Parametric Re (1997)
The first catastrophe bond with a parametric trigger, issued in November 1997 to cover earthquake risk in greater Tokyo.
The first catastrophe bonds paid according to the losses actually suffered by the sponsoring insurer, which forced investors to trust its claims handling and delayed settlement by several months. Parametric Re replaced that measure with a physical fact: the occurrence of an earthquake of a given magnitude within a defined zone around Tokyo, as published by the Japan Meteorological Agency. Investors no longer had to audit a Japanese portfolio they did not know; reading a grid of magnitudes and locations was enough. The price of that simplicity is basis risk: the insurer could suffer heavy losses from an earthquake that missed the grid, or the reverse. The transaction founded the model that most sovereign bonds use today.
In November 1997, Tokio Marine & Fire obtained 90 million dollars of fully collateralized Tokyo earthquake cover through a 100-million-dollar, ten-year issue by Parametric Re Ltd, a Cayman Islands vehicle placed by Goldman Sachs and Swiss Re Capital Markets. It was the first securitization of Japanese earthquake risk.
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