Congo Ebola outbreak may be an eligible event for pandemic cat bond & swaps


The worsening outbreak of the Ebola virus in the Democratic Republic of Congo may be considered an eligible event under the terms of the Class B pandemic swaps and pandemic catastrophe bonds that were issued by the World Bank to support the financing of the Pandemic Emergency Financing Facility (PEF).

The outbreak first came to light just over a week ago when the World Health Organisation (WHO), the reporting source for the PEF capital markets transaction, said that it had confirmed two cases out of a total of 32 Ebola virus disease cases.

Since then the outbreak has worsened and in its latest report issued yesterday the WHO said that it has recorded three confirmed Ebola virus cases, 20 probable and 21 suspected, along with 23 deaths, a rate of 52% out of the cumulative total of 44 Ebola virus disease cases.

In the report the WHO said that one laboratory-confirmed case has been identified in the city of Mbandaka, a city of roughly 1.5 million people according to the WHO.

Given the discovery of this Ebola case in the city of Mbandaka, the WHO has increased the assessment of public health risk to very high at the national level and high at the regional level, as the city is a large urban centre with major national and international river, road and domestic air routes, so heightening the risk of spread both within the Democratic Republic of the Congo and to neighbouring countries.

A meeting is set to be held today by the WHO Director-General to provide advice on whether the current Ebola outbreak constitutes a public heath event of international concern.

Ebola is a is a covered peril under the Class B tranches of pandemic swaps and cat bonds issued through the PEF transaction by the World Bank’s International Bank for Reconstruction and Development (IBRD) last year.

It appears that it could also be deemed an eligible event, under the terms of the transaction, although it’s probably too early in the outbreak for this to be formally announced and further spread of the disease would need to be seen first.

The issuance saw $320 million of IBRD CAR 111-112 capital at risk notes sold to investors through the parametric pandemic cat bond issuance, while another $105 million of pandemic risk linked swaps (derivatives) were also sold to investors, to expand the transaction to those seeking a different risk-linked asset.

The $95 million Series 112 Class B tranche of pandemic cat bond notes cover a range of pandemic perils including, Coronavirus, Crimean Congo Hemorrhagic Fever, Filovirus, Lassa Fever and Rift Valley Fever, with Ebola falling within the Filovirus category.

At the moment the number of confirmed deaths remains well below the trigger point for the Class B pandemic catastrophe bond notes and related swaps, which can only begin to payout for a Filovirus like Ebola once the confirmed deaths pass 250.

The available information from the WHO suggests that this Ebola outbreak will be an eligible event under the terms of the pandemic cat bond notes and swaps, putting the investors in the instruments on watch and effectively heightening the risk as the confirmed death rate from the outbreak rises.

The PEF cat bond notes and swaps are designed to payout as an outbreak is getting to a stage where emergency aid financing would be required, so enabling the mobilisation of capital rapidly to help prevent further spread of any eligible disease outbreak.

The fact a case of Ebola has now been found in a city heightens the potential for it to spread significantly.

Senior WHO official Peter Salama told the BBC news, “This is a major development in the outbreak. We have urban Ebola, which is a very different animal from rural Ebola. The potential for an explosive increase in cases is now there.”

Salama, who is the WHO’s deputy director-general for emergency response, said that the location of Mbandaka city on the Congo river increases the chances of Ebola spreading to Congo-Brazzaville and the Central African Republic, or downstream to Kinshasa, which has a population of 10 million.

“This puts a whole different lens on this outbreak and gives us increased urgency to move very quickly into Mbandaka to stop this new first sign of transmission,” he explained.

Should the Ebola outbreak be an eligible event, which it looks almost certain to be, and the confirmed deaths from it be reported to rise to above 250, then the Class B pandemic cat bond noteholders could be on the hook for a 30% loss to their investments.

If deaths rise to above 750 then the payout percentage would be 60%, while 2500 or more deaths would result in a total loss of principal to the Class B cat bond noteholders and likely investors in the corresponding layer of pandemic swaps as well.

The payout percentages rise to 35% for above 250 deaths and 70% for over 750, should the Ebola outbreak be deemed global, rather than just regional. At the moment it appears to be only regional in nature.

However, the response to the Congo outbreak of Ebola has already been impressive, with the World Bank itself having already made $3 million available to support the Government’s fight against the Ebola outbreak in the country.

Other organisations such as the WHO and United Nations have also contributed funding to help fight the Ebola outbreak, meaning money is already reaching the areas in most need of support.

“We commend the DRC Government’s rapid mobilization to address the current Ebola outbreak,” explained Jean-Christophe Carret, Country Director for the Democratic Republic of Congo at the World Bank Group. “We will continue our strong and ongoing engagement with the Government to ensure a robust response.”

The World Bank’s financing could rise to $15 million if required, to assist further in disease surveillance and response funding efforts.

This should encourage the investor base behind the PEF cat bonds and swaps, as it shows that money is already being disbursed well in advance of the potential for a payout of the notes and swaps.

With this funding going to disease outbreak response and containment efforts, it will actually help to control the outbreak, which could even help to reduce the risk to the PEF notes if this early financing is delivered effectively to the right places in the outbreak area.

For the PEF cat bond notes and swaps to be deemed at risk from this Ebola outbreak it will have to spread significantly and perhaps reach other countries as well, which this early intervention funding from the international community could help to ward off.

The recent outbreak of Lassa fever in Nigeria was also seen as an eligible event under the terms of the pandemic cat bond, but the spread of that outbreak has slowed somewhat.

Of course, covering outbreaks of potentially devastating diseases like Ebola or Lassa fever is precisely what the Pandemic Emergency Financing Facility (PEF) was designed for and where insurance and reinsurance capital and techniques can play an important role in ensuring liquidity of financing right when aid and disease containment efforts require them.

It’s a very good example of how the interest in uncorrelated risk has delivered an opportunity for investors to back socially responsible investments that can make a real difference in the world, through the provision of emergency financing.

The insurance and reinsurance market was integral to the success of the transaction as well, demonstrating its expertise in assessing, understanding and transferring complex risks, while leveraging the capital markets for capacity support.

We’ll update you as and when more information becomes available on the developing Ebola outbreak.

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