Category: Parametric insurance

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Were major hurricane Erick to trigger the $175 million IBRD CAR Mexico 2024 (Pacific) catastrophe bond that provides disaster insurance to the Mexican government, it could reignite the debate surrounding parametric triggers, given the recency to another trigger event with hurricane Otis back in 2023, Florian Steiger of Icosa Investments has suggested.

As we reported earlier this morning, hurricane Erick intensified rapidly to become a major category 4 storm, with sustained winds of 140 mph and a minimum central pressure estimated at 939mb.

As we said in our earlier article, that central pressure was only two millibars above the level needed to activate a partial payout from the IBRD Mexico Pacific coast hurricane catastrophe bond.

However, it’s worth pointing out that a fresh update from the NHC now has the minimum central pressure of hurricane Erick very slightly higher at 940 mb, so now 3 millibar above the trigger pressure.

Update: A further landfall update at 12:00 UTC states that hurricane Erick made landfall with 125 mph sustained winds and a minimum central pressure of 950mb, according to the NHC. So pressure was above the trigger point for the cat bond and did not seem to drop below at any stage as the hurricane approached landfall.

Icosa Investments, the specialist catastrophe bond fund manager, has commented, “Tropical Storm Erick, which formed off Mexico’s Pacific coast, has intensified into a Category 4 hurricane within just a few hours. With sustained winds exceeding 230 km/h, the storm poses an imminent threat and is expected to cause severe damage. Landfall is anticipated later today.

“Unlike in the United States, only a small number of cat bonds cover hurricane risks in Mexico. The current exposure is concentrated in a single IBRD instrument, representing just over 0.3% of market weight. As with most IBRD transactions, this bond relies on a parametric trigger. If the storm’s central pressure at landfall falls below a predefined level, a payout, either partial or total, is made. Such a total loss appears unlikely at present, but it cannot be entirely dismissed, whilst a partial payout is certainly within the realms of possibility as the latest reported pressure is only marginally above the payout threshold.

“Definitive clarity will likely not arrive for several days, because the National Hurricane Center may revise its datasets retroactively. Meanwhile, the bid–ask spread on the affected bond is likely to widen significantly.”

CEO of Icosa Investments Florian Steiger further stated, “Rapid intensification in the Pacific is once again front-page news for cat-bond investors. A fast-strengthening storm now threatens to cause a partial-payout of yet another parametric cat bond, echoing recent experience with Hurricane Otis, which also intensified to major hurricane status within a few hours in almost the same region.

“Such an additional default of a Mexican parametric bond in such short order is bound to reignite debate about trigger design, basis risk and whether the market is truly pricing rapid-intensification exposure. It may also stretch investor patience with parametric structures, whose mixed performance in recent years is already under the microscope.”

Read our earlier article for more on the situation with major hurricane Erick and Mexico’s Pacific coast named storm parametric catastrophe bond.

You can read all about the IBRD CAR Mexico 2024 (Pacific) catastrophe bond and more than 1,000 other cat bond transactions in the extensive Artemis Deal Directory.

Hurricane Erick threat to Mexico cat bond could reignite parametric trigger debate: Icosa was published by: www.Artemis.bm
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Rapid intensification of tropical storm Erick into a major hurricane has brought Mexico’s Pacific coast hurricane parametric catastrophe bond, the $175 million IBRD CAR Mexico 2024 (Pacific) issuance, sharply into focus, as Erick’s central pressure is estimated just a couple of millibars above where the trigger for attachment sits.

At this time, major hurricane Erick has reached category 4 strength, with sustained winds estimated by the National Hurricane Center at 145 mph, with gusts estimated at over 170 mph.

In the next few hours, the centre of Erick is forecast to make landfall near to the border region between the Mexican states of Oaxaca and Guerrero this morning.

In the latest update from the NHC, major hurricane Erick’s minimum central pressure is estimated at 939 mb and the agency says some further intensification is possible before landfall, after which weakening is anticipated.

Artemis has learned that the minimum central pressure of a hurricane that is required for any activation of a payout from the Mexican government’s World Bank supported IBRD Pacific storm cat bond is 937 mb, so just 2 mb away from the latest storm pressure estimate for Erick.

Updates: A fresh estimate from the NHC at 09:00 UTC put the estimated minimum central pressure for hurricane Erick a millibar higher, at 940mb.

A further landfall update at 12:00 UTC states that hurricane Erick made landfall with 125 mph sustained winds and a minimum central pressure of 950mb, according to the NHC. So pressure was above the trigger point for the cat bond and did not seem to drop below at any stage as the hurricane approached landfall.

In that region along the coast from the Mexican states of Oaxaca into Guerrero, in order for a 25% payout of the catastrophe bonds $175 million of principal to come due, a storm must cross into the parametric box with a minimum central pressure of between 937 mb and 931 mb.

Depending on where the landfall occurs, a higher payout of principal could be due further up the coast near to Acapulco, we are told, while a more intense storm with a pressure that dropped below 931 mb could drive a 50% or higher payout for the catastrophe bond. It’s important to note that we believe the parametric trigger works on a sliding scale, so while the minimum payout for the notes is 25%, it can be any percentage above that depending on the pressure and location it crosses the parametric box.

Based on the latest NHC data, for an estimated central pressure of 939 mb, hurricane Erick only needs to deepen by 2 millibar before it breaches the parametric named storm box for investors in the Mexico Pacific coast catastrophe bond could be on the hook for a payout.

It can take some time for payout determinations to be made with parametric catastrophe bonds such as this, given the use of official NHC reports to make that final decision.

In this case, we understand the Pacific coast IBRD catastrophe bond utilises the Automated Tropical Cyclone Forecast best-track data files for that.

In the most recent case of one of the Mexican government’s catastrophe bonds paying out, hurricane Otis caused a just under 50% payout with that storm making landfall in October 2023, but the final report being delivered by March 8th 2024 and then payout not being made until late March or April of that year.

So, should hurricane Erick deepen and its central pressure be reported closer still to the thresholds required, it could take weeks or months for clarity to be understood, about whether the Pacific coast catastrophe bond has been triggered, or not.

With just 2 millibars between the latest central pressure and the initial threshold for attachment to begin for this cat bond, depending on landfall location and where pressure sits as it is extrapolated across the parametric box, holders of the IBRD Pacific coast catastrophe bond notes could be in for a nervous few hours as they wait for the next report from the NHC to then make their own estimations for where pressure could have been as the box was crossed.

Finally, it’s worth noting that storm chasers have provided inputs to NHC best-track data in the past, through provision of on-the-ground readings of central pressure and the catastrophe bond market has experience of that with hurricane Patricia back in 2015.

Morgerman is once again on the ground in Mexico hoping to intersect the eye of major hurricane Erick and will no doubt record pressure readings if he is successful. Something to watch out for and that could provide helpful data to provide an earlier idea of the pressure at landfall, although no necessarily at the point where the parametric named storm box line is crossed.

We’ll update you should hurricane Erick pose a major threat to the notes, although given landfall is just hours away now we may not see any further central pressure updates before the storm has already crossed the parametric line.

Whether the cat bond is really threatened, or not, the threat to lives, livelihoods, property and infrastructure is clear.

The NHC warns in its latest update, “Erick is now an extremely dangerous category 4 hurricane, and devastating wind damage is likely where the core moves onshore. Weather conditions are already deteriorating in the warning area, and preparations to protect life and property should have been completed.

“Erick will produce heavy rainfall across portions of Central America and Southwest Mexico through this week. Life-threatening flooding and mudslides are likely, especially in areas of steep terrain.

“A dangerous, life-threatening storm surge is expected to produce coastal flooding near and to the east of where the center crosses the coast, in areas of onshore winds. The surge will be accompanied by large and destructive waves.”

You can read all about the IBRD CAR Mexico 2024 (Pacific) catastrophe bond and more than 1,000 other cat bond transactions in the extensive Artemis Deal Directory.

Major hurricane Erick puts Mexico parametric Pacific coast IBRD cat bond on-watch was published by: www.Artemis.bm
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Descartes Underwriting, the parametric risk transfer specialist, has secured a strategic investment from Battery Ventures, a global technology-focused global investment firm.

The transaction was executed at a premium to Descartes’ most recent Series B valuation. It allows Battery to join the organisation’s shareholder base, while all existing investors retain a substantial  majority of their holdings.

As part of the transaction, Marcus Ryu, Partner at Battery Ventures and former Chief Executive Officer (CEO) and co-founder of Guidewire Software will join Descartes as a board observer.

Tanguy Touffut, CEO and co-founder of Descartes, said: “Over the past six years, Descartes has established itself as the leading parametric insurance business for climate-related risks, remaining true to our scientific approach to risk transfer.

“As we scale globally to address the widening protection gap around natural disasters, we’re thrilled to welcome Marcus — one of the world’s most accomplished Insurtech entrepreneurs — whose experience and vision will be invaluable as we execute our ambitious roadmap.”

Adding: “Battery’s investment is a major endorsement of our mission and a strong signal of our commitment to the North American market, already our largest market.”

Ryu, also commented: “Over twenty years of serving the global P&C insurance industry informs my keen interest in applying technology to address the enormous underinsurance gap.

“Parametric insurance is one of — if not the — most promising approaches to transfer risk efficiently, and like many industry participants I believe it will continue to grow in importance and adoption.”

Ryu continued: “The team at Descartes Underwriting is uniquely credentialed in this domain, and I am very impressed with the market and thought leadership position they have built with brokers, capacity partners and insureds in a short period.”

Parametric specialist Descartes secures investment from Battery Ventures was published by: www.Artemis.bm
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The Government of Jamaica has prepared itself for the 2025 hurricane season with a further increase to its National Natural Disaster Risk Financing Policy arrangements, with the largely parametric reserves and contingent financing augmented with parametric insurance and its World Bank catastrophe bond.

In March this year, the Jamaican Ministry of Finance negotiated a further J$6.5 billion contingent financing arrangement, which we believe was in the form of a World Bank supported Catastrophe Deferred Drawdown Option (CAT DDO).

In addition, the Jamaican government has meaningful layered protection from a range of instruments, made up of its own reserves and contingent disaster financing, contingent instruments from international partners, parametric insurance from the CCRIF and its catastrophe bond that sits at the top of the layered financing tower.

In a speech last week, Minister of Finance and the Public Service, Fayval Williams, disclosed the additional disaster risk financing and explained the layered approach Jamaica has adopted.

Her comments are an excellent example of how a government can, over time, reach a stage of maturity in its disaster risk financing arrangements that leaves it prepared for most eventualities, with a range of structures, instruments and sources of capital designed to respond to different return-period catastrophe events.

It’s an example other countries take note of, as Jamaica now has one of the most sophisticated disaster risk financing approaches in the world, with private markets and capital augmenting its own reserves and development banks contributions, while the structures are largely parametric in the way they would be activated by a disaster event.

Williams explained, “In the face of what we know to be increased intensity of weather related events, we would have been in a very bad place when Beryl struck if we had not implemented our National Natural Disaster Risk Financing Policy.

“It has many layers of what we call shock absorbers for the economy. Since then, we have increased our disaster coverage to ensure we have the financial flexibility to meet natural disasters.

“The NNDRFP allows the government to prepare financially for natural disasters, the policy ensures funds are available for response and recovery efforts. Had this government not had the foresight to ensure we had this multi-layered risk absorbing facility in place when category five hurricane Beryl hit, we would not have been able to do the emergency repairs to public infrastructure, clean up and relief recovery activities, as well as the social expenditure to assist vulnerable populations.

“Currently, our NNDRF cushion stands at approximately $130.6 billion in terms of coverage. How much we can draw-down on that will depend on the severity of the disaster. Our disaster financing policy takes into consideration those events that are high frequency but low severity, such as floods, and these can be dealt with through budget reallocation or reserve and the contingency funds to provide immediate resources for relief efforts.

“For the higher-severity, low-frequency events, such as hurricanes, we have to use insurance instruments, such as the facility that we have with CCRIF, our Caribbean partner.

“It says in times of disaster, our policy that is, start with what we can reallocate, what we can defer, what we can delay or cancel and if that is not enough, go to the next layer, the contingency fund and the National Disaster fund. This is $4.8 billion. Then you go to the National Natural Disaster Reserve Fund that has $1 billion dollars. Together these two funds total $5.8 billion and are Jamaica’s own resources.

“If those are not enough, the next layer would be two contingent credit arrangements, thanks to our international partners, and I’m pleased to note that on Tuesday, March 4th 2025, an additional facility was added for an amount of $6.5 billion to bring the disaster coverage for Jamaica, again, just to reiterate that number, to $130.6 billion.

“Of course, how much we can access will depend on the severity of the disaster.

“An advantage of the catastrophe financing coverage we have in place is that it is parametric, meaning there are predefined thresholds and predefined payouts. So, if the thresholds are met, funds are triggered and the recovery work can get started almost immediately.

“Compare this with traditional insurance, in which there would have to be a detailed damage assessment, which, as you know, could take months of back and forth and agreeing and disagreeing about what’s damaged what’s not damaged.

“During that time, as you can imagine, of this detailed damage assessment, you could see how people, the infrastructure and the GDP of the country would be suffering, and how slow that process would be in addressing recovery efforts.

“The commitment of this government is to continue strengthening our multi-layered National Natural Disaster Risk Financing policies and to fill in any gaps that we have.

“I will always give former Minister Nigel Clark credit for the work that he started to establish this. We are continuing that work and are ensuring that these facilities remain in place for the benefit of the people of Jamaica, because we understand our geographic location in a hurricane belt, and that we need to be prepared well ahead of that. Not thinking when we are in it, what we are going to do? But we would have already had the plans and the financing in place to support that.”

$130.6 billion Jamaican dollars equates to around US $815 million, so a very meaningful capital buffer to protect the country against severe weather and natural catastrophe events.

The World Bank facilitated $150 million parametric IBRD CAR Jamaica catastrophe bond sits at the top of the financing tower, for any particularly catastrophic disaster impacts the country could face.

While the cat bond did not pay out for hurricane Beryl, receiving some unwarranted criticism for that, it was evident that Jamaica’s layered approach to financing its disaster risks was more than adequate for the impact of that storm and now the cat bond coverage remains available for any significant hurricane impacts through three more hurricanes, up to the end of 2027.

Recall that, the catastrophe bond was always designed to protect the residual risk at the top of Jamaica’s disaster risk financing tower of arrangements.

While, after Beryl, Jamaica’s Minister of Finance at the time, Dr. Nigel Clarke, had explained that not every risk transfer instrument was designed to trigger for every storm event.

Jamaica builds on parametric disaster risk financing for 2025. Cat bond remains core was published by: www.Artemis.bm
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