1 COLOMBIA CO LO MB I A Reduction in fiscal risk by insuring US$40 billion road infrastructure under concession Photography www.freepik.es 2 CO LO MB I A Photography www.freepik.es E X E C U TI V E S UM M A RY • Colombia has the highest rate of road infrastructure insurance based billion through improved insurance recurrent disasters due to natural on the best practices in the interna- policy contracts. This high-quality phenomenon in Latin America with tional markets and adapted to the insurance has allowed the reduction more than 600 disasters per year. national context. of the government’s fiscal exposure by transferring this risk to the local • The heavy rainfall during the 2010-11 • The National Concession Infrastruc- and international insurance and La Niña season caused generalized ture Agency (ANI)1 developed three reinsurance markets. losses across Colombia. Losses to insurance policies with tailor-made the transport infrastructure sector clauses for Colombia, considering the • This is an example of how, to effec- totaled approximately US$1.7 billion, technical guidelines generated by tively reduce the country disasters placing additional financial burden on the WB, the best international market contingent liability a coordinate work the Government of Colombia. standards and the national practice. between the State and the national These insurance policies were the and international private sector is • In 2012 the Ministry of Finance and result from the joint effort between necessary. Appropriate insurance re- Public Credit (MoF) requested tech- public sector entities and private duces, in case of a disaster, the need nical assistance from the World Bank sector companies. for the State to increase debt, and / or (WB) to improve the catastrophic taxes, or divert budget resources that insurance requirements for the pro- • The roads built through Public-Private were destined, before the disaster, tection of public investment. The WB Partnerships (PPPs) for the fourth to meet the country economic and delivered to the Government of the generation of concessions (4G) have social development objectives. country technical guidelines for the been insured for more than US$ 40 1 ANI corresponds to the acronyms in Spanish of Agencia Nacional de Infraestructura 3 CO LO MB I A Photography ANI B AC K G R O U N D Colombia has the highest rate of recur- imately 3.5 million people, and damage For more than a decade, the Colombian rent disasters due to natural phenome- estimates were around 2 percent of na- Government has been working to in- non in Latin America. The country suffers tional GDP and damages to the transport crease its financial response capacity more than 600 disasters due to natural infrastructure sector represented ap- in the event of disasters due to natural phenomenon each year and the number proximately US$1.7 billion. The damage events, which has been integrated as part of disasters is on the rise. 85 percent of to roads created a dispute between the of its public policy for both fiscal risk and the population and assets are in areas ex- government and concessionaires over debt management, and for disaster risk posed to at least two natural hazards. In who held the liability for repair. The con- management. In this context, the medi- the past 30 years, over 15 million people cessionaires maintaining the position that um-term fiscal frameworks for the years have been affected for this reason. damage was caused by “Acts of God”, con- 2017, 2018, 2019 and 2020 have recog- sequently most of the liability fell on the nized that disasters due to natural phe- In the period 2010-2011, the heavy rains government. nomena are the highest contingent for the due to La Niña season affected approx- country. 4 CO LO MB I A Photography ANI SO LU T I O N S Since 2011, the World Bank’s Disaster 2013, the Policy strategy for public finan- of hydrometeorological hazards. Likewise, Risk Financing and Insurance Program cial management of natural disaster risk the GoC has previously had contingent (DRFI), supported by the Swiss Embas- was designed, which was updated in 2016. credit lines (Cat DDO), that have been sy in Colombia - Economic Cooperation activated to cover the cost generated by The DRF Strategy combines, in a cost-ef- and Development (SECO) and the Global the rainy season 2010-2011 and to attend ficient manner, a portfolio of several fi- Facility for Risk Reduction and Recov- the expenses increase generated by the nancial instruments that allow to reduce ery (GFDRR), have supported the GoC in COVID-19 pandemic in year 2020. the country’s fiscal vulnerability to the strengthening its strategy to reduce its occurrence of a disaster due to natural Colombia is also a world pioneer in the fiscal vulnerability to the occurrence of phenomenon. These include public asset development of DRF Strategies at the disasters due to natural phenomenon, insurance, the National Fund for Disaster sub-national level. The MoF, with techni- which is led by the Ministry of Finance Risk Management, budget reallocation, cal assistance from the WB, have provided and Public Credit. and a Catastrophe Bond for US$ 400 mil- support for the preparation of these Strat- As part of the Governments efforts for im- lion against seismic risk issued within egies to the Metropolitan Area of Aburra proving its financial response capability, the framework of the Pacific Alliance (PA). Valley (Antioquia) and the provinces of Colombia was the first country to enact Currently, within the framework of the PA, Cundinamarca, Archipelago of San Andrés, its public policy into a Financial Manage- inputs are being generated to evaluate a Providencia and Santa Catalina and Putu- ment Strategy for Disaster Risk (DRF). In risk transfer instrument for the coverage mayo. These strategies are aligned to the 5 CO LO MB I A strategy of the national government but nity insurance to the GoC, based on in- automatic and facultative contracts, con- reflect the particulars and needs of the ternational best practices adapted to the sidering the reinsurers’ ratings. In Colom- individual territories . 2 national context. Additionally, the ANI held bia, 30% of property insurance premiums working meetings with the local insurance are ceded, and in the case of earthquake In parallel, the GoC approved regulations company guild (FASECOLDA) and with re- coverage ceded approach to 66%. There- to include disaster risk management due insurance companies for developing the fore, the quality of reinsurance is a key to natural phenomena within the public insurance policies terms and conditions. element to ensuring that risk transfer will investment process3. These regulations be effective when needed most. were essential in order to prepare for the As a result, the ANI developed three insur- fourth generation (4G) of concessions, ance policies with tailor-made clauses for By July 2020, the indemnity insurance one of the largest investments in the the country , providing a minimum quali- 4 of the 4G concessions amounts to more country. ty condition to approve 4G projects, in ac- than US$ 40 billion reducing consequent- cordance with provisions established for ly the fiscal exposure of the GoC related Under this framework, ANI established the technical and economic conditions to road infrastructure and disasters due the need to strengthen the indemnity for infrastructure projects under the PPP to natural phenomenon. The insurance insurance. In 2012 the MoF and the Pro- scheme. These policies facilitate insur- policies used are aligned with internation- curement Agency (Colombia Compra Efi- ance of the infrastructure throughout its al market standards and best practices, ciente) requested technical assistance lifespan (existing, rehabilitation, construc- which guarantees that risk transfer is car- from the WB to improve the catastrophic tion, improvement and operation). ried out under high quality conditions and insurance requirements for public invest- in a cost-efficient manner. ments. The dual objective was to protect Under this insurance scheme the claims the new road infrastructure to be built for are paid to the trust managing the PPP Finally, considering the high level of the 4G, as well as to manage the govern- resources; this approach guarantees that indebtedness of countries due to the ment fiscal risk by transferring it to the this resource will be assigned exclusive- COVID-19 pandemic, it is relevant to traditional indemnity insurance. ly to reconstruction activities. strengthen and evaluate risk transfer in- struments that provide resources to ad- In 2012, before the first wave of 4G con- ANI also established requirements for the dress the occurrence of disasters caused cessions, the WB delivered technical reinsurance of 4G concessions, both for by natural phenomena. guidelines for road infrastructure indem- 2 These strategies are available at https://www.minhacienda.gov.co/webcenter/portal/EntidadesFinancieras/pages_Riesgos/estrategiasdeproteccin- financieraets 3 National Council for Economic and Social Policy (CONPES), num. 3714, December 2011 (Foreseeable risk within the framework of the public procure- ment policy); Public Private Partnership Act, Act No. 1508, January 2012; and its regulation in Decree 1467, June 2012 (Modified by 2014 Decrees 301, 1553 y 2043). 4 The three ANI insurance policies are: i) Protection to infrastructure under construction or operation trough the Civil Works Insurance policy , available at https://www.ani.gov.co/sites/ default/files/3._poliza_de_seguro_de_obras_civiles_0.pdf This insurance policy integrates in a single all-risk insurance policy coverages that are usually subscribed separately such as material damage, construction and assembly: (Erection All Risk -EAR- + Construction All Risk -CAR- + Construction Civil Works -CCW-). ii) Extra-contractual civil liability insurance (Liability), available at https://www.ani.gov.co/sites/default/files/poliza_de_seguro_de_responsabilidad_ civil_extracontractua_1.pdf iii) Compliance Insurance for state contracts (Surety Bond), available at https://www.ani.gov.co/sites/default/files/apendice_financiero_3_poliza_uni- ca_de_seguro_de_cumplimiento_para_contratos_estatales_-_con_marcas_0.pdf 6 CO LO MB I A Photography ANI L E S S O N S L E ARN E D Improvements of the concessions’ insur- Cost-efficient public asset insurance The catastrophe risk insurance require- ance requirements reduce the govern- with high quality standards would not ments used for 4G concessions can be ment contingent liabilities arising out have been possible without inter-institu- employed for the sub-national level. The from natural phenomena by transferring tional coordination, both from the public MoF plans to share with the sub-national it to the insurance market. and private sectors. level the concession insurance require- ments used by the national level, so their Once the regulation stipulates as manda- Given the levels of risk ceded to the in- implementation can be evaluated by en- tory the purchase of insurance to protect ternational markets, it is important to tities and governments of sub-national public assets, it is key to ensure that it set high standards for the reinsurance level. will generate the most cost-efficient cov- coverage to be bought by local insurance erage. In the case of Colombia, the regula- companies. For the development of a sustainable and tion requires insurance for road infrastruc- cost-effective insurance for public as- For the fulfillment of the insurance objec- ture built through concessions under PPP. sets the key activities have been identi- tive, it is essential to establish mecha- The inter-institutional work carried out has fied and are presented in Figure 1. nisms guaranteeing that claim payments been key to achieving coverage in accor- are used for the reconstruction of dam- dance with international market best prac- aged assets. tices and at competitive reasonable price. 7 CO LO MB I A Situation Analysis Assessment of the Assessment of the Compilation and legal environment local insurance analysis of current and institutional market insurance policies for capacity public assets Study of Alternatives Monitoring and Evaluation Definition of terms Definition of the Identification of and conditions phases to be covered legal and technical according to (e.g., construction options for insurance international market and operation) schemes practices (*) Implementation of Insurance Programs (*) Including quality requirements for all providers (insurance companies, reinsurers, local and international brokers and loss adjusters) Figure 1: Activities for the insurance of public assets development Source: Disaster Risk Finance & Insurance Program, 2013 Colombia’s experience in the insurance of approach on disaster risk financing and in- existing concessions. In the same sense, concessions catastrophic risks has been surance. Following the example of Colom- several countries have expressed interest shared with other countries facing similar bia, Peru developed insurance guidelines in generating guidelines to strengthen the challenges. The exchange of experiences for its new concessions, as well as guide- insurance of its concessions. is part of the World Bank’s programmatic lines to adjust and review the insurance of 8 CO LO MB I A C O N TAC T José Ángel Villalobos, Senior Financial Sector Specialist, Disaster Risk Financing and Insurance (DRFI) Program, Finance, Competitiveness and Innovation (FCI) Practice, jvil- lalobos@worldbank.org This article was elaborated with the support of Javier Andrés Cuéllar Sánchez (MoF), Yenifer Alejandra Barragán Rojas (MoF), Darío Bacchini (WB) and Ana María Torres (WB).