Cat bond provides Chile with financial protection against earthquakes

The International Bank for Reconstruction and Development (IBRD) has priced a joint catastrophe bond and swap transaction providing a total of $630 million of earthquake insurance coverage to the Government of Chile, which consists of $350 million of catastrophe bonds and $280 million of catastrophe swaps.

By simultaneously offering the risk to both bond investors and to insurance and reinsurance companies in swap form, the World Bank and Chile were able to access a larger amount of risk bearing capacity than either market could offer on its own.

It makes funds readily available in the case of disaster, protects Chile’s fiscal budget, and reduces the potential need to mobilize debt in an event’s aftermath.  It provides coverage for three years with payouts triggered if an earthquake meets the pre-defined parametric criteria for location and severity. 

Aon Securities, GC Securities, a division of MMC Securities LLC, and Swiss Re Capital Markets were Joint Structuring Agent, Joint Manager and Joint Bookrunner. Mercer Investments (HK) Limited was the Joint Manager. AIR Worldwide provided the risk modelling and analysis for the transaction.

Mario Marcel, Minister of Finance, Republic of Chile: “This constitutes a new step made by Chile towards a better protected and resilient public finances, in the face of large-scale natural catastrophe events, such as an earthquake, and is part of a comprehensive strategy that reinforces our commitment to fiscal responsibility, which has been highlighted by different local and international agents.”

Anshula Kant, Managing Director and World Bank Group Chief Financial Officer: "We are pleased to have partnered with the Government of Chile on this important transaction. It is another example of how the World Bank mobilizes private capital for development and supports disaster risk management in our member countries. We are encouraged by the extremely strong demand for the transaction from both bond investors and insurance counterparts who have shown their support for a more resilient future for the people of Chile.”

Andy Palmer, CEO of Swiss Re Capital Markets Limited.

"Swiss Re Capital Markets is proud to have worked with the World Bank and the Republic of Chile to secure $630m of earthquake protection through a combination of parametric cat bond and catastrophe swaps. As the largest single sovereign sponsored transaction in the history of the ILS (Insurance Linked Security) market, it further strengthens Chile’s resilience to catastrophic earthquakes."

Source link: World Bank Press Release.