Swiss Re Insurance-Linked Fund Management

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Mexican government: MultiCat 2012 cat bond helps ensure financial stability


It’s always interesting to hear from the sponsors of catastrophe bonds after the deal closes to better understand the motivations and benefits they feel the transaction brings to their risk management and transfer program. This is even more interesting when it’s a government who are the ultimate beneficiary of a cat bond deal, such as in the case of the recent MultiCat Mexico Ltd. (Series 2012-1) deal.

The Mexican government are not the actual sponsor of this cat bond, rather they benefit through a series of reinsurance and insurance agreements from the cover MultiCat 2012 provides. The MultiCat Mexico 2012 cat bond covers The Fund for Natural Disasters of Mexico (FONDEN), via a catastrophe insurance agreement with AGROASEMEX and a reinsurance agreement with Swiss Re. So Swiss Re are the sponsor, in the traditional sense of a cat bond deal, receiving a fully collateralized, multi-year source of retrocessional reinsurance cover for Mexican hurricane and earthquake risks through MultiCat Mexico 2012.

As well as being the sponsor, Swiss Re served as c-lead manager and worked closely with the Government of Mexico and the World Bank to renew the MultiCat Mexico cat bond. MultiCat forms a key part of Mexico’s sovereign catastrophic risk transfer strategy, with the cat bond featuring as part of a program of risk mitigation, risk modeling as well as traditional and parametric insurance. This enables the Mexican government to put a price to the catastrophe risks the country faces, which is a really important and often overlooked step for governments, as well as to be financially prepared for disasters. The parametric nature of MultiCat and a catastrophe bond is ideal for ensuring a prompt payout should disaster strike, key for enabling recovery in impacted areas in a nation with a largely poor and developing populace.

Swiss Re said that the MultiCat Mexico 2012 cat bond demonstrates their “Long-standing commitment to helping emerging markets build resilience through the use of innovative insurance solutions and the public-private partnership model.” Swiss Re was the first reinsurance company to form a team dedicated to working alongside governments on their risk transfer needs. Swiss Re said; The success of MultiCat once again demonstrates the growing demand within the public sector for these solutions, as well as the growing acceptance by the reinsurance and insurance industry of these programs.”

A statement from José Antonio Meade, the Secretary of the Ministry of Finance and Public Credit, said that the issuance of MultiCat Mexico 2012 complements the resources of FONDEN for emergency recovery from the catastrophic effects of hurricanes and earthquakes. The protection from the cat bond essentially covers the public finances of the country from having a large outlay for recovery work after disaster and would prevent any levy having to be forced on taxpayers in the population.

It’s the third cat bond transaction which has benefitted the Mexican government, with CAT-Mex Ltd. in 2006 and MultiCat Mexico 2009 Ltd. having come before. On this occasion, the statement from the Mexican government ministry says that they were able to extend both the amount and geographical coverage provided by the cat bond, citing favourable conditions in the financial markets. With this statement we assume that they are referring to investors appetite for cat bonds being sufficiently large that it made economic sense to expand the coverage afforded by MultiCat.

The Mexican government statement says that through the MultiCat transaction, Mexico consolidates its leading position in the world as a user of natural disaster risk transfer mechanisms. MultiCat is seen as a key part of the Mexican governments comprehensive catastrophe risk management strategy, which the government has been driving to secure stable and strong public finances. The Mexican government said that MultiCat 2012 reiterates its commitment to efficient and responsible public finances, helping it to ensure an environment of macroeconomic and financial stability.

It is still surprising that no other nation has followed in Mexico’s foot steps and joined the MultiCat program by issuing their own cat bonds. It makes a lot of sense for any nation faced by large natural catastrophes and enables reinsurers and insurers to participate in the countries risks secure in the knowledge that ultimately their operations there are covered.

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