LONDON, Feb 17 - The Inter-American Development Bank (IDB) and Swiss Re RUKN.VX will issue a $100 million insurance policy in the Dominican Republic to protect the country against hurricanes and earthquakes, the IDB said on Thursday.
The five-year policy will be issued by an insurance company set up exclusively to provide coverage to the Caribbean country, the IDB told Reuters.
The policy’s exposure will be split in two, with $50 million covering earthquake risk and $50 million to protect against hurricanes.
The policy will provide $100 million of cover for the Dominican Republic for each of the five years. Any payoff would be determined by the magnitude and location of a quake or hurricane.
The IDB was established in 1959, and is the largest source of development financing for 48 member countries in Latin America and the Caribbean.
The coverage is expected to be in force before the beginning of the 2011 hurricane season.
Guillermo Collich, senior financial sector specialist at the IDB, said there are plans to extend the platform to cover other perils in the Dominican Republic — such as flooding and volcano risks as well as agricultural insurance and coverage for health-related risk and longevity.
“We are currently working on a second facility being set up in Central America - most likely Costa Rica,” he added.
The dedicated insurance vehicle will issue a policy and transfer some of the risk to either the reinsurance sector or capital market investors, Collich said.
“It will be a flexible policy that will give enough scope to change the mix of reinsurance coverage — if another ILS (insurance-linked securities) product, such as a catastrophe bond, is more suitable in the future, then that can be done,” he said.
Insurers and reinsurers sell cat bonds to bond market investors to reduce their own exposure to risks.
Swiss Re declined to comment on the transaction.
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Editing by Ruth Pitchford