Financial Risk Innovation: Development of Earthquake Parametric Triggers for Contingent Credit Instruments

The Inter-American Development Bank (IDB) has developed financial risk management strategies for natural disasters focusing primarily on the emergency phase of the catastrophes where financial support is more cost-efficient and certainly most needed. The main IDB financial instrument to provide liquidity in the aftermath of catastrophic events is the Contingent Credit Facility (CCF). The CCF is a parametric financial insurance product that makes payments upon the occurrence of events of specific characteristics previously defined with the country. Specifically, in the case of earthquake coverage, the USGS and IDB have been collaborating together in order to improve the trigger design of the loans. CCF is now based on parametric triggers that correlate the magnitude, intensity, and population exposure of the event with the payments. This chapter presents the IDB journey to develop this state-of-the-art parametric index for CCF earthquakes pay offs.