The topic of providing risk transfer and financing to cover pandemic risks using catastrophe bonds has reached the World Economic Forum in Davos, Switzerland this week, according to the FT, as the world comes to terms with the threat that could be posed by outbreaks causing high mortality levels.
Artemis first covered about the potential for greater use of catastrophe bonds to cover pandemic risks back in June 2008, when we wrote that the capital markets could provide a robust risk transfer alternative for pandemic risks.
In that 2008 article we cite reinsurance broker Guy Carpenter, who suggested that the best solution to pandemic risks in re/insurance was to “get the risk out of the (re)insurance market and into the capital market (which will provide the depth and liquidity needed).”
That need, for capital, depth and liquidity to finance response to pandemics hasn’t changed. Year’s later the topic has now hit the echelons of industry and finance, being discussed at the Davos WEF meeting in 2015, with the ongoing impact of ebola in Africa leading to an increased profile for the risks that pandemics could pose to society.
In the Financial Times, journalist Gillian Tett wrote yesterday that “the World Bank has been floating its own ideas in Davos” regarding pandemic risks, in coordination with corporations and reinsurance firms.
Tett explained; “The second, and more interesting, part of the proposal would use capital markets to force governments, NGOs and multilateral groups to become more effective in preparing for pandemics.”
“Jim Kim, World Bank president, wants to create a global fund that would issue bonds to finance pandemic-fighting measures by governments and other bodies. These bonds could be issued with a World Bank guarantee or some other form of risk-sharing. Either way, the idea is to provide a form of insurance against future disasters, just as catastrophe or “cat” bonds offer protection against natural shocks,” Tett continued.
The basic idea is to provide contingent financing for pandemic risks, so that governments would have capital on tap when the worst pandemics hit in order to ramp up medical treatment and the response to health pandemics.
Tett also notes that such an initiative could have a valuable side-effect as well, and could; “Inject private-sector rigour and market discipline into global medical bureaucracies.”
Data and modelling are raised as key to being able to understand these risks, how pandemics, start, spread, can be slowed or stopped in their tracks, all of which could force greater focus on healthcare preparation, resilience and risk management.
Tett is right when she suggests in the article that a market in pandemic bonds could one day outstrip the market in natural catastrophe bonds, the potential for demand and exposure requiring coverage is huge. Much in the same vein as the efforts to build disaster risk protection and response financing around the world, an initiative to cover pandemics could be huge and provide valuable capital which would be contingent on outbreaks occurring.
Whether securitisation and insurance-linked securities (ILS) are the right approach for financing recovery and response to societal impacts on the scale of pandemics is a point of some debate. However the predictable nature of a binary, or sliding scale, trigger and the tapping of the capital markets as the only source of capital large enough to cover such societal risks mean this issue is likely to get some attention.
There have of course been a number of mortality catastrophe bonds which provide reinsurance protection to life insurers and reinsurers which face pandemics such as flu in developed countries. Applying similar techniques to emerging economies should not be impossible.
Will the discussion at Davos lead to governments seeking to issue pandemic catastrophe bonds? Hard to tell. But the most important thing is that these issues get on the agenda, or at least discussed, and the capital market shows that it can provide solutions which provide a valuable way to, at the least, finance recovery from some of the biggest risks facing mankind.
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