Chile seeks $150m parametric quake cat bond via the World Bank’s IBRD

The Republic of Chile is aiming to secure $150 million of parametric earthquake disaster insurance protection through a new IBRD – Chile 2023 transaction that is being issued by the World Bank’s multilateral development bank, the International Bank for Reconstruction and Development (IBRD).

The IBRD – Chile 2023 catastrophe bond is the first issuance to come to market with World Bank support since Jamaica’s cat bond back in July 2021, so it’s encouraging to see the return of the organisation.

The government of Chile had previously secured catastrophe bond protection against earthquake risks back in 2018, with the $500 million IBRD CAR 116 issuance that came as part of the giant Pacific Alliance deal, but that matured in early 2021.

So, it’s also encouraging to see the Republic of Chile back in the cat bond market, as the country looks to secure disaster risk financing from the capital markets to aid in its response to major earthquakes.

The IBRD is targeting issuance of $150 million in floating rate Catastrophe-Linked Capital at Risk Notes that will be sold to investors to deliver the capital to support a parametric earthquake insurance arrangement with the Republic of Chile, we’ve been told.

Chile is seeking this quake protection to help counter the effect a damaging earthquake could have on its economy and to secure disaster risk financing.

The proceeds from the sale of the notes will be used by the IBRD to fund sustainable development projects in member countries, while it will enter into an insurance agreement with Chile to make the payouts on the occurrence of any qualifying quakes.

This is a way to make the resulting catastrophe bond notes more ESG-aligned, which can help to make them more attractive to certain investors as well.

The notes will feature a parametric trigger and provide their protection on a per-occurrence basis, across a three-year term, we understand.

The parametric trigger is similar to the one used in Mexico’s cat bond, so depth, magnitude and location of an earthquake are all important, in defining the payout rate for a qualifying quake event.

The IBRD – Chile 2023 catastrophe bond notes can be triggered to make a 30%, 70% or 100% payout of principal, dependent on these factors of quake depth, magnitude and location.

It’s a type of parametric quake in a box trigger, but with numerous boxes running the length of Chile and extending into neighbouring countries so a major quake on Chile’s borders, or off the coast that could cause a tsunami, are captured.

We understand tsunami impacts are covered under the terms of the new Chile cat bond deal.

The proposed $150 million of Chile earthquake notes will have an initial modelled attachment probability of 1.48%, an initial base expected loss of 1% and are being offered to investors with pricing guidance of 4.75% to 5.5%, we’re told.

It’s going to be interesting to see how strong investor appetite is for these new Chile earthquake cat bond notes.

We understand that the IBRD could also issue catastrophe swaps at the same time, expanding the coverage available to Chile, but also perhaps appealing to other investors or to reinsurance companies as well.

Interestingly, we’re also told that these IBRD – Chile 2023 catastrophe bond notes may be listed on the Hong Kong Stock Exchange at close, which could suggest the issuance may benefit from the ILS grant scheme on offer there, helping to lower the cost of issuance somewhat.

It’s very encouraging to see the World Bank’s IBRD continuing to be active in helping sovereign catastrophe bond sponsors access the capital markets for disaster insurance financing.

You can read all about this new IBRD – Chile 2023 catastrophe bond in the extensive Artemis Deal Directory.