ARC explores Ebola cover, World Bank talks pandemic cat bonds

The African Risk Capacity (ARC), the first catastrophe insurance pool for Africa, is considering expanding to offer insurance coverage for Ebola and other epidemics to African nations. Meanwhile the World Bank continues to discuss Ebola and pandemic catastrophe bonds.

Speaking to the Financial Times (here), Richard Wilcox the director-general of the ARC, which operates as the ARC Insurance Company Ltd. (ARC Ltd), said that member states have requested the agencies assistance with provision of insurance covers to finance recovery from outbreaks of epidemics and pandemics such as the recent and ongoing Ebola crisis.

Wilcox told the FT, “In the wake of the Ebola crisis, our member states have asked for insurance coverage to help finance the cost of future outbreaks. It’s a complex exercise in modelling and, later, pricing, but in partnership with leading virologists we believe we will be able to offer outbreak and epidemic coverage in 2017.”

The resulting product could provide capital contingent on a dual-trigger, Wilcox explained, one to finance response for confirmed cases of an outbreak, the second to provide funding to help mitigate the impact of an epidemic that spreads.

ARC is already in the process of working on new products for flood and cyclone risks, to add to is existing drought coverage, but a product to protect and help finance risks associated with epidemics would be the first outside of the natural catastrophe and weather arena.

An ARC product for pandemics, epidemics and disease outbreaks would provide an extremely valuable source of contingent financing for African nations affected by epidemics and pandemics. Also, if ARC keeps up its focus on requiring its policyholder countries to advance their resilience to the covered risks as well, it would benefit the nations considerably.

The World Bank is also continuing its focus on risk transfer and financing for pandemics such as Ebola, which led to discussions about pandemic catastrophe bonds at the World Economic Forum meetings in Davos last week, as we wrote here.

Speaking at Georgetown University in Washington yesterday, World Bank president Jim Yong Kim said that the world is dangerously unprepared for pandemic outbreaks and that measures must be taken to help build resilience against such risks.

Kim explained that the World Bank was working with the World Health Organisation (WHO), other UN agencies, academics, insurance company officials and others, in order to develop a “pandemic facility” which could provide insurance protection. A proposal for such a pandemic insurance facility is expected to be presented in the coming months.

Kim reiterated what was discussed at Davos, saying that the facility would likely involve an insurance policy for the end-users and the use of bonds as a financing layer. The use of catastrophe bonds to transfer country level pandemic risks to the capital markets could be a viable way to achieve a reinsurance layer for such a facility.

Kim hinted that the pandemic coverage could be similar to the way ARC has designed its drought covers, that the better you prepare yourself and make yourself resilient to the policies trigger events, the lower the resulting premiums may be.

The BBC quotes Kim as explaining; “The more that countries, multi-lateral institutions, corporations and donors work together to prepare for future pandemics – by building stronger health systems, improved surveillance and chains of supply and transportation, and fast-acting medical response teams – the lower the premium as well. That would benefit donors and others who would pay the premium, but the greatest benefit would be that market mechanisms would help us to push improvements in our preparedness for epidemics.”

Kim also explained in a recent World Bank article; “A global pandemic emergency facility could mobilize resources from the private and public sectors and frontload financing so that when there’s a global health emergency, financial support would be readily available and flow quickly to support an immediate response at scale. We’ve seen that “passing the hat” around once a pandemic strikes is too costly, both in human lives and in economic terms.”

It is just this kind of “frontloaded” financing that catastrophe bonds and the global capital markets could provide. Securitized instruments can be used to share the risk with those willing to bear it and for whom the diversification of risk portfolios might be attractive, while at the same time the cat bond type trigger mechanism can be calibrated to respond when a nation is hit by an outbreak.

The use of cat bonds for pandemics would provide a valuable reinsurance layer which could make an insurance product managed by ARC a viable way to get protection to the people who most need it.

As we wrote last week, whether catastrophe bonds or other insurance-linked security (ILS) structures are eventually used to help finance and mitigate pandemic risks for diseases such as Ebola is not important. What is important is that these issues are being discussed and that those discussing them are aware of the flexible and responsive coverage that cat bonds and their triggers could provide.

It’s also encouraging to see the African Risk Capacity (ARC) brought into the conversation as the way it has approached the design of its drought cover, with a focus on resilience and food security, would benefit any attempts to provide pandemic insurance to African nations.

Read some of our other articles on related topics (oldest first):

– Capital markets may provide robust alternative for pandemic risks.

– A swine flu pandemic and the catastrophe bond market.

– Pandemic risks and regulatory concerns to spur mortality catastrophe bond issuance.

– Pandemic the major extreme risk for insurers and reinsurers: Survey.

– AXA reported to be readying new mortality catastrophe bond.

– World Bank set to bring more cat bonds, looks at health risk transfer.

– Pandemic catastrophe bonds hit the Davos WEF agenda.