Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Capital markets role in pandemic risk transfer to expand


By the end of 2016, ILS and alternative reinsurance capital rose to a record estimated $78 billion, but this growing pool of capital needs to find opportunities to be put to work in insurance and reinsurance risks and one area of opportunity could be in providing pandemic coverage.

Capital markets-based risk transfer solutions have mostly insured against natural disaster loss, and after these structures have proven beneficial to public sector balance sheets, capital markets innovators have been increasingly moving into new lines of collaboration – most notably with one of the most underinsured risks; pandemic diseases.

As capital markets’ experience in pandemic disease risk coverage expands, new structures for this risk have emerged as market pressures continue to drive innovative strategies for bypassing front-line insurers, shifting the focus from reactionary to proactive and comprehensive coverage.

Global Head of ILS Structuring, Guy Carpenter Securities, Cory Anger, explained that alternative capital is moving to pandemic mitigation and prevention, to provide more “action oriented pandemic protection during the beginning or ongoing phases of a pandemic rather than focusing on replenishing post-event capital losses.”

Previously risk transfer focused heavily on simple disaster-relief insurance, or in the case of mortality paying out after a certain sized loss occurred, but new structures have seen this coverage expand to include interim response and multi-year protection.

The aim of this interim insurance coverage is to offer a fast and efficient response to contain and mitigate epidemics at their origin, preventing the disease from spreading into a global pandemic catastrophe.

Anger said alternative capital is ready to provide protection for these interim response structures that “focus on managing morbidity and other healthcare costs (which can equally affect government healthcare programs, private healthcare plans and hospitals/medical facilities) for treatment for afflicted individuals, containing the spread of pandemic and for cleaning and disinfecting potential contaminated sites.”

This capital market risk-transfer expansion into comprehensive pandemic disease coverage is filling a vital market-gap of insuring against the serious threat to global financial stability the outbreak of infectious disease poses.

Yearly expected losses from potential pandemic risks could top $60 billion, according to a new report, underlining the need for greater involvement from the entire risk transfer landscape.

The impact of infectious diseases is also one of the leading causes of deaths across the globe, as was seen during the Ebola outbreak in 2015.

Chair of the Commission for a Global Health Risk Framework for the Future, Peter Sands, said; “Pandemics don’t respect national boundaries, so we have a common interest in strengthening our defences 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.”

Recognising the urgent need for a structure that enables global comprehensive pandemic coverage, in May last year, the World Bank 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 is backed by pandemic catastrophe bonds and reinsurance.

Jim Yong Kim, President of the World Bank Group, explained; “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.”

The PEF is intended to be financed through insurance and cash based on the resources of the reinsurance market and the proceeds of catastrophe bonds (capital-at-risk notes) issued by the International Bank of Reconstruction and Development (IBRD).”

The World Bank added that; “there is a high probability that the world will experience a severe outbreak in the next ten to fifteen years that could destabilize societies and economies. Recent economic work suggests that the annual global cost of moderately severe to severe pandemics is roughly USD 570 billion, or 0.7 percent of global income. The cost of a severe pandemic like the 1918 Spanish flu could total as much as five percent of global gross domestic product.”

These emerging insurance structures in pandemic disease coverage will offer ILS and cat bond investors increasing opportunities for expansion and diversification, while working to contain the risk of severe outbreak in next 10-15 years, which according to World Bank, makes the spread of ILS capital etc. contribute substantially to providing economic growth and stability.

By broadening the protection available the capital markets and ILS investors stand to provide greater risk transfer support to sovereigns, insurers and other potential cedents, while backing a greater proportion of the pandemic risk transfer market in years to come.

Also read:

Pandemic frequency & severity expected to increase: Survey.

World Bank launches pandemic risk market, backed by cat bonds.

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.

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.