PEF & cat bonds to speed-up emergency response to pandemics: Munich Re

by Artemis on August 3, 2017

The World Bank’s Pandemic Emergency Financing Facility (PEF) and its use of pandemic catastrophe bonds will improve the speed at which emergency response can reach areas experiencing an epidemic or pandemic outbreak, says reinsurance giant Munich Re.

Developed and launched by the World Bank with the support of Munich Re, Swiss Re, and GC Securities, the PEF is designed to rapidly disburse capital to countries in the event of deadly pandemics, and is backed by pandemic cat bonds and reinsurance capacity.

Germany-domiciled reinsurer Munich Re, which developed the insurance component of the PEF alongside fellow reinsurer Swiss Re, has commented on the use of insurance schemes to help protect against global epidemics and pandemics.

Project Lead for Munich Re’s Global Epidemic Risk Business, Gunther Kraut, said; “If the PEF had existed in 2014 during the Ebola outbreak, the world could have mobilised necessary funding as early as July to accelerate the emergency response. Instead, money did not begin to flow until three months later – during which time Ebola cases increased tenfold. Donors ended up committing more than US$ 7bn to Ebola response and recovery, and the overall economic impact of the crisis in Guinea, Liberia, and Sierra Leone reached US$ 2.8bn, according to the latest World Bank estimates.”

Munich Re explains that when addressed early, for the most part, epidemics are containable, so long as money and support is delivered to the right places at the right time.

And Rebecca Cichon, Senior Manager Origination, Munich Re Capital Partners, Zurich, explained how the PEF promotes a speedy response.

“The PEF establishes an explicit framework for the flow of funds from risk takers, via the World Bank to implementing agencies and governments for specific actions aimed at containment. It clears the path for a swift, effective response to epidemic and pandemic outbreaks,” said Cichon.

The rapid response the PEF provides is supported by the facility’s catastrophe bond transactions’ parametric trigger structure, a common feature of the insurance-linked securities (ILS) space that enables funds to be disbursed rapidly once a predefined trigger has been met, such as the number of reported deaths within a certain region, for example.

Discussing the facilities first catastrophe bond, which Artemis has named IBRD CAR 111-112 and which provides $320 million of financial backing and insurance cover to the World Bank’s PEF, Thomas Thumerer, Senior Manager Structuring, Munich Re Capital Partners, Munich, said; “This is one of the most complex and first cat bond transactions of its kind to transfer pandemic risks in such an innovative way to the capital markets. From the initial conceptual idea to the final product, numerous challenges had to be overcome, not least the design of a suitable parametric pay-out trigger.”

Munch Re explains that PEF financing to eligible countries will be triggered when contagion reaches a certain level for a given disease, which includes the number of deaths, the speed at which the disease spreads, and whether it has spread across international borders.

“Presenting investors and (re)insurers with the PEF insurance solution has the potential to support the development of epidemic and pandemic insurance solutions for a broader group of private and public sector entities. Over time, we will increasingly be able to offer our clients a wide range of innovative epidemic risk transfer solutions, thus further strengthening the resilience of societies,” added Kraut.

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