Colombia set for quake catastrophe bond within weeks: Finance Minister

by Artemis on January 11, 2018

The first catastrophe bond covering earthquake risks from the government of Colombia is expected to be launched within a matter of weeks, according to the country’s Minister of Finance and Public Credit, as the country looks to capital market sources to improve its disaster risk transfer and financing.

Mauricio Cardenas, the Minister, said in a tweet this week that, “This month we will issue the first bond that will cover earthquake disaster risks. It is responsible and prudent.”

The statement suggests that the work to provide disaster risk financing and insurance or reinsurance coverage for Pacific Alliance countries, which include Colombia, is nearing fruition, either with a single or a multi-country catastrophe bond.

The Pacific Alliance has been seeking a catastrophe bond to provide earthquake insurance coverage for the members, Mexico, Colombia, Chile, and Peru. The group of nations reportedly signed an agreement with the World Bank to pursue the issuance of a catastrophe bond in 2018.

It’s not clear at this time whether Colombia has perhaps decided to move forwards alone with a cat bond to cover its own earthquake risks, or whether this could be the first multi-country sovereign catastrophe bond issuance in history for a number of the Pacific Alliance members.

We’re told that if the members come to market with a catastrophe bond it is most likely to be issued using the World Bank Treasury’s IBRD notes issuance platform, rather than the MultiCat program.

Either way, it is a sign of the increasing awareness among sovereign sponsors, such as countries, cities and municipalities, that the catastrophe bond and insurance-linked securities (ILS) market is willing and able to provide the insurance and reinsurance capital and structures necessary to help them transfer their disaster risks and secure efficient sources of post-disaster risk capital liquidity.

It’s likely that any Colombian or Pacific Alliance earthquake cat bond will be parametric in nature, providing a mechanism through which disaster financing could be distributed rapidly after any major quake event in the regions covered.

Colombia’s natural disaster strategy has stated the countries aims of exploring the use of catastrophe bonds as a way to secure risk financing for its earthquake risks, seeing the capital markets as an efficient vehicle for distributing the risks and perhaps more cost-effective with the help of the World Bank, over the traditional insurance or reinsurance market.

Should this be a multi-country cat bond covering all of the Pacific Alliance members it could be a relatively large issuance, perhaps the largest natural catastrophe bond issued through the World Bank.

As any further information on a Colombia or Pacific Alliance earthquake catastrophe bond emerges we will update you.

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