Risky cities: earthquake resilience in Istanbul

Straddling the Bosphorus, Istanbul is Turkey's powerhouse. The metropolis generates more than 40% of the country's GDP. However, the 14 million people living and working in this vibrant city live under constant threat of severe earthquakes. They need no reminding of the risk lurking beneath the Marmara Sea just south of the city.

Known as the Northern Anatolian Fault, this weakness in the earth's crust was responsible for the devastating earthquakes back in 1999 near the cities of Izmit and Kocaeli. Since then, both the government and the private sector have taken substantial measures to strengthen urban resilience and to increase insurance penetration. That led to the establishment of the Turkish Catastrophe Insurance Pool for homeowners.

In a new publication entitled Risky cities: Istanbul, the latest in a series of factsheets analysing the natural catastrophe risks in a number of major cities across the world, Swiss Re experts highlight the potential loss scenario for a major earthquake hitting Istanbul. They also point to the further contribution the insurance industry can make towards strengthening financial resilience should such a scenario become reality.

Encouraging progress but protection gap still wide

In Istanbul's case, despite the best efforts of the private and public sectors, the protection gap remains very wide. Our experts estimate that should a major quake strike close to Istanbul, the total economic loss would amount to USD 90-120 billion, roughly three-quarters of which would still be uninsured. The government would be faced with emergency response and reconstruction costs as high as USD 30 billion.

In a telling infographic which compares the potential human impact of natural hazards in 10 major population centers across Europe, the Swiss Re paper estimates that, with 6.7 million people exposed, Istanbul would be top of the list. This is two million more than in Amsterdam-Rotterdam in second place and 2.7 million more than London, where people are exposed to flood and windstorm.

How does Istanbul compare internationally?

Given the exposure to catastrophe risks and the increasing asset concentrations in emerging economic centres such as Istanbul, the recommendations made by the publication's authors cover a broader redistribution of risk and a wider disaster financing mix, including government use of parametric insurance products. By directly insuring itself against seismic risks, the paper says, the government can "reduce its dependency on budget re-allocations and foreign debt financing."

Ramping up earthquake resilience in Istanbul

Turkish Catastrophe Insurance Pool issues second catastrophe bond

There is no telling when the next earthquake will strike. The government and businesses are acutely aware of the threat, and have already done a lot to strengthen the city's resilience to destructive seismic activity.

Importantly, the government-sponsored Turkish Catastrophe Insurance Pool (TCIP) – managed by Eureko Sigorta – provides homeowners with compulsory earthquake insurance. In order to further strengthen the pool's financial protection, TCIP has just sponsored a new USD 100m catastrophe bond.

Building relationships with the capital markets

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 1.50% and pays an interest spread of 325 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 recognise the diversification Turkey earthquake risk brings to their portfolios.”

Süha Çele, Executive Board Member of Eureko Sigorta A.Ş., commented, “We are proud to be the sponsor of Bosphorus Ltd. and are pleased that the second bond has also been well-accepted by the capital markets. In view of the constantly growing portfolio of TCIP, our cooperation with the capital markets will continue in the near future as it allows TCIP to diversify its reinsurance buying and utilize multi-year capacity at a stable price.”

Remzi Duman, Reinsurance Director responsible for reinsurance affairs of Eureko Sigorta A.Ş., added, “The transparent trigger mechanics were understood and accepted by investors, and the strong demand made this a highly successful transaction. Bosphorus 1 Re was the first Turkish-sponsored ILS transaction, and we are happy to have maintained our presence ILS market through Bosphorus Ltd.”

Esther Baur, Head EMEA Global Partnerships says: “Thanks to the Turkish Catastrophe Insurance Pool, about 40% of Turkey's homeowners already have earthquake insurance today. With this second cat bond issuance, TCIP not only has become one of the world's largest catastrophe insurance pools, but also has become one of the most sophisticated. It serves as a role model for many other countries.”

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 USD 20bn, with only USD 1bn 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 USD 90bn. Based on the TCIP homeowners cover and private insurance, Swiss Re estimates that 20-25% of that amount will be covered. This shows the tremendous progress made since TCIP was established. Even so, Turkey continues to persevere in its efforts to narrow the financial risk protection gap.

As a major capacity provider, Swiss Re supports TCIP, the local insurance industry and the government in further strengthening their financial resilience. Swiss Re works closely with insurers and governments around the world to close the protection gap. This includes the Mexican government, a pioneer with regard to transferring natural disaster exposures to insurance and the capital markets, alongside several sovereign insurance pools established to support countries in the Caribbean, Africa and the Pacific Islands.

Resilient Cities: pathway to a more sustainable future

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