data-driven parametric solutions that provide rapid payouts in times of disaster.
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