Design and implementation of a collective insurance program based on cross subsidies for recovery of low income homeowners

Understanding disaster risk due to hazard events creates powerful incentives to develop planning options and tools to reduce and finance potential damages. This paper describes how probabilistic metrics such as the loss exceedance curve, the expected annual loss and the probable maximum loss, calculated with catastrophe risk models, are used for the designing of a risk transfer instrument to cover the private housing in Manizales, Colombia. This voluntary collective instrument promotes the insurance culture and provides financial protection not only to the estate-tax payers but also covers the low-income homeowners through a cross-subsidy strategy. This program is promoted by the city administration and the insurance industry, using the mechanism of the property-tax payment. This collective insurance helps the government to access key resources for low-income householder recovery and improve disaster risk management at local level.