Lima Earthquake Could Cost Peru $28 Billion, Insurers Warn

What a Major Lima Quake Would Cost

Peru is watching two recent Latin American earthquakes as a forewarning. In August, a magnitude-7.4 earthquake in Colombia killed more than 300 people and caused an estimated US$10 billion in losses. In June, two similar events in Venezuela's La Guaira area left more than 6,000 dead, and the World Bank put direct destruction at US$19.5 billion, excluding better-quality reconstruction or debris removal.

Eduardo Morón, president of the insurers' association Apeseg, told an industry event that a comparable high-magnitude earthquake in Lima could cost about 7–8% of Peru's GDP, roughly US$28 billion. That figure is higher than the losses in Colombia or Venezuela because Peru's economy is heavily concentrated in the capital, which generates about 80% of GDP. In Colombia, the quake affected Cali, an intermediate city, but spared Bogotá and Medellín.

Peru's National Institute of Civil Defense, Indeci, has run a national multi-hazard drill scenario under which 555,859 dwellings in Lima would be destroyed or made uninhabitable. That would affect more than two million people, assuming four people per household. Merely installing one temporary module per family would require more than US$2.5 billion, at approximately US$5,000 per unit.

Most of that burden would fall directly on the state. Apeseg calculates that only 0.4% of schools, 5.3% of health facilities and 24.3% of national roads have catastrophe insurance. Overall, 95% of losses from earthquakes or climate events in Peru would have to be absorbed by the government or financed through emergency debt.

Inside Peru's 95% Uninsured Disaster Risk

Why Lima's Concentration Makes the Risk So Expensive

Morón's estimate of 7–8% of GDP, or about US$28 billion, is not a prediction that an earthquake will happen. It is a scenario of what a large one would cost if it struck the capital. The reason the figure is so high is concentration: roughly 80% of Peru's GDP is generated in Lima. A disaster hitting the economic center would disrupt government, finance, ports and services at once, unlike Colombia's quake, which affected a regional city but not Bogotá or Medellín.

A 95% Protection Gap Leaves the State as Insurer of Last Resort

The coverage numbers show how little risk has been transferred. Only 187 schools, or 0.4% of educational centers, have coverage for catastrophic risk. The shares for health facilities and national roads are 5.3% and 24.3%, respectively. Apeseg's warning that 95% of quake and climate losses would fall on the state or emergency debt means the government would need immediate financing at the moment its tax base is damaged. Peru's protection gap is worse than the Latin American average of 81% and far above North America's 43.2%.

The Fiscal Cushion Is Too Thin for a US$28bn Shock

Researcher Carolina Trivelli of the Instituto de Estudios Peruanos said the country has “squandered resources” by relying on ad hoc disaster commissions that dissolve after each event, instead of building permanent capacity. She pointed to the Fiscal Stabilization Fund, which Apeseg says has been stuck between 1.1% and 1.2% of GDP for three years, well below its legal ceiling of 4%. Morón said each major disaster since 1970 has come with a special commission that ends when the next disaster arrives. This is a structural weakness, not a one-time funding problem.

Second-Round Hits to Tourism, Exports and Investor Confidence

Ana Victoria Mejía, client manager at Swiss Re, said natural disasters do not only produce direct damage. They can also reduce national income through lower tourism and exports and erode investor confidence. For a capital city that hosts much of Peru's administrative and business capacity, those second-round effects could multiply the direct physical losses in the months after an earthquake.

After the Warning: Specific Moves for Insurers, Government and Business

For government and fiscal authorities:

• Move the Fiscal Stabilization Fund toward its 4% of GDP legal ceiling. Apeseg says it has sat at 1.1–1.2% for three years, limiting the cushion for a US$28 billion shock.
• Replace temporary disaster commissions with a permanent crisis authority. Morón's criticism that each disaster since 1970 has produced a short-lived special commission points to recurring institutional loss.
• Insure public schools and health facilities now. Current catastrophic coverage is just 0.4% for schools and 5.3% for health facilities, leaving critical infrastructure unprotected.

For insurers and reinsurers:

• Pursue the public-sector gap. With only 0.4% of schools and 5.3% of health facilities insured, Apeseg's own figures show the state is a prospective buyer of catastrophe cover, including parametric structures tied to earthquake magnitude and location.
• Price Lima as a concentration risk, not a regional average. Because 80% of GDP is generated in the capital, the tail risk is larger than in Colombia or Venezuela.

For businesses with Lima operations:

• Treat private cover as the primary buffer. With 95% of catastrophe losses expected to be state-borne or debt-financed, there is no guarantee that business interruption costs would be covered by government relief.
• Factor displacement into continuity planning. Indeci's scenario of 555,859 uninhabitable homes implies a large share of employees and suppliers would be displaced after a major event.