Global Parametrics, the parametric and index-based disaster risk transfer company, and the UK government’s Department for International Development (DFID), have agreed in principal to provide some of the capital necessary to back the Red Cross’ volcano catastrophe bond.
The Danish Red Cross and International Federation of Red Cross and Crescent Societies is seeking to issue a privately placed catastrophe bond linked to volcanic risks, the first such transaction.
The organisation is attempting to tap into investor appetites for insurance-linked securities (ILS) and reinsurance market risk premia as a way to secure contingent financing to support its own work around the world, to the benefit of those countries struck by disaster.
In addition, the Red Cross recognises the potential benefits of parametric triggers backed by efficient ILS capital as a way to secure funding where capital and capacity can be delivered quickly and effectively to support the best possible humanitarian response, after disasters strike.
The cat bond will be structured with a trigger that is tiered across three ash plume heights, enabling different levels of payout for differing severities of eruption.
A post-triggering payout formula and risk model has been developed for use in the cat bond transaction by Mitiga Solutions, a volcano-focused scientific and technical firm that was previously spun out of the Barcelona Supercomputer Centre.
Adam Bornstein, global innovative finance delegate for the Danish Red Cross, explained, “Whereas most cat bonds pay out after a risk event has created a loss, our volcano cat bond pays out before ash hits the ground and serious loss occurs. With this cat bond, we’ve leveraged the funding attributes of insurance with the benefits of early action protocols – the world’s first blended cat bond.”
Now, the first slice of capital to back the volcano cat bond has been secured, with the Global Parametrics managed Natural Disaster Fund (NDF), which is backed by the UK’s DFID, purchasing an option to buy up to $5 million of the issued volcano cat bond notes.
Commenting on the news Hector Ibarra, CEO of Global Parametrics and the Portfolio Manager of the NDF, explained, “Cat bonds are steadily proving their position as alternative investment strategies and an innovation such as the new volcano catastrophe bond will not only support asset class diversification, but enable investors to demonstrate their commitment to ESG-led investments by supporting the resilience of communities that are vulnerable to the effects of volcanic eruptions.
“Our partners at the Red Cross have created one of the most relevant and system-changing solutions in the humanitarian aid universe as well as driving the development of new, relevant insurance-linked securities. We are proud to support this huge step forward.”
The cat bond aligns with the mission of Global Parametrics and DFID, in providing much-needed responsive risk capital to support recoveries from disasters.
The investment is subject to the successful completion of the volcanic risk cat bond, as well as the terms of the transaction’s suitability to the investment strategy of the Natural Disaster Fund (NDF) at the time it is issued.
Birgitte Bischoff Ebbesen, international director at the Danish Red Cross, also commented, “The volcano cat bond has the potential to be a game changer, as we, with this promising initiative, explore a new approach of engagement between the humanitarian and the financial sector in a mutually beneficial way; ensuring quick response to people affected by volcanic eruptions.
“With underlying support from dynamic partners like NDF and Global Parametrics, the Red Cross is creating new opportunities for global capital markets to invest in value-driven humanitarian aid.”
This is a strong vote of confidence in the Red Cross’ work to get this catastrophe bond transaction off the ground and demonstrates there is appetite to underwrite and back this risk at the highest levels.
Rachel Turner, Director for Economic Development at the UK Government’s Department for International Development (DFID), added, “This is an innovative programme that takes a huge step in the shift to preparedness which is vital to building resilient communities. The programme showcases the value that both Global Parametrics and the NDF brings to this nascent sector, but also the active, innovative and solutions-driven nature that the Danish Red Cross has imbued, an approach that is required from partners to tackle such challenges.”
The Red Cross has also received $50,000 under the agreement to support the catastrophe risk modelling necessary to get the volcano cat bond to market, a sum it will not have to repay if the transaction failed to launch.
It’s encouraging to see that DFID has recognised the innovative approach being taken by the Red Cross and wants to extend its support to the initiative.
The first pure-volcano catastrophe bond is making good progress in getting to market, which is testament to the efforts of the Red Cross and its innovative and open approach to disaster relief financing.
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