|Earthquakes have exacted a heavy toll on Mexico|
The finance ministry says that ideally Mexico would issue a cat bond against hurricanes before president Vicente Fox ends his term in December. Even if that goal is not met, president-elect Felipe Calderón is expected to follow a similar, pro-market economic policy and Mexicos cat bond issuance is forecast to continue. Whats important is to find innovative insurance schemes to protect our natural disaster fund and our public finances, González Anaya says, adding that the bonds give the government immediate access to funds should disaster strike. He adds that Mexico went ahead with the earthquake bond first because although hurricanes are far more frequent than earthquakes, an earthquakes intensity is easier to measure and easier to insure against. Heavy rains are even more complex disasters because risk levels must take into account the probability of mudslides and other rain-related disasters.
Whatever the specific form Mexicos future cat bond sales take, more issuance would likely be welcomed by investors, as the paper provides diversification in Mexican credits but with no correlation to other financial risks. Interest paid by cat bonds can be high, at more than five percentage points over Libor, with the three-month Libor rate currently at around 5.4%. Soaring issuance in cat bonds worldwide with a record $2 billion sold last year and that amount expected to double this year is also aiding the Caribbeans offshore tax havens to develop new business. Many bonds are sold out of special purpose vehicles in the Caribbean. Mexicos earthquake cat bond is a Cayman Islands class B special purpose insurer known as CAT-Mex.