WTW designs 'world-first' parametric insurance for sovereign debt restructuring

WTW designs 'world-first' parametric insurance for sovereign debt restructuring | Insurance Business America

WTW designs 'world-first' parametric insurance for sovereign debt restructuring

Willis Towers Watson has designed and placed what it says is the world’s first parametric insurance transaction making possible the government of Belize’s debt restructuring for marine conservation. Underwritten by the reinsurer Munich Re, the insurance protection played a vital role in enabling the country to refinance its sovereign debt under The Nature Conservancy’s (TNC) Blue Bonds for Ocean conservation program.

TNC’s $364 million transaction with Belize was supported by Credit Suisse as sole structuring bank and arranger of the financing, with political risk insurance provided by the US International Development Finance Corporation.

Willis Towers Watson created the world’s first sovereign debt “catastrophe wrapper” for the transaction. The “catastrophe wrapper” provides insurance protection to cover Belize’s loan repayments after hurricane events. The wrapper strengthens sustainability and resilience to climate shocks, which have previously triggered downgrades in credit rating that have exacerbated economic hardship, WTW said.

“Volcanoes, earthquakes, and hurricanes repeatedly disrupt economic development in the Caribbean region, from households and communities to the sovereign level,” said Dr. Simon Young (pictured above), a senior director at Willis Towers Watson’s Climate and Resilience Hub, who led the design of the catastrophe wrapper. “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.”

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The transaction was marketed and placed by Willis Towers Watson’s alternative risk transfer team. Munich Re provided the best terms and conditions and was awarded 100% of the placement, which covers the first 31 months of the bond term.

As part of Belize’s debt restructuring program, the country purchased its only international bond with $364 million of capital arranged by TNC and insured by the International Development Finance Corporation. The commitment enabled Belize to restructure about $553 million of external commercial debt – an amount that represents 30% of Belize’s GDP – and reduce the national debt by 12%.

The Willis Towers Watson placement can be used as a template for integrated creditors and issuers as global development finance institutions consider integrating climate risks into their mainstream sovereign loan programs, WTW said. The parametric wrapper uses objective criteria to trigger the benefits and pays upfront for relief of debt servicing payments in the event of a disaster.