Mexico's new cat bond integral for disaster risk management

Mexico’s new cat bond integral for disaster risk management – AM Best | Insurance Business New Zealand

Reinsurance

Mexico’s new cat bond integral for disaster risk management – AM Best

It could mitigate economic losses

Reinsurance

By
Kenneth Araullo

The recently issued catastrophe bond by the Mexican government has raised its level of bond protection against natural disasters to $595 million, reflecting an overall increase of 23%, according to a new AM Best report.

The catastrophe bond, totaling $175 million, was announced on May 15, 2024. In addition, Mexico’s natural catastrophe fund, known as Fondo de Desastres Naturales (FONDEN), holds $1 billion, which is separate from the catastrophe bond resources.

Best’s Commentary notes that the expanded catastrophe bond coverage could mitigate economic losses for areas that are more vulnerable to natural disasters.

Eli Sanchez, director at AM Best, stated that insurers’ risk appetites can be limited by various factors, making some risks uninsurable.

“But with this kind of vehicle, risk can be transferred to the debt markets, showcasing opportunities for the region’s financial markets,” Sanchez said.

Risk transfers to Latin America’s debt markets are generally subdued but are common in Brazil and have benefited Mexico on several occasions, including Hurricane Otis in 2023, Hurricane Patricia in 2015, and the Mexico City earthquake in 2017.

Additionally, using the debt markets to address insurance gaps allows for greater transparency in public finance compared to self-insured funds, which could be influenced by political pressures, the report noted.

The expanded catastrophe bond coverage aims to reduce economic losses in disaster-prone areas. AM Best highlighted that while insurers’ risk appetites may be restricted by several factors, catastrophe bonds enable the transfer of risk to the debt markets, enhancing financial market opportunities in the region.

The report also pointed out that risk transfers to Latin America’s debt markets are muted overall but are common in Brazil and have proven effective in Mexico during natural disasters. Furthermore, utilizing debt markets for insurance coverage offers more transparency in public finance than self-insured funds, which might face political influences.

AM Best noted that it will continue to monitor the use of catastrophe bonds in the region and their impact on the development of Latin America’s insurance industry.

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