Resilience (catastrophe) bond framework developed by RE:bound

The RE:bound program, a partnership between re:focus partners, risk modeller RMS, reinsurance firm Swiss Re and The Rockefeller Foundation, has released a new framework that leverages the catastrophe bond structure for the financing of resilient infrastructure projects.

The resilience bonds developed by RE:bound are designed to help manage the financial risk from catastrophes, as a typical cat bond would, while also promoting investment in resilient infrastructure projects that mitigate physical risks.

As such the work undertaken by RE:bound provides a framework and structure for a new insurance product that transfers risk but also is intended to generate capital investments for risk-reduction projects.

The project is set to add an interesting dimension to the market for investments in insurance and reinsurance risk, bringing together risk transfer, insurance and resilience finance in a single investable bond could be extremely attractive to the likes of global pension funds which have socially responsible investment goals to meet.

An increasing number of the world’s ILS managers are embracing the fact that they provide disaster risk capital and find this a draw for investors looking to invest responsibly. The RE:bound program could bring a big opportunity for this aspect of ILS and catastrophe bonds to be stressed and help the market to grow.

In fact, as we wrote last week, the Rockefeller Foundation said that catastrophe bonds have the potential to “provide the world with access to the $200-$300 billion of capital required to help countries combat climate change shocks.”

These resilience bonds are designed to play the dual role of providing insurance, or risk transfer, as well as resilience benefits for cities exposed to disaster risks. By providing additional catastrophe insurance protection for a city or public utility at the same time as allowing investments in resilient infrastructure, such as sea walls or flood defences, a saving can be captured.

RMS explains that cities or utilities; “Could capture the insurance savings or reduction in cost from one year to the next for projects that reduce economic losses from disasters during the term of such bond. An analogy is a life insurance policy offering rebates for actions that lessen health risks, such as quitting smoking or exercising regularly.”

“At The Rockefeller Foundation we recognize that to solve today’s challenges, communities need new and innovative tools that can transform how they think and operate through a resilience lens,” said Judith Rodin, president of The Rockefeller Foundation. “The new resilience bond highlighted in the RE.bound paper is an innovative way to bring private sector financing to help communities grow resilient and ultimately recover more quickly from severe shocks.”

Shalini Vajjhala, founder and CEO of re:focus partners added; “The RE.bound approach offers not only a tool for financing resilient infrastructure projects, but also for setting risk-based design standards for future capital investments. It can help communities and cities around the world better protect themselves against the physical and financial risks of disaster.”

Ben Brookes, vice president for capital markets at RMS, commented; “Resilience bonds have the potential to be powerful tools for encouraging the creation of a more resilient society. It’s critical, however, for the bonds to be underpinned by accurate risk modeling. It’s only through meticulous risk quantification using advanced catastrophe modeling methodologies that the design criteria of the instrument, as well as decisions around future risk mitigation and resiliency investments, can be agreed with confidence. We are excited about the opportunity to lend our risk expertise in this area to the RE.bound program.”

“Improving society’s resilience is core to Swiss Re’s business. With growing urbanization and increasing climate change impacts, the challenges our cities and communities face globally are evolving and the solutions we provide must evolve with them,” stated Alex Kaplan, vice president at reinsurance firm Swiss Re. “Resilience bonds could not only support a faster recovery, but would also help to improve preparedness in a very substantial way, and could help to fast-track resilience from idea to reality.”

These resilience and catastrophe linked bonds could help to encourage greater uptake of insurance by cities and public entities as well, enabling them to see the additional benefits of resilience alongside enhancing their risk management and insurance protection.

That could bring new risk to the market, help to narrow some areas of under-insurance, improve the disaster resilience of those sponsoring these bonds and bring new investment opportunities to the ILS space.

Artemis spoke to some of the representatives of the parties involved in RE:bound, who said that the dual purpose resilience bonds provide a framework for resilience and disaster risk transfer, have a wide range of potential sponsors and the potential to create a much larger market, with a broader investor-base, than traditional cat bonds alone.

Charlotte Acton, Head of Risk Transfer Consultancy at RMS, told Artemis; “The risk/reward for each resilience bond is determined by the individual specifics of the resilience project and the entities and perils covered. However, the key to success for any resilience bond, is quantifying the risk-reduction implied by a prospective resilience project as part of the design phase. The recent advances in our storm surge and flood modeling, combined with infrastructure modeling, have made it easier for us to conduct the kind of detailed risk reduction studies required for these types of initiative.

“We see the modeling and risk reduction studies as a two-fold enabler. First, for the up-front funding for resilience measures, and second for post-disaster financing: the resilience investment can be made to maximise risk reduction for a given spend, and that risk reduction can be effectively and robustly quantified, and therefore priced.”

Shalini Vajjhala, Founder & CEO, re:focus partners explained that the potential use-cases and range of sponsors for resilience bonds is larger and that the market has significant potential to help a wide range of users enhance their resilience while also benefiting from disaster insurance and risk transfer.

“The potential market for Resilience Bonds is enormous, and there are a wide variety of possible applications. For example, current cat bond sponsors with capital projects that can deliver measurable risk reductions should look to these new bonds to generate and capture insurance savings in future issuances. More broadly, for cities, public utilities, transit authorities, and other large asset holders who are obliged to hold insurance, Resilience Bonds offer the opportunity to rebalance their insurance portfolios and create rebates for new projects that reduce their risk profile. Finally, governments and international organizations, like the United Nations, seeking to meet global climate finance commitments can use Resilience Bonds to leverage existing disaster assistance programs with private capital to build resilience and expand insurance coverage for the most vulnerable communities,” Vajjhala explained.

Finally, Artemis asked James Rhodes of re:focus partners, the co-lead on the RE.bound Program, how investors should think about resilience bonds, versus cat bonds and whether they are likely to become part of the same portfolio for some investors.

Rhodes responded; “Resilience bonds are deliberately designed to mirror the risk and return profiles of traditional cat bonds; however, given their potential to advance a broad set of social and environmental priorities, we expect that resilience bonds will attract a broad set of investors and could serve as the basis for additional asset allocations within investor portfolios.”

The catastrophe bond structure has always been flexible and as Artemis has written many times is suited to the transfer of a much broader range of risks than simply catastrophe exposure. RE:bound is taking the use of cat bonds a stage further, harnessing the financing aspects of bond securitisation, alongside the risk transfer and trigger of the cat bond structure, to create a new and compelling asset which also has wide applications for resilience and social good.

A much fuller description of the resilience bond framework and use-cases is described in a RE.bound report released today, titled ‘Leveraging Catastrophe Bonds as a Mechanism for Resilient Infrastructure Project Finance‘ (PDF download).

With the report, the RE:bound program members aims to help industry and public sector or government officials to understand how these new resilience bonds can work, show why they are an important tool for communities facing increasingly frequent and severe storms and floods, as well as to educate local risk managers how they can be used to protect their own communities.

The next steps for the RE:bound program are to involve policy, project design, and finance experts to explore options for applying the risk modeling approach and resilience bond mechanism, with the goals of enabling governments and international organizations to reduce their dependence on disaster aid, improving protection for the most at-risk countries and communities, and supporting global climate finance commitments.

Also read:

– RE:bound to apply catastrophe bond tech to project financing.

– Goldman Sachs to push catastrophe bonds for climate resilience.

– Cat bonds can help provide $200-300bn for climate change shocks: Rockefeller Foundation.