Aon Securities, the investment banking division of reinsurance intermediary and capital adviser Aon Benfield, has assisted the World Bank in structuring the largest-ever catastrophe bond covering earthquake, which provides the organization with US$1.36 billion of capital markets’ protection.
The bond mitigates balance sheet risk for the World Bank in Chile, Colombia, Mexico and Peru by offering protection against earthquake risk on a parametric basis. Aon explained that the bond’s parametric trigger is based on earthquake magnitudes provided by the U.S. Geological Survey.
It is the second largest catastrophe bond on record and represents the largest sovereign risk transfer in the history of the insurance-linked securities sector, said Aon Securities in a statement.
The issuance was made across five tranches of notes – one for each of Chile, Colombia and Peru, and two for Mexico. The issuance provides US$500 million in earthquake risk protection for Chile, US$400 million for Colombia, US$260 million for Mexico and US$200 million for Peru, Aon Securities said. (Within the Mexican coverage, there are two classes of notes with different risk profiles, but the total coverage would be equal to $260 million, a representative explained.)
Coverage is provided on a three-year basis for the Chile, Colombia and Peru notes, and on a two-year basis for the Mexico notes.
The transaction brings the total amount of risk transfer facilitated by the World Bank to US$3.6 billion, and is part of the organization’s broader work to support Chile, Colombia, Mexico and Peru – all member countries of the Pacific Alliance – in managing risk from natural disasters.
“This record-breaking issuance highlights the strategic partnership between nations seeking efficient sources of capital to fund emergency costs and investors seeking to invest in diversifying risks and support sustainable development initiatives,” said Paul Schultz, CEO of Aon Securities. “We are optimistic that this transaction will pave the way for other governments to develop more resilient risk management programs for their uninsured exposures.”
