Potential $60bn annual pandemic cost needs global risk transfer effort

by Artemis on January 20, 2016

The outbreak of infectious disease poses a very real and serious threat to global financial stability, with a new report claiming that yearly expected losses from potential pandemic risks top $60 billion, underlining the need for greater involvement from the entire risk transfer landscape.

The devastating impact of the Ebola outbreak in 2015, other known threats such as influenza, and also infectious diseases that are currently unknown, as was the case with HIV/AIDS just a few decades ago, is among the leading cause of deaths across the globe, and the economic costs of such events are rising.

The potential financial impact of a wide-spread pandemic or epidemic demonstrates the need for insurance, reinsurance and the capital markets to support risk transfer and mitigation efforts.

And while advances in media, technology, and communication have enabled a greater, global understanding of the seriousness of pandemic events, with social media platforms helping to raise funds and spread awareness of the recent Ebola episode, the report stresses that far too little is done by governments and global organisations when it comes to financing preparedness and response measures.

“Against this, we propose incremental spending of $4.5 billion per year, a fraction of what we spend on other risks to humankind. Framed as a risk to human society, this is a compelling investment.

“Framed as a risk to economic growth and stability, it is equally convincing,” says the report, titled ‘The Neglected Dimension of Global Security, A Framework to Counter Infectious Disease Crisis,’ which comes from the Commission on a Global Health Risk Framework for the Future.

Chair of the Commission, Peter Sands, said; “Pandemics don’t respect national boundaries, so we have a common interest in strengthening our defenses against infectious diseases in every part of the world.

“Preventing and preparing for potentially catastrophic pandemics is far more effective, and ultimately, far less expensive, than reacting to them when they occur, which they will.”

Supporting the report, the World Economic Forum’s Global Risk Report for 2016 also highlights the potential disruption to business and economic stability that pandemics pose, while emphasising that increased global interconnectedness and a rising population signals that more people have the potential to be affected in the future, with the impacts wide-reaching.

In response to the need for improved financing the World Bank has been working with the World Health Organisation (WHO) and a range of other partners, including reinsurance giants Swiss Re and Munich Re, to establish the Pandemic Emergency Financing Facility (PEF), a move that the Commission report supports as “a compliment to the WHO’s contingency fund.”

The reports notes that both the WHO’s contingency fund and the PEF should be established by the end of 2016.

“Innovative insurance and capital market solutions could be attractive, if demonstrated to be economic and practical,” says the report.

The structures currently available in the insurance, reinsurance, insurance-linked securities (ILS), and wider risk-transfer sector, and the willingness of market participants to innovate, enter new regions, and to access diversifying risks are evident.

And with the $60 billion figure being so high it’s likely that a combined effort from public, and private sector entities, in insurance, reinsurance and the capital markets, will be essential in protecting the rising pandemic costs, which is precisely what the PEF aims to do.

Furthermore, reinsurers such as Swiss Re do have experience with the securitisation of pandemic risks, as they have sponsored several catastrophe bonds that protect against extreme mortality risks that can be caused by pandemics such as influenza, the most recent being the $100 million Vita Capital VI Limited (Series 2015-1) transaction.

While catastrophe bonds alone aren’t going to adequately cover the $60 billion yearly estimate, they could provide a complimentary source of funding to the PEF, which could issue a cat bond to provide extra insurance or reinsurance coverage to places where it is needed the most, and this would also act as an additional source capital.

A key component of the PEF, which is also a feature of cat bond market issuance, is the utilisation of a parametric trigger structure, which enables rapid payout post-event, as once the predetermined parameter is invoked, the payment is triggered.

The $4.5 million per year spend proposed by the Commission, and the efforts of public and private sector entities, such as the WHO, reinsurance and insurance entities, and the World Bank with PEF, also underline the importance of building awareness and preparedness pre-event, so that once the next pandemic strikes, which it will, the impacts are mitigated and the response is meaningful.

Too little too late were the words often heard during the Ebola outbreak of 2015, but if the above plans come to fruition and a concerted, industry-wide effort to address the problem is adhered to, countries will be much better prepared to react once a disease outburst occurs, and could already have much-needed financing in place.

Also read:

World Bank developing pandemic risk financing concept.

ARC explores Ebola cover, World Bank talks pandemic cat bonds.

Pandemic catastrophe bonds hit the Davos WEF agenda.

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