The decision as to whether Peru’s earthquake exposed IBRD CAR 120 catastrophe bond will payout a portion of the investor principal is expected within 20 days of the magnitude 8.0 earthquake that struck Peru on Sunday 26th May, according to the country’s Finance Minister.
Carlos Oliva, the Minister for Finance and the Economy in the Peruvian government spoke yesterday about the earthquake and the fact that preliminary information suggests that the country will be due a payout of some of the parametric disaster insurance the World Bank issued IBRD CAR 120 catastrophe bond provides.
As we explained on Monday this week, the magnitude 8.0 earthquake struck Peru in a relatively sparsely populated area of the Amazon jungle. However, it was the most intense quake to strike the country in twelve years, with strong shaking was felt as far as 600 miles away from the epicentre and damage widely reported to homes, commercial buildings and infrastructure.
The $200 million IBRD CAR 120 catastrophe bond, which was issued as part of the Pacific Alliance cat bond arrangement to cover the four countries of that trading bloc, was immediately considered exposed to the quake, with early indications suggesting that the magnitude, depth and location of the earthquake could result in a 30% or $60 million payout of the cat bond principal.
Payouts are never instantaneous, as the parameters associated with the earthquake have to be run through the relevant calculation process, in order to determine whether any payout is due.
In the case of the Peru earthquake cat bond, the calculation process is expected to be completed within 20 calendar days of the earthquake occurrence, with risk modeller AIR Worldwide playing the role of calculation agent.
Minister of Finance of Peru Carlos Oliva commented at an event yesterday, “We have 20 days for the World Bank to review the parameters to see if the insurance is activated or not, the parameters have to do with intensity of the earthquake, location, depth, among others.”
He explained that the insurance coverage provided by the Peru quake cat bond is designed to assist the government after disaster strikes, deliver additional relief funding and mitigate the impact on its finances due to damage to infrastructure and other core assets.
He went on to explain that the Peruvian government also believes that the preliminary figures suggest the parametric trigger requirements have been met and a payout from the cat bond could be due, but urged listeners to wait calmly for the decision of the World Bank.
The calculation process, at a fixed 20 calendar days, is actually relatively quick for this parametric catastrophe bond, much quicker than previous issuances have proved to be.
However, there are other parametric insurance and reinsurance products that now promise payouts in a matter of just a handful of days, suggesting that in time parametric cat bond calculation processes will also speed up more.
The calculation process needs to be rigorous though, as with significant sums of capital at risk, $200 million in total for this cat bond issuance or $60 million if it does prove to be a 30% loss, hence a strictly defined process to determine whether a payout is due and how much it should be needs to be followed in order to protect the interests of the global investors backing these notes.
Minister of Finance Oliva also confirmed our recent report that the Pacific Alliance nations are also working on securing catastrophe bond backed coverage for other natural disaster perils, which as we explained is likely to mean a focus on climate and weather related catastrophe insurance coverage.
“Now, we are working on replicating this coverage for other types of natural events that also happen in our region,” he commented.
So we should have some visibility on the potential for this World Bank supported Peru earthquake catastrophe bond to payout on or around June 16th, perhaps before if the calculation process can be expedited in any way.
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