The design of the recently announced Climate Resilient Development Bond (CRD Bond), an insurance-linked security (ILS) hybrid that integrates catastrophe bond protection and investment in climate resilience, was driven in part by the trend towards risks becoming uninsurable, according to Julian Enoizi, Global Head of Public Sector at Guy Carpenter.
As we reported, the Climate Resilient Development Bond (CRD Bond) sees a new attempt to link risk transfer and resilience using institutional investor funding, while also transferring climate related catastrophe risks to the capital markets.
As we stated in that article, the new CRD Bond is familiar, being similar in its concept to a resilience bond structure that had been proposed back in 2015 but never took off.
So we reached out to Enoizi of Guy Carpenter to get a little more insight into some of the design choices made and why he feels that this time it could become a successful offering.
To begin, Enoizi believes that the purpose of the Climate Resilient Development Bond (CRD Bond) is more targeted and this means a different outcome, as well as motivator for investors.
He explained that the purpose of the ‘original’ resilience bonds was to deliver risk transfer and investment in resilience infrastructure, which effectively equals monetising the avoided losses.
In the case of these CRD Bonds, the purpose is now risk transfer on a community basis, as well as the investment in resilience infrastructure, but also investment in resilience measures at the household level (upfront and/or at claims stage), alongside the stacked investment model that can allow for different types of investors.
As a result, Enoizi sees the CRD Bonds as, “monetising avoided losses and obtaining advance finance from a wider pool of investors.”
In the case of the original resilience bond concept, the challenges faced were the scale, as the risk premium does not work at the very local project level, while there was a time lag element associated with major infrastructure projects and also the costs of the development of infrastructure for resilience exceeded the premium savings that would be made.
The CRD Bond structure and how it is utilised can help to address a number of these, Enoizi believes.
For starters, on the scale question, choosing community, peril and the resilience project or measures using a science based approach is critical, taking into account the advances within climate science.
On the time lag front, a more integrated approach between the larger development of infrastructure for resilience, which takes more time, alongside household level adaptation measures that can be implemented more rapidly, should help.
On the costs of the infrastructure projects, Enoizi noted that the CRD Bond would use a “stacked investor structure that envisages capital and coupon investment and public funding.”
Explaining, “Public funding maybe more easily forthcoming on the basis that future savings can be made. In our note we acknowledge that the funding derived from monetizing the risk reduction may not match the full costs of the project. However, it will be a contribution that could make the difference between the project being financially feasible or unaffordable for the relevant community. We also think that a carefully chosen project could generate future income that could either be allocated as ROI or for reinvestment.”
We asked Enoizi why now? Why should the CRD Bond concept be received more positively by investors now, than was seen with the resilience bond concept, issues mentioned above aside.
He said that the, “CRD Bond allows for different investors with different investment objectives (commercial, ESG, philanthropic). For commercial investors the usual ILS motivations apply (diversification etc.).
“We think that investors who want to actively manage the environmental footprint of their portfolios has increased, including as result of sustainability-related disclosure obligations that are hardening into law in several jurisdictions.”
While at the heart of the matter and the motivation behind the CRD Bond design, is the fact risks are increasingly being viewed as harder to insurer, or uninsurable, with climate risk a significant factor.
“The fact that risks are increasingly becoming uninsurable (e.g. State Farm pull out of California wildfire insurance) – so the need has only become greater now for society and for our industry to remain relevant,” Enoizi explained.
Adding that, “This, coupled with greater funding for mitigation available and scientific advancements in measuring the risk reduction value,” will help to advance the structure proposal and hopefully make the CRD Bond a reality.
Enoizi noted that the road to market may not be a simple one though, closing by saying, “All that said, we recognize the difficulties of aligning disparate interests.”