Page 20 - Insurance Times July 2022

Case Study 1: Combating Natural Catastrophes Bank is helping Jamaica to develop resilience in this area
through various financing instruments.
in the Pacific region with the multi-country
Earthquake Bond
The World Bank priced a CAT Bond that will provide the
The World Bank (International Bank for Reconstruction and
Government of Jamaica with financial protection of up to
Development) issued sustainable development bonds in the
USD185 million against losses from named storms for three
year 2018 that collectively provided USD 1.36 billion in
Atlantic tropical cyclone seasons ending in December 2023.
earthquake protection to the South American countries of
Pay-outs to Jamaica will be triggered when a named storm
Chile, Colombia, Mexico and Peru. The World Bank issued the
event meets the parametric criteria for location and severity
transaction as part of its broader work to support these
set forth in the bond terms.
countries in managing risk from natural disasters.
The transaction includes an innovative reporting feature
This is the largest sovereign risk insurance transaction ever
resulting in a quick pay-out calculation, within weeks of a
and the second largest issuance in the history of the
qualifying named storm. It is also the first CAT Bond to use an
Catastrophe Bond market.
innovative cat-in-a grid parametric trigger design for tropical
cyclone risk.
The issuance comprised five classes of World Bank bonds: one
each for Chile, Colombia and Peru, and two classes for Mexico.
Under the respective classes, Chile was to receive USD 500 How do CAT Bonds work?
million, Colombia USD 400 million, Mexico USD 260 million CAT Bonds are usually issued by three different types of
and Peru USD 200 million in risk insurance. institutions: insurance companies, reinsurers, and state
catastrophe funds. These three types of institutions employ
Each class has different terms and all are designed to cover CAT Bonds in their own distinctive ways to offload their specific
earthquake risks. The triggers are parametric and depend insurance risks.
on data provided by the US Geological Survey.
An important feature of CAT bonds that tends to differ across
The classes for Chile, Colombia and Peru were intended to
the issuer types is the trigger-i.e., the mechanism used to
provide coverage for three years. The classes for Mexico were
determine when pay-outs must be made to the bond
intended to provide coverage for two years.
issuer.This contractually agreed-upon threshold is also known
as the bond's attachment point.
Case Study 2: Combating Natural Catastrophes
in Mexico with CAT Bonds There are three common types of triggers for a CAT Bond:
Mexico is highly exposed to many natural hazards such as indemnity, industry loss and parametric.
hurricanes, storms, floods, earthquakes and volcanic
eruptions. Indemnity triggers base CAT Bond pay-outs on the actual
insurance losses experienced by the issuer, and function
In 2006, Mexico became the first country to utilize CAT Bonds.
similarly to traditional reinsurance.
The World Bank issued four catastrophe (CAT) Bonds in the
year 2020 that will provide the Government of Mexico with
Industry loss triggers base pay-outs on aggregate losses to
financial protection of up to USD 485 million against losses
the insurance industry and employ a third-party modeler to
from earthquakes and named storms for four years.
provide an independent estimate of these covered losses.
If a natural disaster occurs that is eligible for coverage, some,
And finally, parametric triggers base pay-outs on the
or all, of the bond proceeds will be made available to the
measured strength of the covered catastrophe-such as an
Mexican Fund for Natural Disasters.
earthquake's magnitude or a hurricane's wind speed and
barometric pressure.
Pay-outs will be triggered when the earthquake or named
storm meet the parametric criteria for location and severity
Using an indemnity trigger ensures that the CAT Bond will
set forth in the bond terms.
pay out when the insurance company's actual losses reach
the bond's attachment point, which gives the insurer greater
Case Study3: Combating Natural Catastrophes in
precision in its risk-management strategy compared with
Jamaica with CAT Bonds other types of triggers. However, because actual losses must
Jamaica is highly exposed to tropical cyclone events. The World be observed and verified before the bond can be triggered, a

20 The Insurance Times, July 2022