Resilience (cat) bonds can help public sector access private risk capital

by Artemis on October 17, 2017

In a new report, RE:bound has further explored the potential benefits of resilience bonds, underlining the opportunity for the public sector to access private capital, to transfer disaster risks away from while supporting the development of resilient infrastructure projects.

Re:bound - Resilience catastrophe bondsThe catastrophe bond-style transaction concept has been developed by consultancy RE:bound working alongside industry participants, and are designed to assist with the management of financial risks from catastrophe events, while promoting investment in resilient infrastructure that ultimately mitigates the physical exposure.

In a recent article, founder and Chief Executive Officer (CEO) of RE:focus Partners and co-author of the new report, A Guide to Public-Sector Resilience Bond Sponsorship, Shalini Vajjhala, stressed the benefits of a resilience bond.

“Resilience Bonds offer visibility and control over risk reduction projects for public officials, providing a new way to leverage private capital and speed along the design, funding, and implementation of high-priority projects,” said Vajjhala.

As Artemis has discussed before, the development of resilience bonds brings a new, interesting dimension to the insurance, reinsurance, and insurance-linked securities (ILS) investment space.

Increasingly, investment fund managers, ILS included, are eager to not only return profits to their investors, but also participate in responsible investments. With extreme weather and climate-related events seemingly on the rise, both in terms of frequency and severity, the need to protect both pre-and post-event is becoming ever more apparent.

“Making this link between short-term disaster risk reduction and long-term resilience can help local leaders make major investments to protect their communities,” continued Vajjhala.

Adding; “Without that step, reliance on government disaster relief funds will inevitably grow.”

The global protection gap (disparity between economic and insured losses post-event) is well known, with dangerously low levels of insurance penetration in emerging parts of the world resulting in prolonged recovery times, with much of the financial burden often falling on already strained governments.

But as highlighted by hurricanes Harvey and Irma recently, the protection gap is evident in developed markets, as well, and resilience bonds could support increased insurance penetration while providing valuable financial assistance to public-sector projects designed to build resilience against natural catastrophe and climate-related events, such as rising water levels.

“Globally, governments at all levels can no longer afford to ignore catastrophic risks. The human cost of doing so is too high. Nor can public officials prioritize long-term risks over immediate needs. Resilience Bonds can help public sector leaders break free of this zero-sum game and take steps to both protect against future risks and invest in resilient economic development today,” concludes the report.

Resilience bonds provide a way for reinsurance-like capital to be put to work backing infrastructure development, by removing the risks which can make these projects unpalatable to investors. With ILS and reinsurance markets best positioned to absorb these risks, finding a way to ensure they are compensated, while maintaining the integrity of an ILS-like investment could be key to unlocking significant private capital.

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