World Bank issues cat bond for disaster risk protection in Mexico

The World Bank has issued three catastrophe bonds providing $420 million in insurance coverage to the government of Mexico for potential disasters including named storm events on the Atlantic coast and earthquakes.

These new cat bonds not only replace but also augment by $60 million the coverage provided by previous bonds.

The World Bank has placed an emphasis on Mexico’s vulnerability to natural disasters, with over 40% of its territory and nearly one-third of its population exposed to hurricanes, storms, floods, earthquakes, and volcanic eruptions.

Economically, this translates to approximately 30% of Mexico’s GDP being at risk from three or more types of hazards, and over 70% at risk from two or more.

Mexico pioneered the use of the cat bond market for risk financing in 2006, becoming the first government to do so. Since then, it has sponsored 20 cat bonds to mitigate the financial impact of natural disasters.

These bonds were issued under the International Bank for Reconstruction and Development’s (IBRD) “capital at risk” notes program, designed to transfer risks related to natural disasters from developing countries to the capital markets.

The latest issuance drew interest from 27 institutional investors globally, securing catastrophe insurance financing for Mexico for the next four years. The bond payouts, which are contingent on specific parametric criteria being met regarding the location and severity of an event, will be handled by IBRD and passed to the Mexican government through intermediaries Munich Re and Agroasemex, S.A., a state-owned insurance firm.

Jorge Familiar, vice president and treasurer of the World Bank, highlighted the partnership and its role in protecting the country from losses.

“For almost two decades, Mexico has been partnering with the World Bank to access the risk-bearing capacity of the capital markets for its disaster risk management,” he said. “The continued success of these transactions is a good example for other countries we are working with, as they consider the capital markets as a resource for financial protection against unpredictable natural events.”

The transaction was facilitated by GC Securities, Aon, and Munich Re as joint structuring agents, with GC Securities and Aon serving as joint bookrunners. AIR Worldwide provided risk modeling and calculation services.

“Munich Re congratulates and is pleased that we had the opportunity to support the Mexican Secretariat of Finance and Public Credit as well as the World Bank by structuring and acting as fronting reinsurer in order to facilitate this successful capital market risk transfer,” Andreas Müller, head of global retro and ILS at Munich Re, said.

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