The World Bank has called for the ongoing development of its Pandemic Emergency Financing Facility (PEF), to incentivise greater investment in preparedness, and take advantage of the opportunity to deliver business interruption (BI) cover for the private sector as it works towards PEF-2.
The World Bank launched the PEF in 2016 as a facility designed to rapidly disburse capital to countries in the event of deadly pandemics, that would be backed by pandemic catastrophe bonds and reinsurance capacity.
The PEF would be triggered based on parametric factors, linked to the onset of pandemic or the scientific knowledge that one was developing in a country, in order to allow for rapid payouts of risk capital to be made.
Now, roughly a year later the International Working Group on Financing Preparedness (IWG), established by the World Bank, has released a report which looks at countries’ preparedness for a pandemic event, and which makes some recommendations for change in an effort to stimulate greater awareness and preparedness.
In recent times the ability of the insurance, reinsurance, ILS, and broader risk transfer markets to assist with disaster response and provide essential financing has been increasingly realised.
The skills and experience of the reinsurance and insurance-linked securities (ILS) market, surrounding risk modelling, risk identification, risk preparedness, risk management and risk pricing is unparalleled, suggesting the risk transfer world has a significant role to play in driving investment in preparedness and ultimately increasing global resilience.
The report explains that the initial PEF fails to directly incentivise regions to invest in pandemic preparedness measures and, was never actually intended to focus on the private sector operating in the risk areas, but that could all be about to change.
The report calls for the establishment of PEF-2, which should be designed such that it “directly incentivizes recipient country investment in preparedness by involving recipient countries in paying some portion of the premiums.”
This could involve the expansion of the scheme to countries outside of the International Development Association (IDA) area, says the report.
Furthermore, the World Bank highlights an opportunity for PEF-2 to expand the take-up of parametric insurance or reinsurance solutions to the private sector, calling for greater penetration of business interruption (BI) cover against infectious disease risks and pandemic events.
This, says the report, “would simultaneously increase economic resilience and create greater awareness of infectious disease risks among private sector leaders.
“The product offering would rely on the same data and analytical tools as the offering to governments. Here the challenge is to stimulate the demand since most companies underestimate the risks to their businesses.”
The expansion of parametric insurance, for BI risks caused by a pandemic, is an interesting and important recommendation of the report for the insurance, reinsurance, and ILS space.
Any expansion of insurance coverage, both in terms of region and peril, will ultimately require greater reinsurance participation and financial backing, which in turn provides increasing opportunities for the ILS sector to play a role.
Artemis discussed last year how the initial PEF was looking at the development of pandemic catastrophe bonds and parametric triggers as a means of backing the facility, owing to the schemes need to disburse funds rapidly in the event of an outbreak.
So far, the World Bank hasn’t issued a pandemic cat bond to back the PEF, but perhaps this has something to do with the fact the initial PEF was more to test the waters and get a feel for the environment.
But as the scheme looks to expand its remit to include private businesses, ultimately requiring more capacity, the potential for pandemic catastrophe bonds and parametric insurance or reinsurance solutions, via the PEF-2, becomes increasingly likely.
Greater involvement from insurers and reinsurers but also, and importantly, the deep capacity pool and broad investor base found in the capital markets, to provide the backing for greater preparedness and expansion of coverage, could be essential to how regions manage the next pandemic event.
Greater capital markets involvement would alleviate some of the funding requirements of governments, while bringing new risk to re/insurance and ILS markets.
The expansion of the PEF’s remit to include private business interruption pandemic insurance coverage would broaden the risk pool, making it increasingly diverse. But also increase the number of beneficiaries and the size of the payouts, making a capital markets solution even more of a fit.
It will be interesting to see how deep of a role the capital markets can play with the potential future development of PEF-2, but it could be that a pandemic catastrophe bond isn’t too far away from being a reality.
World Bank Group President, Jim Yong Kim, commented; “Pandemics can strike anywhere, and everyone is at risk – especially the poor and the vulnerable.
“We must finally break the cycle of panic and neglect in our response to grave threats from infectious diseases. We have to ensure we are prepared, so the next outbreak does not become the next pandemic.”
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