Mexico catastrophe bond and the Chiapas earthquake (2017)
An August 2017 World Bank issue covering Mexico for 360 million dollars, whose earthquake tranche paid out in full after the September 7, 2017 earthquake.
A state that funds reconstruction from its budget must either hold idle reserves or borrow at the worst moment. Since 2006, Mexico has chosen to transfer part of that risk to the markets through catastrophe bonds issued by the World Bank for its disaster fund, FONDEN. The 2017 issue split the cover into tranches by peril, earthquake, Atlantic cyclone and Pacific cyclone, each with its own trigger parameters: epicenter, depth and magnitude for the earthquake. The split lets investors choose their peril and lets the state pay each risk at its own price. The full 2017 payout showed the market that a well-built parametric trigger settles in a few weeks, without any damage assessment.
Issued on August 4, 2017 for 360 million dollars, the transaction saw its 150-million-dollar earthquake tranche triggered by the magnitude 8.1 earthquake of September 7, 2017 off the coast of Chiapas. In October 2017, the Mexican Finance Ministry confirmed a payout of 100% of the tranche, after the calculation agent verified the epicenter, depth and intensity.
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