World Bank launches pandemic risk market, backed by cat bonds

by Artemis on May 23, 2016

The World Bank has launched the “first-ever insurance market for pandemic risk”, the Pandemic Emergency Financing Facility (PEF), which is designed to rapidly disburse capital in the event of deadly pandemics and will be backed by pandemic catastrophe bonds and reinsurance.

World Bank logoThe PEF, which has been in development for over a year, will be the first time that World Bank cat bonds have been used to transfer the risk of severe infectious diseases and pandemic outbreaks, as the use of insurance-linked securities (ILS) and capital market backed risk finance is put to work to ensure global and national responses to future outbreaks with pandemic potential are accelerated.

Jim Yong Kim, President of the World Bank Group, explained; “Pandemics pose some of the biggest threats in the world to people’s lives and to economies, and for the first time we will have a system that can move funding and teams of experts to the sites of outbreaks before they spin out of control.

“This facility addresses a long, collective failure in dealing with pandemics. The Ebola crisis in Guinea, Liberia and Sierra Leone taught all of us that we must be much more vigilant to outbreaks and respond immediately to save lives and also to protect economic growth.”

When looking for financial solutions to create a facility that would allow for rapid disbursement of capital in the event of a developing pandemic catastrophe or infectious disease, the catastrophe bond structure and parametric triggers has always been on the cards.

With the World Bank having its own facility for issuing catastrophe bonds directly through its Treasury department, pandemic cat bonds to augment the reinsurance capacity required by the PEF should be an efficient and cost-effective way to secure a source of capital contingent on specified pandemic disease factors being experienced or recorded, as well as helping to diversify the risk capital across the institutional capital markets.

The World Bank describes the Pandemic Emergency Financing Facility (PEF) as an “innovative, fast-disbursing global financing mechanism designed to protect the world against deadly pandemics.”

The facility has been designed by the World Bank, working with the World Health Organisation (WHO) and the private sector including major reinsurance firms Munich Re and Swiss Re, to speed up response to outbreaks that show pandemic potential, by rapidly disbursing the capital and financing required to put in place response measures.

“Recent years have seen a dramatic resurgence of the threat from emerging and re-emerging infectious diseases,” commented Margaret Chan, Director-General of the World Health Organization. “WHO fully supports the Pandemic Emergency Financing Facility as a critical contribution to global health security and a crucial line of defence against high-threat pathogens.”

The PEF will be part funded by an “insurance window”, which will be backed by reinsurance market capital and issuance of World Bank pandemic catastrophe bonds, as well as a “cash window”. Once triggered funds will be rapidly released to countries and qualified international responding agencies.

The insurance window, backed by the reinsurance and pandemic cat bonds, will provide up to $500 million of coverage for an initial three-year term for outbreaks of infectious diseases deemed most likely to cause major epidemics.

This includes such diseases and outbreaks as new Orthomyxoviruses (e.g. new influenza pandemic virus A, B and C), Coronaviridae (e.g. SARS, MERS), Filoviridae (e.g. Ebola, Marburg) and other zoonotic diseases (e.g. Crimean Congo, Rift Valley, Lassa fever), the World Bank explained.

Parametric triggers will be designed using publicly available data, and will determine when a payout is triggered and disbursement of funds is due, based on the size, severity and spread of the outbreak.

The cash window is designed provide more flexible funding in order to address a much larger set of emerging pathogens, which may not trigger the insurance window. In this way the cash window is almost a tool for minimising basis risk, as it ensures capital can be made available when a parameter is not sufficient to trigger the insurance and catastrophe bonds.

The PEF, which is targeting an operational date later this year, will cover all 77 countries eligible for financing from the International Development Association, the World Bank Group’s fund for the poorest countries.

Demonstrating the need for robust financing mechanisms, the World Bank notes that the annual global cost of moderately severe to severe pandemics is around $570 billion, or 0.7% of global GDP. A particularly severe pandemic, such as the 1918 Spanish flu, could cost as much as 5% of global GDP, or nearly $4 trillion.

Hence having rapidly available contingent capital in order to coordinate a local and regional response to an outbreak is key, as it will minimise the spread, impact, deaths and ultimately cost to the world of major pandemics.

The PEF has been designed to do the following:

  • It will insure the world’s poorest countries against the threat of a pandemic.
  • In the event of a severe infectious disease outbreak, it will release funds quickly to the countries and/or to international responders, to accelerate the response—saving lives and reducing human suffering.
  • By mobilizing an earlier, faster, better planned and coordinated response, it will reduce the costs to countries and their people for response and recovery.
  • It will promote greater global and national investments in preparing for future outbreaks and strengthening national health systems.
  • It will combine public and private resources to advance global health security, and create a new insurance market for managing pandemic risk.

For the insurance-linked securities (ILS) investor market, the issuance and sale of cat bond notes linked to pandemic risk using parametric triggers will be welcomed, as an expansion of the cat bond market we see today.

Pandemic risk has been a feature of many catastrophe bonds over the year, but these have all been linked to mortality experience, either reported or an index of mortality, and these World Bank pandemic cat bonds will be the first to link the payout and loss of cat bond principal to parametric factors linked to the emergence and spread of an outbreak.

So these World Bank cat bonds will offer ILS and cat bond investors diversification opportunities and a unique type of deal to bring into their portfolios. That should ensure appetite to invest is strong and that will help to ensure keen pricing, making the funding of the PEF more efficient.

The World Bank has of course been involved in the issuance of the MultiCat catastrophe bonds, MultiCat Mexico 2009 Ltd. and MultiCat Mexico Ltd. (Series 2012-1), as well as the more recent CCRIF cat bond World Bank – CCRIF 2014-1 which was the first to be issued directly by the World Bank Treasury.

The announcement of the launch of the PEF was made in Sendai, Japan on Saturday in advance of the May 26-27 Summit of Group of Seven Leaders in Ise-Shima, Japan. Japan, which holds the G7 Presidency currently, has committed the first $50 million in funding toward the initiatives launch.

“Japan is proud to support the Pandemic Emergency Financing Facility, which prevents pandemics from undermining important development achievements,” Japan’s Deputy Prime Minister and Minister of Finance Taro Aso said. “Innovative financing for crisis responses by the PEF, together with financing for preparedness and prevention in peacetime including through IDA, are important to mitigate human and social losses and to help quickly recover in the event of a crisis. It is cost-effective and should be emphasized at all stages of economic development.”

It’s encouraging to see cat bonds providing a key piece of the PEF infrastructure, as a financial instrument designed to transfer risk to the capital markets and provide funding at just the time it’s needed they are perfectly positioned to provide a growing piece of the capital required to back the PEF.

It will be interesting to see what mix of traditional reinsurance capital and cat bond capital is eventually sourced for the PEF. The cat bond market could likely provide a significant proportion of the $500m facilities backing, if the World Bank chose to secure the majority from the capital markets.

We’ll keep you updated when the first Pandemic Emergency Financing Facility (PEF) catastrophe bonds from the World Bank are launched.

Also read:

ILS could emulate AXIS’ new pandemic BI covers parametric triggers.

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

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.

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

A swine flu pandemic and the catastrophe bond market.

Capital markets may provide robust alternative for pandemic risks.

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