Design and implementation of seismic risk insurance to cover low-income homeowners by a cross-subsidy strategy

Abstract

This paper discusses how a catastrophe risk model–based on metrics such as the Probabilistic Maximum Loss and the Average Annual Loss– has been used to estimate, building by building, the probabilistic losses of different portfolios of exposed elements. It also explains how a risk transfer instrument to cover the private housing in Manizales, Colombia, was designed, promoting the insurance culture and covering the low-income homeowners through a cross-subsidy strategy. This instrument is a voluntary collective insurance promoted by the city administration and the insurance industry, using the mechanism of the property-tax payment. The program provides financial protection not only to the estate-tax payers but also to the low-income homeowners that cannot pay the tax due to their income limitations. This collective insurance helps the government to access key resources for low-income householder recovery and improve disaster risk management at local level.