Start Network looks to parametrics & cat bonds for crisis response

by Artemis on October 2, 2015

The Start Network, an international network of non-governmental humanitarian organisations, has committed to developing prototype use-cases for parametric insurance and catastrophe bonds as solutions to provide funding in response to humanitarian crises.

Responsive payouts of financing are essential after humanitarian crises, from weather or climate related, natural disasters, pandemics or even unrest. These scenarios require funding to be made available rapidly, on the occurrence of specific factors that the world’s NGO’s know will cause a humanitarian toll.

Enter parametric insurance or risk transfer structures and catastrophe bonds, two financial solutions from the world’s insurance and reinsurance markets which can and should be applied to humanitarian use-cases.

Start Network, through its collectively owned Start Labs incubator, has committed to investigate and develop new prototype methods of making financing available at the precise time it is required, in response to a crisis, to enable the best possible recovery.

Funding is available for disaster and crisis response, the Start Network notes, but often the NGO’s and other organisations providing funding find themselves hampered by outdated models of funding distribution.

“Money exists for disasters but the system is slow, reactive and inefficient. In humanitarian crises attention from institutional donors and the general public is often triggered by media headlines. By the time these crises hit the headlines, they have already escalated to a point where many lives have been lost,” the Start Network explains.

In order to enable a faster response and for funding to be sent to where it is needed immediately a crisis event occurs, the Start Network believes a “more proactive and systematic approach” is required. Start already has a pooled fund for rapid response to humanitarian crises, the Start Fund, but wants to build on that using new financial techniques for risk transfer and financing.

As a result the Start Network has committed to building “new funding mechanisms that can channel predictable and quick resources” to the NGO’s and other organisations on the ground.

Part of the work will involve a loan facility, enabling NGO’s working in humanitarian emergencies to secure financing quickly and more efficiently.

But more interesting to Artemis, are the two other financing mechanisms that Start Network has committed to build. Parametric insurance targeting drought and food shortages and catastrophe bonds targeting pandemic risks.

The parametric insurance product, of which there will be two, will feature “drought forecast modelling linked to pre-set triggers for pay-outs,” Start Network explains. The ultimate goal is to provide “predictable funding for early response to major drought-induced food crises in 12-15 countries.”

This is a similar approach to the African Risk Capacity (ARC), which provides parametric drought insurance for food security to sovereign African nations, except Start Network will be aiming to provide this to NGO’s and the like.

The catastrophe bond development will look to create pandemic bonds for NGO’s, which would help to ensure early funding is made available for frontline responders, helping to finance work to contain emerging epidemics which have the potential to scale.

These pandemic cat bonds would target the early stages of epidemics, when typically other funding is not available soon enough to make a difference. Start Network will work in collaboration with the African Risk Capacity on this product, which they call a pandemic containment bond.

The goal is to create a “layered risk management strategy” more typically seen for sovereign or private re/insurance clients. Start Network feels these responsive risk transfer and financing tools could “improve efficiency, timeliness and effectiveness in how relief funds are deployed.”

“The ability to anticipate and respond early to emerging crises already exists, but the way humanitarian financing is administered undermines that ability. We need new business models that are tailored to specific risks. These flexible and scalable financial models can enable the best-placed humanitarian NGOs to better prevent the loss of lives and livelihoods by acting faster and with greater agency,” commented Sean Lowrie, Director of the Start Network.

Kevin Noone, Executive Director, International Medical Corps UK, added; “New conflicts and threats are constantly emerging, and the only thing we can be certain of is that the next disaster or conflict will occur, it’s simply a matter of when, where, and on what scale. Innovations such as these new financial models announced today will help International Medical Corps and the other 23 members of the START Network, to save more lives when humanitarian disasters strike.”

It’s encouraging to see an organisation like Start Network embrace the potential of responsive risk transfer instruments to aid with response funding to humanitarian crises. The use of insurance-linked securities (ILS) structures alongside parametric triggers can create financing tools which meet this goal, providing response funding just when it is most required.

Many institutional investors would find backing such instruments extremely attractive, fulfilling a social impact investment goal while also offering a new type of risk in ILS form.

It’s not clear whether these products, particularly the pandemic cat bonds, would be offered to the ILS market or institutional investors to begin with, or financed by NGO’s and aid organisations themselves.

But it is easy to foresee a time in the future where large investors looking to make allocations to asset classes which can make a social impact could find such instruments tick that box, as well as offering an asset with low correlation and which provides attractive portfolio benefits as well.

As the push to better finance disaster risk and humanitarian response around the world grows, we expect to see an increasing number of efforts to make use of catastrophe bond and parametric trigger technology. As sources of responsive risk transfer and financing, the techniques honed in the ILS market can provide a huge amount of value in cases of crisis response.


The insurance protection gapRead our series of articles focused on the insurance protection gap – underinsurance in emerging and developing economies and the gap between economic and insurance losses – an opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.

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