Willis Towers Watson’s alternative risk transfer division has designed and placed the world’s first parametric insurance transaction to support the Government of Belize’s debt restructuring for marine conservation.
The parametric solution is designed to improve the economic and environmental resilience of island and coastal nation sovereign borrowers to climate-related events such as natural disasters, as well as to mitigate subsequent credit rating downgrades and economic turbulence.
This is particularly important for islands that depend heavily on tourism for their national economy, with the IMF recommending earlier this year that authorities should develop a comprehensive disaster resilience strategy that includes insurance.
The solution was underwritten by Munich Re to allow Belize to refinance its sovereign debt under The Nature Conservancy’s Blue Bonds for Ocean Conservation programme.
For the US$364 million transaction, Willis Towers Watson created the innovative sovereign debt ‘catastrophe wrapper’ to provide insurance protection to cover Belize’s loan payments following hurricane events.
As the need for climate risk to be integrated into mainstream sovereign loan programmes heightens, this transaction can be used as a template for integrated protection for creditors and issuers.
The design was led by Simon Young, senior director at Willis Towers Watson’s Climate and Resilience Hub. He explains: “Volcanoes, earthquakes, and hurricanes repeatedly disrupt economic development in the Caribbean region, from households and communities to the sovereign level. That disruption leads to higher debt and a longer, more painful path to recovery.
“The parametric wrapper is a game changer for the financial resilience of island and coastal nations and will help to unlock the financing of nature-based solutions in achieving global net zero and biodiversity targets.”
Michael Roth, public sector practice lead in Munich Re’s capital partners team, adds: “Parametric insurance will be a powerful tool enabling borrowing countries hit by natural disasters to benefit from financial relief by a temporary waiving of debt service. By reducing the credit risk for sovereign lenders, borrowing countries may improve access to, as well as terms and conditions of, debt finance.
“The blue bond transaction combines nature conservation, risk reduction, sovereign financing and risk transfer in a unique way. We hope the bespoke Blue Bond transaction will be just the starting point for more environmental oriented shock-resilient sovereign debt bonds and loans to follow.”
