Insurers Face Minimal Losses from Peru and Ecuador Earthquake: A.M. Best

May 29, 2019

A.M. Best said it does not foresee a major impact to the domestic insurance markets in Peru or Ecuador following a significant earthquake centered in Peru that also affected several provinces in neighboring Ecuador.

On May 26, 2019, an 8.0 magnitude earthquake struck in the interior Loreto region of Peru, an event that could be felt in Ecuador, Colombia and Brazil. To date, the areas known to be affected by the earthquake are concentrated in Loreto and in several provinces in Ecuador. In Peru, there is reported damage to housing infrastructure and schools, as well as disruptions in highway travel due to minor landslides and asphalt shifting.

According to the U.S. Geological Survey (USGS), initial economic losses are estimated at less than 1% of Peru’s gross domestic product. The earthquake had a depth of approximately 68 miles, according to the USGS. In Ecuador, damages are described as minor, without any collapse of structures.

In a Best’s Commentary, titled, “Minimal Insured Loss Expected in Peru and Ecuador from M8.0 Earthquake,” A.M. Best states it does not anticipate significant insured losses in Peru or Ecuador as a result, given the limited impact reported so far and the low insurance penetration in the regions affected by the earthquake.

Peru is the seventh largest insurance market in Latin America, with a market penetration rate of approximately 1.8% in 2018, according to the ratings agency. Additionally, A.M. Best said strong regulatory requirements mandate the use of catastrophic reserves and that foreign reinsurers be highly rated, further protecting the capital of companies.

During 2018, five insurers wrote a total of USD $271 million in earthquake premium in Peru, with one insurer underwriting 52% of the market. These insurers retained approximately 32% of the earthquake premium. Additionally, Peru’s government has a catastrophic bond (IBRD CAR 120) as a part of the Pacific Alliance, which could be triggered on its single $200 million tranche that protects Peru against earthquakes, specifically at 30% of the principal, or approximately USD $60 million, according to A.M,. Best.

Ecuador is the eighth largest insurance market in Latin America with a market penetration rate of approximately 1.6% in 2018. During 2018, catastrophe premiums in Ecuador totaled USD 55 million, with a retained premium of approximately 58%; this premium was underwritten by five insurers, with one holding a 52% market share.

A.M. Best said it will continue to monitor the impact of this event on the balance sheet of rated insurers in these countries.

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