The World Bank has issued its first catastrophe bond — a $30-million deal providing reinsurance protection to an earthquake and hurricane insurance fund, whose beneficiaries are Bermuda and 15 Caribbean governments.

All 16 countries are signatories to the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a risk pooling entity owned, operated and registered in the Caribbean — but co-founded by Bermuda.

It is designed to limit the financial impact to Caribbean governments of catastrophic hurricanes and earthquakes, by quickly providing short-term liquidity when a policy is triggered.

Atypical features of this catastrophe bond are that it has no name and no special purpose insurer as an issuing vehicle.

At its launch, CCRIF CEO Isaac Anthony expressed appreciation for the support and confidence of the World Bank.

He said. “CCRIF has previously been reliant on the traditional reinsurance market for its risk transfer but as the Facility seeks to grow and expand we felt it would be beneficial to diversify the sources of risk capital to include the capital markets. We are pleased to be part of this ground-breaking initiative of the Bank, and this will enable us to continue to offer our tropical cyclone and earthquake policies at the lowest possible price — an important consideration for our members in these times of economic and fiscal challenges.”

CCRIF chairman Milo Pearson said: “This partnership is another example of CCRIF’s continuing efforts to explore ways to help the countries in the Caribbean Region in building resilience to natural hazards.”

The new cat bond provides three years of annual aggregate protection for hurricanes and earthquakes affecting the 16 CCRIF member countries, using the same triggers and measurements as the Facility’s underlying parametric insurance model.

Vice-president and treasurer at the World Bank, Madelyn Antoncic, said: “With this first transaction under the Capital-at-Risk Notes Programme, CCRIF benefits from access to the highly competitive prices offered by the cat bond market as well as from the efficiency of using this programme. At the same time, cat bond investors benefit from exposure to new perils.”

The placement agent for the cat bond was Guy Carpenter (GC Securities) and the co-structuring agents for CCRIF were GC Securities and Munich Re. Swiss Re Capital Markets acted as adviser to the World Bank.

The CCRIF yesterday described itself online as “the world’s first and, to date, only regional fund utilising parametric insurance, giving Caribbean governments the unique opportunity to purchase earthquake and hurricane catastrophe coverage with the lowest-possible pricing.

“CCRIF represents a paradigm shift in the way governments treat risk, with Caribbean governments leading the way in pre-disaster planning. CCRIF was developed under the technical leadership of the World Bank and with a grant from the Government of Japan.

“It was capitalised through contributions to a multi-donor Trust Fund by the Government of Canada, the European Union, the World Bank, the governments of the UK and France, the Caribbean Development Bank and the governments of Ireland and Bermuda, as well as through membership fees paid by participating governments.”

Since the inception of CCRIF in 2007, the Facility has made eight payouts totaling just over $32 million to seven member governments. All payouts were transferred to the respective governments immediately after the stipulated 14-day waiting period (and in some cases advances were made within a week) after each event.

The new cat bond provides the CCRIF with a fully-collateralised source of reinsurance protection against hurricanes and earthquakes. The World Bank’s Treasury unit has its own bond issuance platform, the Global Debt Issuance Facility and these catastrophe linked notes have been issued directly by the World Bank as a series of unsecured general obligation bonds.

The Artemis.bm website, which publishes news, commentary and statistics on the alternative risk transfer market, said: “In the past a $30-million top layer of the CCRIF’s catastrophe reinsurance programme had been transferred to the capital markets in a catastrophe swap form. It would appear that this cat bond is to replace that layer.

“The way the CCRIF provides its protection to its members means that this cat bond will contain some risk of storm surge, as well as wind from tropical cyclones, as well as the earthquake risk. The CCRIF takes parameters of an event and applies them to member government exposure information to determine a loss estimate.

“The issuance uses a parametric modelled loss arrangement, the same as the underlying trigger for the CCRIF’s reinsurance programme. The $30 million of cover is assumed to be the same layer of the reinsurance programme which was previously transferred to the capital markets in a catastrophe swap form. The catastrophe bond, or notes, can be triggered on an annual aggregate basis, so provide protection for losses from multiple events as well as a single large event. We do not have attachment probabilities at this time.

“The transaction sees the World Bank enter into a catastrophe swap with the CCRIF mirroring the terms of the cat bond. If the bond is triggered by a referenced natural hazard, hence the parametric trigger, then the principal of the bond will be reduced by an amount determined under the bond terms and an equivalent amount will be paid to CCRIF under the swap.”

Artemis.bm said the World Bank is standing between the investors in the cat bond, noting: “We understand that the notes have been issued in such a way as to be transferable in the secondary market, meaning they can have liquidity and the investors holding them will be able to sell them through secondary broking desks.”

The notes will pay investors a coupon of LIBOR plus 6.3 percent to 6.5 percent.

The 16 current members of the CCRIF are: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Trinidad & Tobago and the Turks & Caicos Islands.