Chile secures $630m earthquake insurance deal with World Bank

The Government of Chile has agreed to a catastrophe bond and swap transaction with the World Bank protecting it from $630 million worth of damage and disruptive economic impacts of earthquakes and resulting tsunamis. Chile is one of the most seismically active countries in the world, experiencing some of the largest earthquakes ever recorded.

The International Bank for Reconstruction and Development (IBRD) has priced a joint catastrophe bond and swap transaction that provides a total of $630 million of earthquake insurance coverage to the Government of Chile, which consists of $350 million of catastrophe bonds and $280 million of catastrophe swaps.

By simultaneously offering the risk to both bond investors and to insurance and reinsurance companies in swap form, the World Bank and Chile were able to access a larger amount of risk bearing capacity than either market could offer on its own.

The transaction provides Chile with financial protection to mitigate the potentially disruptive economic impacts of earthquakes and resulting tsunamis. It makes funds readily available in the case of disaster, protects Chile’s fiscal budget, and reduces the potential need to mobilize debt in an event’s aftermath.

The deal provides coverage for three years with payouts triggered if an earthquake meets the pre-defined parametric criteria for location and severity.

It is the first catastrophe bond to be listed on the Hong Kong Exchange (HKEX), and IBRD’s largest catastrophe risk transfer transaction for a single country. The transaction represents IBRD’s nineteenth catastrophe bond and the second for Chile. The first for Chile was issued in March 2018 as part of a transaction that also included bonds issued by IBRD for the three other Pacific Alliance countries Colombia, Mexico, and Peru.

Mario Marcel, Minister of Finance, Republic of Chile, thanked the World Bank for the support in this transaction. He said: “This constitutes a new step made by Chile towards a better protected and resilient public finances, in the face of large-scale natural catastrophe events, such as an earthquake, and is part of a comprehensive strategy that reinforces our commitment to fiscal responsibility, which has been highlighted by different local and international agents.”

Anshula Kant, managing director and World Bank Group chief financial officer, said: “We are pleased to have partnered with the Government of Chile on this important transaction. It is another example of how the World Bank mobilises private capital for development and supports disaster risk management in our member countries. We are encouraged by the extremely strong demand for the transaction from both bond investors and insurance counterparts who have shown their support for a more resilient future for the people of Chile.”

Carlos Felipe Jaramillo, World Bank vice president for Latin America and the Caribbean, added: “Chile is one of the most seismically active countries in the world, experiencing some of the largest earthquakes ever recorded. Through the intermediation of the World Bank, this CAT bond allows Chile to transfer major earthquake risks to the capital markets while enabling the authorities to respond quickly to the needs of citizens when calamities strike.”

Aon Securities, GC Securities, a division of MMC Securities, and Swiss Re Capital Markets were joint structuring agent, joint manager and joint bookrunner. Mercer Investments (HK) was the Joint Manager. AIR Worldwide provided the risk modeling and analysis for the transaction.

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