World Bank earthquake cover for Chile (2023)
A March 2023 transaction that combined a catastrophe bond and a swap to transfer 630 million dollars of Chilean earthquake risk to the markets.
A state heavily exposed to earthquakes needs liquidity within days of the catastrophe, before international aid or debt can be mobilized. The World Bank issues a catastrophe bond on its behalf with a parametric trigger based on the earthquake's magnitude, depth and location, and supplements it with a catastrophe swap placed with reinsurers. Combining the two instruments widens the base of risk takers: catastrophe bond fund investors on one side, traditional reinsurance on the other. The price paid is basis risk: a destructive earthquake that lands just outside the trigger box pays nothing.
In March 2023, the World Bank placed for Chile a 350-million-dollar catastrophe bond and a 280-million-dollar catastrophe swap, for 630 million dollars of earthquake cover over three years, the largest such transaction the Bank had then carried out for a single country.
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