World Bank cat bond payout possible as Hurricane Erick approaches Mexico: Icosa

By Henry Gale

June 19 - (The Insurer) - Hurricane Erick might trigger a partial payout on the government of Mexico's parametric cat bond, ILS investment manager Icosa said in a LinkedIn post.

• Erick strengthens to category four, nearing Mexico's Pacific coast

• World Bank's $175 million cat bond for Pacific hurricane risks could be triggered

• Icosa CEO highlights debate on parametric design and pricing rapid intensification

Erick strengthened into a category four hurricane as it approached Mexico's Pacific coast early on Thursday, according to updates issued by the National Hurricane Center. It was set to make landfall within hours in the western portion of the state of Oaxaca or the eastern portion of Guerrero.

The World Bank issued a parametric catastrophe bond for Mexico in 2024 covering $175 million of Pacific hurricane risks, after it separately secured protection against Atlantic hurricane and earthquake risks in a separate bond.

"As with most IBRD transactions, this bond relies on a parametric trigger," Icosa Investments said on Thursday morning. "If the storm’s central pressure at landfall falls below a predefined level, a payout, either partial or total, is made."

Icosa said a total loss "appears unlikely at present, but it cannot be entirely dismissed, whilst a partial payout is certainly within the realms of possibility as the latest reported pressure is only marginally above the payout threshold."

It added that it could be several days before it is clear whether the trigger has been met, as the National Hurricane Center may revise its minimum central pressure or storm track data.

"Meanwhile, the bid-ask spread on the affected bond is likely to widen significantly," Icosa said.

Mexico's $175 million Pacific hurricane cat bond replaced a previous $125 million bond, which paid $60 million to the government after 2023's Hurricane Otis.

In a separate post, Icosa CEO Florian Steiger said a payout for Hurricane Erick "is bound to reignite debate about trigger design, basis risk and whether the market is truly pricing rapid-intensification exposure."

He added, "It may also stretch investor patience with parametric structures, whose mixed performance in recent years is already under the microscope."