Rapid intensification of tropical storm Erick into a major hurricane has brought Mexico’s Pacific coast hurricane parametric catastrophe bond, the $175 million issuance, sharply into focus, as Erick’s central pressure is estimated just a couple of millibars above where the trigger for attachment sits.At this time, major hurricane Erick has reached category 4 strength, with sustained winds estimated by the National Hurricane Center at 145 mph, with gusts estimated at over 170 mph.In the next few hours, the centre of Erick is forecast to make landfall near to the border region between the Mexican states of Oaxaca and Guerrero this morning.In the latest update from the NHC, major hurricane Erick’s minimum central pressure is estimated at 939 mb and the agency says some further intensification is possible before landfall, after which weakening is anticipated.

Artemis has learned that the minimum central pressure of a hurricane that is required for any activation of a payout from the Mexican government’s World Bank supported IBRD Pacific storm cat bond is 937 mb, so just 2 mb away from the latest storm pressure estimate for Erick.put the estimated minimum central pressure for hurricane Erick a millibar higher, at 940mb.In that region along the coast from the Mexican states of Oaxaca into Guerrero, in order for a 25% payout of the catastrophe bonds $175 million of principal to come due, a storm must cross into the parametric box with a minimum central pressure of between 937 mb and 931 mb.

Depending on where the landfall occurs, a higher payout of principal could be due further up the coast near to Acapulco, we are told, while a more intense storm with a pressure that dropped below 931 mb could drive a 50% or higher payout for the catastrophe bond.It’s important to note that we believe the parametric trigger works on a sliding scale, so while the minimum payout for the notes is 25%, it can be any percentage above that depending on the pressure and location it crosses the parametric box.Based on the latest NHC data, for an estimated central pressure of 939 mb, hurricane Erick only needs to deepen by 2 millibar before it breaches the parametric named storm box for investors in the Mexico Pacific coast catastrophe bond could be on the hook for a payout.

It can take some time for payout determinations to be made with parametric catastrophe bonds such as this, given the use of official NHC reports to make that final decision.In this case, we understand the Pacific coast IBRD catastrophe bond utilises the Automated Tropical Cyclone Forecast best-track data files for that.In the most recent case of one of the Mexican government’s catastrophe bonds paying out, .

So, should hurricane Erick deepen and its central pressure be reported closer still to the thresholds required, it could take weeks or months for clarity to be understood, about whether the Pacific coast catastrophe bond has been triggered, or not.With just 2 millibars between the latest central pressure and the initial threshold for attachment to begin for this cat bond, depending on landfall location and where pressure sits as it is extrapolated across the parametric box, holders of the IBRD Pacific coast catastrophe bond notes could be in for a nervous few hours as they wait for the next report from the NHC to then make their own estimations for where pressure could have been as the box was crossed.Finally, it’s worth noting that storm chasers have provided inputs to NHC best-track data in the past, through provision of on-the-ground readings of central pressure and .

Morgerman is once again on the ground in Mexico hoping to intersect the eye of major hurricane Erick and will no doubt record pressure readings if he is successful.Something to watch out for and that could provide helpful data to provide an earlier idea of the pressure at landfall, although no necessarily at the point where the parametric named storm box line is crossed.We’ll update you should hurricane Erick pose a major threat to the notes, although given landfall is just hours away now we may not see any further central pressure updates before the storm has already crossed the parametric line.

Whether the cat bond is really threatened, or not, the threat to lives, livelihoods, property and infrastructure is clear.The NHC warns in its latest update, “Erick is now an extremely dangerous category 4 hurricane, and devastating wind damage is likely where the core moves onshore.Weather conditions are already deteriorating in the warning area, and preparations to protect life and property should have been completed.

“Erick will produce heavy rainfall across portions of Central America and Southwest Mexico through this week.Life-threatening flooding and mudslides are likely, especially in areas of steep terrain.“A dangerous, life-threatening storm surge is expected to produce coastal flooding near and to the east of where the center crosses the coast, in areas of onshore winds.

The surge will be accompanied by large and destructive waves.” You can read all about the catastrophe bond and more than 1,000 other cat bond transactions in the extensive Artemis Deal Directory..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.