Catastrophe bonds continue to gain traction as a potential capital structure for delivering post-disaster financing or funding for international humanitarian and development organisations, with the United Nations agency UNICEF among the latest to explore insurance-linked securities (ILS).
Forward-looking agencies and humanitarian organisations are exploring the cat bond as a way to deliver new sources of funding linked to climate and disaster related experience, in the hope of closing existing funding gaps and also identifying ways to disburse capital much more rapidly after humanitarian crises occur.
Often reliant on donor funding and cash from parent organisations, humanitarian and international development organisations have struggled in the past to get the capital into disaster zones quickly enough. It’s thought that the faster the cash can be distributed to people, governments and non-governmental organisations on the ground, the greater its impact can be.
In addition, these organisations are looking to secure new sources of capacity for post-disaster funding, willing to pay premiums in return for securing the capital ready for when the worst happens.
Insurance-linked securities (ILS), as well as insurance and reinsurance market technology, are receiving increasing focus as a result, with catastrophe bonds and in particular those with a parametric trigger to facilitate rapid payout seen as an attractive option.
UNICEF, as the UN agency focused on provision of humanitarian and developmental aid to children around the world, recognises the growing threat related to climate change and the potential for natural disasters to become more frequent and severe.
Extreme weather threatens children in many regions of the world and the delivery of aid to areas affected by disaster is key, to ward off food insecurity, diseases, disruption to schooling and lives, as well as to prevent societal issues such as child labour from emerging in disaster zones.
Because of this threat and the potentially increasing urgency of it, the agency is in the initial stages of exploring sponsorship of a UNICEF catastrophe bond, which would be a capital markets backed insurance risk transfer solution designed to enable rapid resource mobilisation in the event of natural disasters.
It’s seen as a way to mobilise financing to protect UNICEF’s work in the field, as well as to secure additional capital inflows that could be rapidly put to work when natural disasters strike.
Innovative finance is a key pillar of UNICEF’s current strategic plan that runs until 2021 and the agency sees a UNICEF catastrophe bond as a possible foundation of the financial structures necessary to deliver a raft of innovative financing solutions.
Mobilising capacity is one thing insurance-linked securities (ILS) can certainly deliver on, where risks are in need of transferring to those better able to carry them.
It’s understood that premium payments will be seen as income, possibly from donors or other multi-lateral banks and organisations, payable to a special purpose vehicle that can issue the catastrophe bonds on UNICEF’s behalf.
Seeing the role of the catastrophe bond expand into humanitarian areas is a natural next step for the ILS market, given the risk associated with climate, weather and other natural catastrophe related disasters is significant and a real threat to humanitarian agencies work.
The way cat bonds can secure efficient financing from institutional capital markets, while providing insurance or reinsurance like capacity that can payout rapidly dependent on the triggers used, makes the catastrophe bond an ideal solution for the innovative financing work of agencies like UNICEF.
– World Bank looks at new cat bond risks, including cyber, famine, migration.
– Red Cross making volcano cat bond progress.
– Red Cross looks to ILS structure for refugee & migration financing.
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