Mexico's Disaster Bonds Were Meant To Provide Quick Cash After Hurricanes And Earthquakes. But It Often Hasn’t Worked Out That Way

Hurricane Odile churned toward the western coast of Mexico on Sept. 14, 2014, a Category 4 storm with winds powerful enough to flatten homes, bend lampposts and punch windows out of luxury high-rises.

Officials across southern Baja braced for impact, ­shuttering schools, grounding flights and opening emergency shelters. In the resort city of Cabo San Lucas, where the storm would make landfall late that night, police officers raced through drenched and blustery streets with megaphones, warning everyone remaining to leave.

More than a thousand miles away in Mexico City, federal government officials watched nervously, hoping their recent investments in an unusual financial scheme would help cover the damage.

With the help of Wall Street and the World Bank, Mexico had issued a series of complex insurance securities called catastrophe bonds, which promise quick payouts when powerful storms or earthquakes strike.

Known as “cat bonds,” they were designed for events just like Odile — a storm U.S. officials would describe as the "strongest hurricane to make landfall in the satellite era in the state of Baja California Sur."

Indeed, from all reports the government had seen, including from the U.S. National Hurricane Center, they were going to collect $50 million.

And they might have, had it not been for a storm chaser from Los Angeles, whose atmospheric pressure readings from a beachfront hotel would upend the entire system, denying the battered government any payout, while keeping the funds secure for investors through a shell company in the Cayman Islands.

A year later, the same thrill-seeker’s data would help lower another projected payout, when Hurricane Patricia, the most powerful storm ever recorded in the Western Hemisphere, hit the western state of Jalisco.

Combined, the incidents prevented Mexico from collecting tens of millions in recovery funds and exposed fissures in this arcane yet booming financial market — today worth $90 billion.

The market is dominated by private insurance companies, but institutions such as the World Bank and the International Monetary Fund have promoted it as a potential lifeline for the world’s neediest countries, many of which also happen to be the most vulnerable to natural disasters.

Learn more at L.A. Times

Kate McCartyglobal