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Mexico issues first `catastrophe' bond for earthquakes

The Mexican government said on Friday it issued its first catastrophe bond as part of a program that could provide it with up to US$450 million in the event of a major earthquake in the next three years.

The bond has advantages over a standard insurance policy given that money would be available immediately, and there is no need to prove damage, Finance Secretary Francisco Gil Diaz told a news conference.

The government said it placed US$160 million in catastrophe bonds through Deutsche Bank and Swiss Reinsurance Co.

The bonds don't represent debt for the Mexican government, which will pay US$26 million in premiums over the three years, Gil said.

Payment would be triggered if an earthquake of magnitude 8 or higher is registered along Mexico's Pacific coast, or one of magnitude 7.5 or higher occurs in an area around the capital, Mexico City. Three zones were defined, with coverage of US$150 million in each case.

Gil Diaz said that in the event of a major earthquake the bond would boost resources in the government's natural disaster fund, Fonden, without pressuring public finances.

Mexico is prone to both earthquakes and hurricanes. A magnitude 8.1 earthquake that hit Mexico in 1985 destroyed hundreds of buildings and caused thousands of deaths.

Last year, Mexican insurance industry officials estimated that the 1985 earthquake led to payouts of US$250 million, but considered that last year's hurricanes were more expensive to the industry even after adjusting for inflation.

The industry has paid about US$2.27 billion in insured claims from the three hurricanes that hit Mexico last year: Emily, Stan and Wilma. Last year was one of the busiest Atlantic hurricane seasons ever, and another busy season is expected this year.

Gil Diaz said that the government was unable to find catastrophe bonds for hurricanes at a reasonable cost.
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