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Original Risk: A Society for Change Agents

Red Cross targets cat bonds for nature-based, humanitarian, resilience financing


The Red Cross, working alongside insurance-linked securities (ILS) risk securitisation facilitator and risk transfer consultancy Replexus Group, is developing a solution to promote nature-based solutions to disaster risk, financed partly through the use of catastrophe bonds, as well as other humanitarian and development scenarios.

mangrove-imageRecently, the Danish Red Cross successfully delivered the world’s very first catastrophe bond covering pure volcanic eruption risk.

The organisations innovative finance team have been exploring other use-cases for catastrophe bonds and insurance-linked securities (ILS), around areas where it feels supporting capacity from the capital markets can both take on exposure to natural disasters, while helping its own funding work harder and do more.

Areas such as refugee and migration financing are among those that have been explored, where cat bonds or ILS could be useful tools.

But another, which is moving through initial planning phases, is the use of catastrophe bonds as a financing tools behind a facility to fund and foster development of nature-based solutions to enhance disaster resilience in parts of Asia, we understand.

The Danish Red Cross, Netherlands Red Cross and Replexus are together developing an Asia Pacific Nature Based Risk Reduction & Insurance Facility, for which a feasibility study has now been submitted.

The blended financing facility would cover multiple nature-based solutions, such as mangrove forests, that protect and buffer communities from the impacts of natural disasters.

The Asia Pacific Nature Based Risk Reduction & Insurance Facility would enable capital market investors to contribute to climate adaptation efforts, through the development of a structure designed to benefit both the humanitarian sector and commercial investors.

The goal is to help evolve the funding paradigm under which organisations like the Red Cross work, by moving away from a purely grant funded approach to one that is blended and encourages capital market participation.

The proposal would see Replexus’ Guernsey based cell vehicle and private catastrophe bond issuer Dunant Re IC Limited acting as the vehicle through which risk transfer to the capital markets would be achieved, while an Asia Pacific Financing Facility would be set up to act as an umbrella organisation to support trust funds established to benefit communities and pay premiums for the disaster cover involved.

The feasibility study also proposes setting up a specific catastrophe bond fund, that would only invest in humanitarian catastrophe bonds, such as the already issued volcano cat bond and any issued by this new nature-based financing approach.

The first project under the new facility is expected to be focused on Philippine mangroves, with a possible Philippine mangrove catastrophe bond (essentially a Pacific cyclone cat bond) potentially issued to support the disaster insurance component of the arrangement.

The ultimate goal is to raise donor funding to support maintenance and management of nature-based resilience solutions, such as mangrove swamps, while also funding issuance of humanitarian insurance-linked securities (HILS).

The goal is to provide the funding for aid agencies to immediately respond to disasters, while encouraging upkeep of nature-based resilience solutions, and also allow trusts, donors and other institutional investors to allocate capital to a managed portfolio of humanitarian insurance-linked securities (ILS), created via the roll-out of this and other similar projects.

Other ongoing initiatives, such as a watershed and storm surge product in Indonesia and Bangladesh, are also expected to utilise the catastrophe bond structure and become humanitarian ILS arrangements, while having a health insurance related component to them.

Leveraging ILS structures and the appetite of institutional markets to support financing of humanitarian risks and development projects can be of significant benefit to the Red Cross and other organisations like it.

It can free up their own funding, while bringing in capital market investors to support their activities and making disaster recovery financing more responsive.

Longer-term, there is also a goal to further unlock the ESG appetite of investors, working with the capital markets and the ILS community on new innovative leveraged structures that can support loans and investments in fragile or developing communities.

The idea is to position the humanitarian ILS product as a tool that enables resilience building before disasters strike, protection during the risk period, and rapid financing payouts should the worst occur to speed recovery.

It’s encouraging to see the work continuing at the Red Cross to find ways to integrate the best of disaster insurance risk financing technology into its project funding and financing, with the goal of enhancing resilience and helping to make communities more sustainable in the face of disasters.

This is only going to become more important with the rise of climate related exposures and potential sea level rise, as well as climate linked outcomes related to drought and how that can affect populations.

With the capital markets keen to assume natural disaster risk in return for a premium, while also being increasingly motivated to fund resilience and sustainability under its ESG appetite, there is a significant opportunity to leverage this at organisations like the Red Cross to help its own donor funding work far harder, while providing more responsive and resilience focused risk transfer tools to the communities it works in.

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