Macro earthquake insurance

The Mexican government has tapped international markets to issue a
special catastrophe bond to finance rescue and rebuilding in case of a
disastrous earthquake, finance ministry…

Swiss Re, the Zurich-based reinsurance group, issued the bonds,
which pay 230 basis points over the Libor benchmark interest rate.

"If
there’s no disaster in three years," the finance minister, Francisco
Gil Diáz, said, "the investors keep the premium and the interest" and
get back the bond.

But if a quake hits, the  government gets the full value of the bonds, and investors lose their money.

Catastrophe
bonds were started in the 1990’s, and have largely been issued by
private companies to cover losses from natural disasters. Taiwan is the
only other government that has issued such a bond against a quake, but
it covers damages from losses.

In Mexico’s case, the government
collects the $450 million in the bonds and the insurance payout if a
quake of 7.5 or 8 magnitude on the Richter scale hits specific regions,
regardless of damage. Mr. González Anaya said that meant the government
would have money for rescue operations immediately after a disaster.

Mexico has a special fund for natural disasters but the fund has only $80 million.

Last
year, the Mexican government spent $1.2 billion to cover rescue and
rebuilding operations after Hurricanes Stan and Wilma. Mr. González
Anaya hopes to issue a similar kind of catastrophe bond against
hurricanes.

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