Best’s Commentary: Mexico’s New Catastrophe Bond Issuance Fundamental for Country’s Disaster Risk Management

A recently issued catastrophe bond by Mexico’s government has raised its level of bond protection against natural disasters to USD 595 million, reflecting an overall increase of 23%, according to the 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 USD 1 billion, which is separate from the catastrophe bond resources.

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

“Insurers’ risk appetites can be limited by myriad factors, making some risks not insurable,” said Eli Sanchez, director, AM Best. “But with this kind of vehicle, risk can be transferred to the debt markets, showcasing opportunities for the region’s financial markets.”

Risk transfers to Latin America’s debt markets overall are muted but common in Brazil and have reaped benefits in Mexico on several occasions, including Hurricane Otis (2023), Hurricane Patricia (2015) and the Mexico City 2017 earthquake. Additionally, using the debt markets to fill some insurance gaps allows for greater transparency for public finance than self-insured funds, which could be subject to political pressures, according to the report.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=343649.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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