Catastrophe bond backed EU emergency healthcare fund proposed

A new study has called for the creation of an Emergency Health Financing Facility (EHFF) for the European Union (EU) healthcare sector, with the securitization of health emergency risks in the form of catastrophe bonds seen as a viable funding solution.

The research study, undertaken and published by Professor David Veredas, Professor Simon Ashby and doctoral researcher Dimitrios Kolokas of Vlerick Business School, proposes the need for financial structures to support European Union health care.

The COVID-19 pandemic caused financial and economic crises, but these were not on the magnitude of the public health crisis the pandemic has triggered.

COVID-19 caught the institutions of the world off-guard and while we do not know when the next health crisis may strike, the researches highlight that the pandemic will definitely not be the last.

The experience of the pandemic and so as to be ready for the next health care emergency, “The EU needs effective and unified health emergency response arrangements, and collaboration between member States. It also needs a significant financial cushion for rapid and predictably increasing funding,” the researchers explain.

They propose the creation of an Emergency Health Financing Facility (EHFF) for Europe, which they say should be designed to complement existing structures in the EU without compromising the EU budget nor the public finances of member States.

The existing institutions of the EU and the member states are all going to be facing serious financial strains for the coming years, given the costs of responding to the COVID-19 pandemic.

As a result, the researchers are suggesting a structure that will leverage the capital markets as a source of financing for the proposed European Emergency Health Financing Facility (EHFF), with the insurance-linked securities (ILS) structure seen as a viable tool to underpin it.

They propose “a new layer of financial innovation”, to involve the securitization of health emergency risks in the form of fixed income securities that are sold to institutional investors.

These catastrophe bonds would be designed to not just transfer pandemic risk, but more broadly health emergency risks to the capital markets, leveraging institutional appetites to fund the EHFF facility.

The proposal would see the EHFF facility being structured to provide financing for the ramping up of medical supplies, testing kits, building infrastructures, and sudden increases of personnel, amongst other uses.

In addition, it would be designed to complement existing EU institutions and structures, like rescEU and the Emergency Support Instrument.

Notably, the researchers believe that a centralised health risk financing facility could, “enhance cooperation and solidarity within the EU, which is essential to overcome the effects of a systemic health emergency, without increasing the burden on Member State finances.”

David Veredas, Professor of Financial Markets at Vlerick Business School, and co-author of the proposal, explained in more detail, “The last systemic crisis was in 2008 – 2011 and brought several EU countries to the brink of default. Pre-existing structures were not sufficient to avert disaster, lessons were learned, and regulation was brought in order to stop this happening again. We must do the same with this crisis if we are currently experiencing, as this time the magnitude is even greater given its focus is on public health.

“The current EU systems for dealing with this emergency are not enough, and have not worked efficiently. The crisis is being resolved with an unprecedented EU-debt funded recovery fund and the largest EU budget ever. In order to stop Member States being completely overwhelmed by this crisis both from a healthcare point of view, and economically too, we have to learn from our mistakes, and install a financing facility for future crises.”

The EHFF would be a health risk management tool that provides liquidity just when it is needed, with funding payouts triggered by health emergencies, such as but not limited to future pandemics.

The idea is to make it so compelling that EU member states all join given the safety net an EHFF would create for them, with shared costs and benefits making it more useful to join than to bear the costs of health emergencies on their own.

Catastrophe bonds, linked to EU health emergency risks, would be the proposed financing tool to underpin the EHFF facility.

Obviously, the ILS market has some experience in such an instrument gained from the World Bank’s catastrophe bond, which underpinned part of the financing for its Pandemic Emergency Financing Facility (PEF).

The Emergency Health Financing Facility (EHFF) for the European Union (EU) healthcare sector would cover a broader range of risks, so it would need to be designed with triggers that could capture different types of health care emergencies, including a pandemic.

There would be a correlation element, of course, as any major health care emergency in the EU would likely see financial market volatility occurring alongside it, in some form.

But institutional investors do have the appetite for these kinds of structures and use of the catastrophe bond, or insurance-linked securities (ILS) as a way to provide the financing required might also make this compelling for insurance and reinsurance companies to get involved.

Parametric triggers are proposed as most appropriate, and this would not be unfamiliar to EU member states, as the European Commission already uses triggering criteria for emergency funds.

By pooling the health insurance emergency related risks, the EU could then source reinsurance financing for these using the ILS market, with instruments triggered by specific emergency declaration and related health care statistics.

It’s another interesting proposal for leveraging the risk transfer and financing efficiency of capital markets reinsurance instruments such as the cat bond to support the world’s biggest exposures.

The need to be able to respond rapidly to health crises has been made abundantly clear by the pandemic and liquidity and financing are critical to enable that.

The policy paper can be accessed in full via the Vlerick Business School website here (fill out the form at the bottom of the page).