Mexican CAT

This post is not a continuation of the Riskprof’s discussion on pet owner rights. 

Mexico is considered more at risk for a strong earthquake than even California, so in response the Mexican government has recently issued a special catastrophe bond (from NYT) to finance rescue and rebuilding in case of a disastrous earthquake.   The $160 million bond is part of a larger $450 million insurance package over the next three years that will cost the Mexican government $26 million. Swiss Re, the Zurich-based reinsurance group, issued the bonds, which pay 230 basis points over the Libor benchmark interest rate.

Unlike the indexed trigger of the Livestock Insurance Program in Mongolia, the Mexican contract contains a parametric trigger in which the suspension of interest and/or principal on the bond occurs when a specific loss metric reaches a certain value.  In Mexico's case, the government collects the $450 million in the bonds and the insurance payout if a quake of 7.5 or 8 magnitude on the Richter scale hits specific regions, regardless of damage. Investors who buy the bonds are essentially betting that an earthquake of a particular magnitude will not hit specified regions in Mexico in the next three years.

"If there's no disaster in three years," the finance minister, Francisco Gil Diáz, said, "the investors keep the premium and the interest" and get back the bond.

But if a quake hits, the government gets the full value of the bonds, and investors lose their money.

Comments

[Mura]

Hi ! Your site is very interesting. Thank you.

[Evan]

Great Post, sometimes there is no answer in the insurance game!