It’s been reported that a number of countries in South America are looking to sponsor a catastrophe bond to protect against earthquake risks, with the help of reinsurance giant Swiss Re.
Peru, Chile, Colombia, and Mexico, which are the four member countries that make up the Pacific Alliance (a Latin American trade bloc), in partnership with reinsurer Swiss Re, are looking to develop cat bond cover for earthquake risk in order to have immediate liquidity to pay for damages following a quake.
This is according to a recent article published on the online platform of Gestión, which includes a discussion with Juan Pablo Regidor, Senior Client Manager at reinsurance firm Swiss Re.
The article states that Peru is eager to develop a quake cat bond owing to the potential for extensive damages and resulting high financial losses, citing that a cat bond would enable the government to have immediate access to funds post-event.
As explained by Regidor, Mexico has already utilised such risk transfer, and its government actually received a $50 million payout from the impacts of hurricane Patricia, which highlights the benefits of a parametric risk transfer solution, like a cat bond, at protecting vulnerable nations against natural disasters.
Artemis discussed at the time how the event had triggered a payout from the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond transaction, although this did take longer than anticipated owing to reporting delays from the National Hurricane Center.
For Pacific Alliance member countries receiving funds rapidly post-event is often vital in their recovery process, and utilising a parametric trigger structure, which is highlighted by Regidor, can ensure rapid payout. This is further highlighted by the recent impact of hurricane Matthew, which resulted in a payout from the CCRIF of $29.2 million to member countries, and which was paid out in just 14 days.
Regidor explains that a parametric trigger that ensures coverage is paid rapidly helps to provide liquidity in the market, which enables the government to move forward with the rebuilding and recovery process.
It’s apparent from the article that Peru is very keen for the establishment of a catastrophe bond, but Regidor explains that this also depends on the other member countries of the Pacific Alliance, and whether they want to enter into such an agreement.
Cooperation between the Ministry of Economy and Finance (MEF) and Swiss Re for the development of a cat bond is needed to determine how such a transaction would work, explains Regidor, but there does appears to be genuine interest from the MEF.
The utilisation of insurance-linked securities (ILS) tools such as cat bonds can be hugely beneficial to countries sovereign governments and regions susceptible to natural disasters, ensuring rapid payout post-event and ultimately increasing the insurability of peril regions around the world by providing access to efficient risk and reinsurance capacity.