Turkey launches 2nd catastrophe bond

MANILA, Philippines - The government-sponsored Turkish Catastrophe Insurance Pool (TCIP) – managed by Eureko Sigorta – provides homeowners with compulsory earthquake insurance.

The TCIP was formed to offer protection through credit and construction in the event of an earthquake.

Eureko Sigorta is an international insurance and risk assessment company and the leader of bank insurance in Turkey.

Recently, TCIP launched its second $100-million catastrophe bond (cat bond).

In 2013, it successfully raised $400 million from its first cat bond.

The cat bond, known as Bosphorus Ltd. Series 2015-1 Class A, is the second of its kind. Providing a three-year cover as a derivative, the bond has a parametric trigger generating an immediate payout to TCIP if the agreed earthquake conditions are met. 

Complementing the existing traditional reinsurance program that Swiss Re also supports, the bond has an expected loss of 1.5 percent and pays an interest spread of 325 basis points (bps) per annum to investors.

The proceeds of the bond are invested in IBRD notes as collateral. Swiss Re Capital Markets acted as co-structurer for the transaction.

Andy Palmer, Senior ILS structurer, explains that Turkey’s ability to transfer disaster risk to the international capital markets will help the country reduce pressure on government budgets and the broader economy in the event of a quake.

Additionally, he adds, “Investors welcome this important sponsor back to the market, and recognize the diversification Turkey earthquake risk brings to their portfolios,” Palmer added.

Turkey role model on insurance protection, maintaining efforts to improve Turkey has suffered many devastating earthquakes in the past, such as the Kocaeli and Düzce quakes in 1999.

Swiss Re estimates these two earthquakes to have cost the Turkish economy $20 billion, with only $1 billion being insured.

The government, businesses and homeowners picked up much of the remainder of the bill – and where no financial back up was available, homes, possessions and livelihoods were simply lost.

TCIP was created as a result of this event. Should a major earthquake of magnitude 7.5 hit the Istanbul area today, Swiss Re estimates it could cause losses of more than $90 billion.

Based on the TCIP homeowners cover and private insurance, Swiss Re estimates 20- to 25 percent of that amount will be covered. This shows the tremendous progress made since TCIP was established.