Chile, Colombia, Peru and Mexico join forces to protect economies against earthquake risk: World Bank issues largest-ever sovereign sponsored catastrophe bond
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Chile, Colombia, Peru and Mexico are nations exposed to earthquake risk, having suffered several devastating losses to lives and property in the last few years alone.
The latest in a string of major earthquakes affecting Latin America struck Mexico City in September 2017, taking more than 450 lives and causing economic losses of approximately USD 12 billion according to preliminary Swiss Re Institute sigma estimates.
To help reduce the pressure on government budgets and taxpayers' pockets for future disasters of similar scale, the World Bank has issued the largest-ever sovereign sponsored catastrophe bond, providing cover to the four aforementioned members of the regional integration initiative known as the Pacific Alliance. Swiss Re is proud to have assisted in the structuring and placement of the parametric catastrophe bond with a total notional of USD 1.36 billion covering earthquake risk. It was issued via the World Bank's global debt facility on February 7, 2018 and will help the Pacific Alliance members recover faster from major earthquakes, and protect their economic development.
Taking the long term view on unforeseen events
Insurance and reinsurance is fundamentally about adopting a long-term view of risk management and quantifying risk of unforeseen events. By taking concerted action, these four governments are demonstrating their joint leadership to systematically manage a common risk that poses a threat to their economic development. Recent important earthquakes in the Pacific Alliance member countries include 2010 in Chile, 2007 in Peru and 2017 in Mexico.
Created in 2011, the Pacific Alliance is a political and economic initiative between the four countries. Their combined population is 216 million people, and together they account for 39% of the Gross Domestic Product of Latin America and the Caribbean. While these four countries have further strengthened their economic alliance with this transaction, the flexible nature of parametric covers allowed each country to customize its coverage in line with its exposure and overall disaster risk financing strategy.
Powerful leadership to protect economic development
The bond was issued through the World Bank’s International Bank for Reconstruction and Development (IBRD) platform. Swiss Re Capital Markets was awarded a joint lead mandate for structuring and bookrunning as part of a wider consortium. "By working together to manage their financial exposure to earthquake, the leaders of Chile, Colombia, Peru and Mexico are making a powerful commitment to their people to promote long-term economic development. We are privileged to have been part of this landmark transaction," said Swiss Re's Martyn Parker, Chairman Global Partnerships. Swiss Re's track record of cooperating with the World Bank on innovative catastrophe bond placements also includes the Pandemic Emergency Financing Facility, launched in 2017.