Peru wants to move ahead with a pan-regional catastrophe bond “as soon as possible” as it braces for a big earthquake, the country’s finance minister said yesterday.
Finance ministers from the Pacific Alliance — Chile, Colombia, Mexico and Peru — met yesterday to discuss an instrument that would provide emergency funds in the case of a large quake in one of the four countries.
“Three of the four Pacific Alliance countries have suffered from very big earthquakes and in Peru the topic is in the news every day,” Claudia Cooper told GlobalMarkets. “We have to develop a very strong strategy on how we will deal if there is a very big earthquake, especially in Lima, where most of the population is.”
While the topic of a Pacific Alliance Cat bond has been on the radar for some time, Cooper, who took over as finance minister in Peru just last month, is pushing to speed up the process.
“We want a very simple decision-making variable so that we can issue the bond as soon as possible. We don’t want to wait another year to make it a reality, we want it as soon as possible.”
Peru hopes to have the Cat bond in place by early next year, she said. The instrument will have a similar format to one issued by the World Bank in August on behalf of Mexico.
The North American country paid 412bp over six-month Libor for the three year bond that offered protection against a quake measuring 7.9 or higher on the Richter scale. It is in line for a $150m payout after an 8.1-scale earthquake in the south of the country last month triggered the bond.
The World Bank-backed pan-Pacific Alliance catastrophe bond could exploit economies of scale for the four countries, which all face earthquake risks, Cooper said. A key point of discussion ahead of issuing the bond will be the trigger event — the lower the Richter scale reading, the higher the bond’s coupons.
For Mexico, catastrophe bonds are part of a package that includes traditional insurance and excess loss protection, José Antonio Meade, the country’s finance minister, told GlobalMarkets.
In Peru’s case, a Cat bond would offer insurance in addition to contingent lines and savings, Cooper said. “We have contingent lines and we have saved some money but we need insurance so that we have a combined strategy of insurance, contingent lines and savings.”