The recent completion of the world’s first pure volcanic risk catastrophe bond for its sponsor the Danish Red Cross, is an impressive example of the use of insurance-linked securities (ILS) in the humanitarian field, according to one of the investors in the bond, Plenum Investments AG.
The first volcano cat bond will provide financing to the Danish Red Cross for humanitarian relief efforts after an eruption breaches the parametric trigger used, which is based on plume height and prevailing wind direction.
While only $3 million in size, the volcano cat bond issuance is a first transaction to support a humanitarian organisation and as such seen as ground-breaking in the sector.
Dirk Schmelzer, portfolio manager and member of the sustainability committee of Plenum Investments Ltd. in Zurich commented, “This CAT bond is groundbreaking in that it is settled with blockchain technology and applies a new method of modelling. The volcano CAT bond is an impressive example of the use of catastrophe bonds in the humanitarian field. While the World Bank embarked on this path already a few years ago, it is new that this concept is now also implemented in the non-government sector.”
Plenum Investments was named among the ILS fund managers that invested in the volcanic risk cat bond.
The manager said that the issuance represents “a welcome diversifier for conservatively oriented CAT bond funds.”
Explaining that, “Since the risk is well modeled and the parametric-based payout mechanism ensures a high level of transparency. Also, with a multiplier higher than two, the risk-return ratio of this CAT bond is priced such that both sponsor and investor achieve a balanced cost-income ratio.”
Plenum hopes to see more use of the catastrophe bond within the humanitarian field for disaster relief financing.
The cat bond can secure important institutional funding for relief efforts, locking it up across multi-year periods and making it available to the relief agencies when qualifying disasters trigger the cat bond notes.
“It is to be hoped that this pilot project will inspire imitators. Being prepared for emergencies is not only a clear commitment to help, but also proves impressively that the capital market can live up to its social responsibility through CAT bonds,” added Nico Rischmann, who, together with Dirk Schmelzer, is active in the Competence Centre for Sustainability at Plenum.
Plenum Investments said that the Red Cross catastrophe bond is “another milestone on the road to a targeted protection of the most vulnerable regions of the world.”
“With its significant financial participation in this issuance, Plenum Investments Ltd. does its bit to increase awareness of how the asset class of CAT bonds can contribute to sustainability,” the company added.