Cat bonds – a bridge between private capital & humanitarian needs: Howden

Catastrophe bonds and other insurance or reinsurance related solutions can be a bridge between the private capital markets and humanitarian project funding needs, according to David Howden, CEO of Howden Group.

Speaking at an event of the COP26 climate conference in Glasgow yesterday, Howden explained that the wealth of private capital locked up and often earning little in the way of returns in some institutional markets, could be put mobilised to help address funding gaps and shortfalls in the humanitarian community.

There is a roughly $20 billion disaster relief funding shortfall, according to Howden and he explained the opportunity for insurance and reinsurance specialists, alongside institutional investors, to deliver on mechanisms that can channel financing efficiently to those bearing risk.

“The shortfall isn’t just a funding gap – it is lives and livelihoods. It is the difference between the 235 million people who need humanitarian support and the 160 million people that humanitarian organisations can currently afford to reach,” Howden explained.

Detailing that insurance related instruments such as catastrophe bonds are one product that “could be the bridge between private capital and the humanitarian projects that need it.”

“The real power of insurance lies not only in its underwriting and risk modelling capabilities, but its ability to attract and mobilise capital,” Howden further explained.

He referenced the Danish Red Cross’ groundbreaking volcanic risk catastrophe bond, which Howden Group played a role in assisting to get the deal to market, while also funding part of the issuance costs through its foundation.

Discussing how such structures and insurance models, like the Red Cross volcano cat bond, can be applied more broadly to solve challenges around disaster risk and relief, Howden explained that he sees this as part of the insurance and reinsurance industry’s future.

“In Alok Sharma’s opening speech, he talked of the communities being devastated by climate change – droughts, floods, hurricanes, famine, plagues of locusts; this can be applied to all of them.

“It is an acorn which, if we bring together the investment, humanitarian and philanthropic communities, can grow into a forest of oaks trees.

“The concept has received huge support from our own employees, who want to work in an industry that is not just for profit but for purpose as well. They are putting significant sums of their own money into our foundation to back it, enabling the foundation to commit future funding that will result in up to £100m of disaster relief financing for projects globally,” David Howden explained.

Howden went on to say that if just 3% of global pension fund assets under management were redirected into insurance-based ESG investments, it could amount to as much as $1.5 trillion of capital that can be deployed for social good.

Howden said it needs a concerted effort from all sides, including the global investment community, humanitarian agencies and philanthropic communities, who should work together to create a market in such instruments.

“We can’t keep relying on government and charities to find more money – there is far more private capital available than public – and there is huge appetite from this capital to invest in ESG, but it needs a market. So I’m here today to ask for your help in creating that market,” Howden said.

Adding, “To humanitarian organisations wanting to make the most of your funds for resilience and preparedness – bring us your disaster relief projects. To foundations looking to make the greatest impact on saving lives and livelihoods with every donation – fund the premium and stretch the impact of every dollar. And to investors looking to channel your capital into asset classes that help to deliver societal good – come and talk to us.

“Together, we can plant and grow that amazing oak forest by creating a market that unlocks private capital for social good.”

It’s encouraging to see Howden spreading this message, which is something the insurance-linked securities and catastrophe bond community has been saying for two decades now.

The use of cat bonds as a structure for channeling private capital markets funding into disaster relief and recovery financing globally is a very real and tangible possibility, with the right backing and acceptance, as well as structuring.

But, as we’ve said before, the costs of issuing cat bonds need to come down, as it shouldn’t just be a case of philanthropic funding making this possible.

The industry can cut significant fat out of the transaction chain and as we’ve said many times before, to change insurance for good and truly connect private capital pools with climate, weather and catastrophe risks, the market structure and mode of transferring risk from primary clients, via reinsurance and right through to sources of retrocessional capital, must be made as efficient as possible and the industry needs to redouble its focus on cost and removing fat (expense) from the transaction.

To really bridge the gap between private capital and humanitarian needs and make the most of an evident opportunity, the ILS and re/insurance industry must find ways to make it simpler and more cost-effective to structure and distribute risks, matching it with capital in the most efficient ways possible.