The Government of Mexico’s disaster bond, which is now set to be triggered after main hurricane Otis final week, was already deliberate for renewal in March 2024, and the actual fact one other cat bond is about to payout to the good thing about Mexico will probably make this much more of a precedence.
The nation has a sturdy disaster insurance coverage program in place and within the final yr or two has been engaged on upgraded danger modelling capabilities, in addition to initiatives to higher organise information associated to disaster occasions, whereas additionally implementing a parametric insurance coverage scheme as nicely.
The World Bank facilitated disaster bond program has been a lynchpin of Mexico’s disaster insurance coverage preparations, with the nation benefiting from quite a lot of payouts over the years.
The Mexican authorities really started its disaster bond journey approach again in 2006, when its FONDEN catastrophe fund entity was the beneficiary of the $160 million CAT-Mex Ltd. parametric earthquake cat bond.
That CAT Mex cat bond was delivered to market with the assist of Swiss Re and ran clear with no losses. We even have a 2007 Swiss Re sponsored cat bond listed, Fusion 2007 Ltd., part of which sourced capital markets backed retrocession for a reinsurance settlement between the Swiss reinsurer and Mexico’s FONDEN.
Then, in 2009, the Mexican authorities returned for the primary time with the assist of the World Bank, with a $290 million MultiCat Mexico 2009 Ltd. cat bond that supplied FONDEN (Fund for Natural Disasters) with each earthquake and hurricane safety.
The 2009 cat bond additionally ran by its time period with out loss, after which Mexico got here again for a renewal with the MultiCat Mexico Ltd. (Series 2012-1) cat bond issuance.
The MultiCat Mexico 2012 cat bond was the place Mexico first benefited from a payout after the parametric set off was activated by hurricane Patricia in 2015, inflicting a a 50% lack of principal to the $100 million Class C notes.
The $50 million payout got here in 2016, after the ultimate willpower of the set off variables.
The Mexican authorities returned in 2017, utilizing the World Bank’s IBRD Capital-At-Risk notes program for the primary time, with the $360 million IBRD / FONDEN 2017 cat bond deal.
Mexico benefitted from its second catastrophe insurance coverage payout from a cat bond with the 2017 Fonden deal, as a seventh September 2017 magnitude 8.1 earthquake within the Chiapas area of Mexico breached the parametric set off and triggered a $150 million loss to buyers and restoration for Mexico.
In 2018, Mexico then turned the beneficiary of a $260 million IBRD CAR 118-119 cat bond which was issued as a part of the Pacific Alliance deal. That deal ran clear with none payouts coming due.
Most lately, Mexico then got here again to market by its FONDEN catastrophe fund for the $485 million IBRD / FONDEN 2020 disaster bond, which we now imagine may ship the federal government a $62.5 million payout after hurricane Otis slammed into the Acapulco area at Cat 5 power final week.
If this most recent payout involves cross, it means Mexico may have benefitted from $262.5 million in catastrophe insurance coverage recoveries from insurance-linked securities (ILS) and capital market buyers.
It exhibits how subtle Mexico is, with regards to deciding on its protection as nicely, because the payouts have all been for excessive occasions, simply the sort you may count on a disaster bond to reply to.
There has been one key change as nicely, given Mexico’s Fund for Natural Disasters (El Fondo de Desastres Naturales), extra generally referred to as FONDEN, was dismantled.
However, the cat bond protection continued with the direct beneficiary of the protection turning into Mexico’s Treasury, as we reported.
With hurricane Otis triggering the present Fonden 2020 cat bond, which is because of mature in March 2024, it raises the query of what Mexico may do subsequent.
We’ve discovered {that a} renewal for the Mexican authorities’s disaster bond protection had already been deliberate, with paperwork seen by Artemis that lay out its 2024 onwards financial plan that includes the cat bond and citing the will to renew it.
That need to renew the Mexican authorities’s disaster bond protection is simply more likely to enhance, now the utility of cat bonds is confirmed out once more, with a payout due after a significant pure catastrophe occasion.
Officials of Mexico’s Ministry of Finance final week acknowledged the “activation” of the disaster bond after hurricane Otis, so it’s now awaiting the ultimate willpower of the payout quantity, which continues to be anticipated to be 50% of the $125 million tranche of notes uncovered to Pacific hurricanes.
The Undersecretary of the Treasury stated he felt there’s a “high probability” the cat bond is triggered and in addition talked about Mexico’s parametric insurance coverage as probably paying out as nicely.
Mexico’s President this weekend urged insurers to make payouts after hurricane Otis swift, to assist in the restoration and financing the reconstruction effort.
A swift, as is feasible, payout from the disaster bond would offer one other clear instance of the advantages of including the capital markets to sovereign catastrophe danger finance planning.
There is a few concern within the nation that the shuttering of the Fonden catastrophe fund has weakened Mexico’s monetary resilience to disasters like Otis, with the quantity of funding anticipated to be available now lessened, some have stated.
But the disaster bond is at the very least one space of continuity in Mexico’s catastrophe financing, the significance of which is about to be highlighted once more.
Mexico has supplied an necessary instance to others, as a dedicated sponsor of disaster bonds that has benefitted from their safety on quite a lot of events and has remained constant in securing renewal protection every time they’ve expired as nicely.
