The Pacific Alliance hopes to expand its cat association to cover hurricanes, floods and droughts

The Pacific Alliance, a Latin American trade bloc made up of Peru, Chile, Colombia and Mexico, wants to expand the coverage provided by their disaster links, with hydrometeorological hazards including tropical cyclones, droughts, floods and even cold weather. The finance ministries of Pacific Alliance members met in late 2020 to discuss next steps in disaster risk financing and the disaster bond journey.

The Pacific Alliance trade bloc countries in Latin America are currently tapping $ 1.36 billion in earthquake-backed bonds in a multi-country Qatari bond issue that was introduced to the market in early 2018.

The Pacific Alliance bond deal was the largest single disaster bond issuance the World Bank has ever facilitated, and it is, in fact, the largest sovereign risk insurance transaction ever.

Now, member states want to work towards expanding the disaster bond cover, which offers protection against a host of other risks affecting the region.

A working group evaluated the effectiveness of the Pacific Alliance’s first cat bonds and discussed the trading bloc’s goals for a renewal issuance.

Coverage of other weather and climate risks has been identified as a priority, and the trading block would like to achieve this by either including coverage in the renewal of its seismic cat bonds, a separate bond issuance, or another hedging instrument if the cat bond proves not well suited to cover a range of situations Exposure to hydrology.

All four countries rated the bond issuance of the 1st Pacific Alliance as a positive success, given that it met the goal of disaster risk insurance that could respond quickly in the event of a devastating earthquake.

Of course, Peru has already benefited from its participation in the issuance of disaster bonds, after the country received a $ 60 million payment when an earthquake protected its bonds under the disaster under the Pacific Alliance agreement.

This amount went directly to the Disaster Fund of the Republic of Peru, using funds identified by the Technical Secretariat of the FONDES Disaster Fund.

When evaluating the first cat bond, members of the Pacific Alliance agreed that having quick-pay sources of disaster insurance like this was essential and that in the case of Peru they helped to disburse relief and recovery resources exactly where they were needed.

In addition, the evaluation process also considered cooperation with the World Bank on the issuance of catastrophe bonds and members of the commercial bloc agreed that this cooperation should continue.

The group has been assessing the inclusion of additional risks for some time now, but this is now focusing on hydrometeorological risks, such as tropical cyclones, floods, droughts, extreme hail or frost.

In the coming year, this work will continue and will focus on how the cat bond issuance, or other hedging mechanism, is structured to provide coverage for an expanded set of risks, with the cost of the issue in mind and the efficiency of the catastrophe insurance protection.

Current Pacific Alliance disaster bonds will continue to be covered through mid-February 2021, which means that any repeat issue will have to reach the market relatively soon if hedge continuity is to be achieved.

Of course, if catastrophe expansion is imminent, this could delay replenishment as new risks are modeled and included in any future Pacific Alliance disaster bond deal.

With these positive messages from protected countries, we hope to see a renewal of the mature seismic cat bonds, and possibly the addition of other risk coverage, in the coming months.

Mexico has since issued its own cat bond from the World Bank, which runs through 2024 and covers earthquake and hurricane risks, so it will be interesting to see if it plays a role in any renewal of the Pacific Alliance issuance.

You can read all about Pacific Alliance disaster bonds, which are divided into four separate country-specific transactions in our Deal Guide as follows: Chilean IBRD CAR 116; Colombian Earthquake Deed IBRD CAR 117; Two series of Mexican earthquake bonds IBRD CAR 118-119 (due to the two banknote series involved); And the Peruvian cat earthquake IBRD CAR 120.

The New Mexico Earthquake and Hurricane Disaster Bond issued this year can be found here: IBRD / FONDEN 2020.

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