In March 2023, the World Bank executeda dual catastrophe bond and swap
transaction that provides the Republicof Chile with $630 million of insurance
cover for earthquake events - $350
million of catastrophe bonds and $280
million of catastrophe swaps.
This is World Bank’s largest catastrophe (cat) risk transfer
transaction for a single country, its nineteenth catastrophebond and the second for Chile.

Background
Chile has a long history of earthquakes and tsunamis andis one of the most earthquake-prone countries in the world.
In March 2018, the Government of Chile, along with thethree other Pacific Alliance countries, Colombia, Mexico,and Peru, collectively accessed the Insurance Linked
Securities (ILS) market, using the World Bank Capital at Risk
Notes (CAR) program, with the largest ever sovereign cat
bond transaction for a total of US$1.36 billion. The
transaction provided Chile with $500 million of insurance
cover against severe earthquakes for a period of threeyears.
To mitigate the impact of infrequent yet devastating
earthquake events, Chile requested support from theWorld Bank to renew and potentially expand theearthquake cover that expired in February 2021. This would
provide Chile with better protected and resilient publicfinances and was part of a comprehensive strategy towards
fiscal responsibility. It would reduce the need to raise debt
in the aftermath of a disaster and would potentiallycomplement a contingency fund for natural disasters (thatwould cover more frequent events) that is under discussion
in the Chilean senate.

Financial and Project Objectives•••

Cover severe earthquake events that generate highrecovery needs and impact the fiscal balance
Optimize the cat-in-a-grid parametric structure, andprovide quick payouts after an earthquake event
Expand the coverage from the 2018 transaction

Photo Credit: REUTERS/Ivan Alvarado

Financial Solution
The World Bank simultaneously marketed and executed a$350 million cat bond and $280 million of cat swaps. Thebond and swaps were written on the exact same financial
terms, the cat bond with bond investors and the cat swaps
with (re)insurance companies. Combined they provide
Chile with $630 million of earthquake (including resultingtsunamis) insurance cover for three years.
Chile pays an insurance premium for the overall coverage,
which the World Bank transfers to the cat bond investors
and cat swap counterparties. The insurance premium isfixed for the three years of cover, removing any cost
uncertainty for Chile.
The World Bank will provide insurance payouts to Chile
based on the physical parameters of an earthquake event,which were defined based on the requirements of Chile.
Therefore, there is no need to wait for incurred losses to beassessed before the insurance would payout.
If a qualifying event occurs, Chile will issue a notice to theindependent calculation agent (AIR Worldwide) who will
determine the payout amount based on the location,
magnitude, and depth of an earthquake. The World Bank
will transfer the payouts to Chile as soon as a calculation
report is available, within approximately one month after
an earthquake occurs.
Given the large size objectives of Chile and tight cat bondmarket liquidity in the second half of 2022, the team agreed

to explore simultaneous placement in the cat bond and(re)insurance markets. This tight liquidity reflected investor
losses in bond and equity markets that spurred arebalancing of investors’ portfolios, high inflation driving up
coverage needs with sponsors competing for scarce capital,
and the impact of Hurricane Ian on Florida exposed cat
bonds that eroded investable capital.

these transactions leveraging its experience andreputation, large institutional investor base, and bondissuance infrastructure including its capital-at-risk notes
program. The World Bank procured external service
providers for the transaction including Aon Securities, GC
Securities and Swiss Re Capital Markets as lead managers
and AIR Worldwide as risk modeler and calculation agent.

Outcome

The World Bank is also supporting Chile with a grantapplication from the Hong Kong Insurance Authority tosupport the cat bond transaction costs.

Through marketing the risk simultaneously in cat bond and(re)insurance markets, the World Bank was able to build
price tension across the two books and maximize size for
Chile. This transaction priced at the low end of guidance at
4.75% per annum and for 26% greater coverage than in2018.
It is the largest single country cat bond transaction, the firstcat bond and first World Bank bond listed on the HongKong Exchange, and it was supported by the Hong Kong
Insurance Authority.

Investor Base
The transaction attracted a diverse base of 24 bondinvestors and 4 (re)insurance companies.
Cat bond distribution:
Geographic Distribution

Investor TypeEurope

54%

ILS Fund76%

North America

40%

Asset Managers

15%

World Bank’s Role

Bermuda4%

Pension Fund

6%

The World Bank issued the cat bond and entered into cat
swaps with (re)insurance companies in order to provide
insurance cover to Chile. The World Bank managed thestructuring, documentation, marketing, and execution ofAsia

2%

Insurer / Reinsurer3%(Re)insurance company cat swap regional distribution:
Europe – 60%, North America – 36%, and Bermuda – 4%

Transaction Structure

Transaction Summary
Peril

Chile Earthquake

Coverage Amount$630 million (US$350 million bond principal and US$280 million swap notional)

Risk Period

3 years

Trigger Type

Parametric CAT-in-a-gridPayout Structure

Linear sliding scale based on earthquake severity with a payout of 30%, 70%, 100% of principal

Risk Statistics (Annual)

Expected Loss: 1.00%; Attachment Probability: 1.48%

Risk Margin4.75%

Contact: Michael Bennett, Manager, Market Solutions and Structured Finance, The World Bank Treasury
 mbennett1@worldbank.org  +1 (202) 458 5099
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.