Protection against earthquake risk for four Latin American countries

Chile, Colombia, Peru and Mexico are all exposed to the threat of earthquakes. The most recent in a string of major earthquakes occurred in Mexico City in September 2017, taking more than 450 lives and causing economic losses of approximately USD 12 billion. Previously, Chile had been hit in 2010 and Peru in 2007.

In 2011, the four countries founded a regional integration initiative known as the Pacific Alliance (alianzapacifico.net). Working together through this organisation, the countries’ governments recently took an important step to improve their financial protection against the potential losses of earthquakes, by sponsoring a catastrophe bond issued by the World Bank’s International Bank for Reconstruction and Development (IBRD, www.worldbank.org/en/who-we-are/ibrd). With a total notional of USD 1.36 billion, it is the largest sovereign-sponsored catastrophe bond to date.

Swiss Re Capital Markets acted as joint structuring agent and bookrunner on this landmark transaction. Further, utilising its rated balance sheet, Swiss Re acted as transformer between Mexico and IBRD to facilitate Mexico’s access to the capital markets. The flexible nature of the parametric trigger allows the four countries to customise their individual coverage in line with their exposures and overall disaster risk financing strategies. As a result, the countries can now receive fast payouts once the coverage is triggered and are therefore able to accelerate their emergency response following a qualifying earthquake event.