EMPOWER RESULTS

Helping Countries Recover from Devastating Earthquakes

Twenty seconds. That’s how long the ground shook just after lunchtime on September 19, 2017, 82 miles southeast of Mexico City. For 20 seconds, residents felt the force of a 7.1 magnitude earthquake.

 

But the earthquake itself was just the beginning.

There were 370 fatalities and more than 6,000 reported injuries. Thirty-eight buildings collapsed during the earthquake and another 360 needed to be demolished during recovery efforts. Nearly 5 million customers in the region lost power and there were widespread gas leaks and fires. Recovery efforts took months and, in some cases, those efforts are still ongoing.

In all, it took just 20 seconds to cause 370 casualties and cost more than $2 billion to Mexico’s economy.

As the disaster to hit Mexico, and the 8.0 magnitude quake to hit central Peru in 2019, show, this is an all-too common story for developing countries in high-risk earthquake regions: an earthquake causes significant structural damage to a densely populated area, an already delicate infrastructure starts to fail, and emergency funding is needed – fast.

The Peru quake, which hit in May 2019, was felt as far away as Venezuela, Ecuador, and Brazil. The region saw several key buildings, including six health centers and five schools, destroyed along with houses, roads and bridges. Although the magnitude of the Peru quake was 33 times larger than Mexico’s, its impact was diminished by the fact it happened so far underground – 70 miles beneath the surface of the earth – rather than on the surface.

“Without proper emergency financing lined up ahead of time, an earthquake can very quickly turn into a significant humanitarian crisis.” Michael Bennett, Head of Derivatives and Structured Finance for Capital Markets at the World Bank

Should an earthquake strike, countries without the funding in place have to add the complicated and time-consuming process of raising more money to the already daunting mix of recovery, rescue and emergency efforts.

That’s exactly the problem the World Bank looked to solve in 2018 with a $1.4 billion earthquake catastrophe bond – the largest ever – for the high-risk countries in the Pacific Alliance – Mexico, Colombia, Chile, and Peru. In the past 25 years, these countries have been hit with a combined 67 earthquakes measuring 6.0 magnitude or higher. The bond was designed to help countries to quickly cover what the World Bank calls emergency losses – the money needed in the aftermath of a disaster for initiatives such as resettlement tent cities and repairing bridges and roads.

In order to execute the vision they had for the bond, the World Bank knew it needed a trusted partner with a strong track record of innovative transactions – both in design and placement. Given the considerable size of the bond and the short four-month timeline to bring the bond to market, the World Bank turned to Aon.

“We saw Aon as a very innovative partner that could get large transactions done,” explained Bennett.

It was this approach, powered by data and analytics combined with a commitment to social impact, that Aon brought to the problem.

“What we were able to do was to bring some insights. Rather than just seeing numbers, we were able to put some characterization around the problem.” Paul Schultz, Chief Executive Officer, Aon Securities, Reinsurance Solutions, Aon

Catastrophe bonds like the one Aon worked on for the World Bank are a type of insurance-linked security that helps countries transfer risks such as natural disasters from a bond issuer to an investor. The investor accepts the risk of a catastrophe and the potential loss of money invested in exchange for a rate of return. For a country to receive an emergency payout, a set of pre-determined parameters would have to be met.

With natural disasters, speed is of the essence. Faster access to funds means earlier action, which means the impact on people and infrastructure is reduced. Working with the other members of the structuring team, Aon built a solution that ensured the World Bank would receive funds, and therefore make loss payments, much faster.

The bond was put together so that Chile, Colombia, and Peru were provided with three years of earthquake catastrophe coverage, while Mexico got two years. The U.S. Geological Survey would provide the data that would determine whether the emergency funds would be distributed – all within a few weeks.

And in 2019, Peru became the first of the Pacific Alliance countries to benefit from the bond, receiving a $60 million payout for the quake that levelled key homes, buildings and infrastructure.

But it’s the added benefits from the way the World Bank and Aon structured the bond that makes this transaction so innovative.

“Contrary to customary catastrophe bond structure, the proceeds of the bonds are not held as collateral but are rather lent to member countries in order to fund sustainable development projects,” said Schultz. “In this way, not only is the bond providing protection against natural disaster, but also helping to fund economic progress.”

Much of this economic progress comes from the World Bank’s sustainable development projects, which include initiatives aimed at eliminating poverty and hunger, providing access to clean water and education, and promoting gender equality and climate action.

And investors took notice: when the bond was launched in February 2018, the transaction attracted $2.5 billion of investor orders, with more than 45 investors from around the world taking part.

“In addition to helping Mexico, Chile, Colombia, and Peru obtain capital following a natural disaster, the World Bank catastrophe bond also helps investors diversify their risks and support sustainable development initiatives,” Shultz said. “Such disaster risk transfer is critical to protect the development aims of the Pacific Alliance nations.”

To successfully build this record-breaking bond, Aon worked with colleagues across Aon Securities, the investment banking team of Aon, and local teams in each Pacific Alliance country to bring insight to data and analytics in a collaborative, cross-team effort – in just four months.

Aon and the World Bank believe the collaborative effort has other applications to help countries all over the world in their de-risking efforts. Famine, drought, and other natural disasters are all possibilities for this kind of catastrophe bond structure.

“This is a great example of how Aon can bring differentiated value to sovereign nations and governments,” Shultz said. “It highlights the social impact Aon has created with communities at risk and our ability to bring innovative products to market that utilize a variety of forms of capital.”