Disaster Risk Financing
Product Note: MultiCat Program
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An efficient strategy to prevent and manage disaster risks in Mexico (Feature story)
On October 12, 2012, the Government of Mexico successfully launched MultiCat Mexico 2012, a $315 million catastrophe bond that provides coverage against earthquakes and hurricanes. The World Bank Treasury served as arranger of the transaction under the MultiCat Program – a catastrophe bond issuance platform that helps governments and public entities access the international capital markets to obtain insurance against natural disasters. This issuance, which follows the successful MutliCat Mexico 2009 transaction, is part of the government’s overall disaster risk financing strategy.
The MultiCat Program
As part of the World Bank’s efforts to partner with its member countries in the implementation of strategies to manage their natural catastrophe exposure, the World Bank Treasury established the MultiCat Program in 2009. The MultiCat Program facilitates access for the World Bank’s member countries and public entities to the catastrophe bond market by offering an off-the-shelf documentation platform that simplifies the issuance process. As arranger under the MultiCat Program, the World Bank assists in formulating the issuance strategy and provides advice and support for the transaction.
Similar to the 2009 issuance, the new bond provides parametric insurance coverage against earthquake risk in five geographic regions and hurricane risk in three regions along the Atlantic and Pacific coasts. Goldman Sachs and Swiss Re acted as co-lead structurers and joint underwriters with Munich Re as co-lead structurer. The firm AIR Worldwide conducted the risk modeling work. The 3-year bond was oversubscribed between 200 and 450 percent depending on the peril insured and class of notes issued.
Given the high level of demand for the transaction, Mexico was able to achieve terms that were significantly better than the 2009 bond and highly competitive with more traditional reinsurance. This success was due in part to a growing catastrophe bond market, the opportunity this transaction provided for investors to diversify away from the main risks covered by other catastrophe bonds (US wind and earthquake risk), and Mexico’s strong reputation in the market.
These catastrophe bonds have not only allowed Mexico to transfer a pool of disaster risk to the market and secure multi-year protection for the covered risks at a fixed price, they have also helped the government to diversify its risk financing strategy and reduce potential pressure on public budgets. Rather than relying only on public budgets after a disaster, Mexico has effectively locked in funding for disaster relief prior to the event happening.