WHO discusses catastrophe bonds to close COVID funding gaps

The World Heath Organization (WHO) has raised the subject of catastrophe bonds as a potential source of capital for funding development of tools to help in the response to the global COVID-19 pandemic.

The Access to COVID-19 Tools (ACT) Accelerator is an initiative set up by the WHO alongside partners, with the goal of delivering on tools for diagnostics, treatment, vaccines and health system strengthening.

At the 3rd ACT Accelerator Facilitation Council meeting yesterday on December 14th, the subject of gaps in funding was raised.

A huge $28 billion in capital is required, according to the Council members, with US $4.3 billion required immediately and an additional US $23.9 billion needed in 2021.

“We are gravely concerned that the current ACT Accelerator’s funding gaps will impede global equitable access to these products and ultimately delay the end to the crisis everywhere. Leaders must acknowledge the broader macroeconomic benefits of investments in the ACT-Accelerator and accept that stopping the pandemic globally will require additional funding beyond current health and official development assistance budgets,” the Co-Chairs of the Council explained in a statement.

Adding that, “The Council is exploring all new and existing financing sources and mechanisms to develop a robust financing framework to ensure the promise of the ACT Accelerator is realized.”

Which brought the subject of private capital to the conversation and it’s reported by Reuters that catastrophe bonds were raised as one structure that could be used to secure financing for these COVID-19 response and mitigation related tools.

Reuters reports that Bruce Aylward, a senior adviser to the WHO and the WHO’s coordinator for and the ACT Accelerator, said that new financing mechanisms were discussed at the Council, including concessional loans and catastrophe bonds.

“Right now financing is what stands between us and getting out of this pandemic as rapidly as possible,” Aylward explained to a U.N. briefing in Geneva.

We understand the Council is extremely focused on securing financing commitments for ACT, as a way to help the world move beyond the pandemic as quickly as possible.

Quite how catastrophe bonds are envisaged to be utilised remains unclear to us, although presumably pandemic cat bonds could be structured to respond to future waves of the pandemic to deliver more financing to response, mitigation and tool development.

This could be viewed as the risk of funding shortfall being transferred to the capital market, or the risk of future waves of the pandemic.

Of course, parametric triggered catastrophe bonds can be used as a mechanism to secure financing for any definable event, it doesn’t necessarily have to be a pure catastrophe, or insurance and reinsurance related risk.

Catastrophe bonds have already demonstrated they can be used in the case of pandemics, as was seen with the World Bank’s pandemic bond which paid out after being triggered by COVID-19.

But this specific WHO discussion seems to position cat bonds in a slightly different way, although still a potentially viable solution to channel private market contingent capital to be used in delivering pandemic response funding.

A Hannover Re executive previously said that the capital markets could potentially support up to $2 billion of capacity to back pandemic catastrophe bonds.

That falls far short of the needs of the WHO’s ACT Accelerator, but it would be a welcome addition of capital from a diversified source.