World Bank links catastrophe & pandemic risk finance for the Maldives


The World Bank has delivered the first of a new combined catastrophe and pandemic contingent risk financing solution to the Maldives, leveraging existing structures to create something responsive and that works similar to insurance for the archipelagic nation.

World Bank logoThe Maldives is highly exposed to natural hazards and climate variability, and is considered one of the most vulnerable countries in the world to sea-level rise.

In addition, the Maldives is seen as highly exposed to public health threats as well, with Severe Acute Respiratory Illnesses, influenza, dengue fever and zika all seen as significant threats to public health.

As a result, the World Bank has designed a new risk financing solution for the Maldives, bringing together both catastrophe and pandemic protection in a solution for the first time.

The risk financing solutions aren’t in traditional insurance and reinsurance form, but their are links to the efficacy of risk transfer instruments for natural catastrophe risks, such as catastrophe bonds and traditional reinsurance, as well as a direct link via the pandemic risk protection.

The World Bank has delivered the Maldives a $10 million Catastrophe Deferred Drawdown Option, (Cat DDO), with a linked Pandemic Emergency Financing Facility (PEF).

The World Bank explained that this CAT DDO-PEF will, “Help enhance the Maldives’ financial capacity to effectively manage the human, physical and fiscal impact of climate change, natural disasters and diseases.”

The CAT DDO is a catastrophe contingent debt instrument, that only makes its financing available after the government of a country declares a disaster following a catastrophe type event.

In this respect the CAT DDO is similar to parametric catastrophe bonds, except instead of their being collateral set aside the payout is effectively a loan from the World Bank to the country in question.

But in this case the CAT DDO has been linked with pandemic risk financing delivered through the World Bank’s Pandemic Emergency Financing (PEF) facility, a first for the Bank.

The Pandemic Emergency Financing Facility (PEF) was established in 2017 and saw the World Bank tapping into both the reinsurance and capital market’s appetite for relatively uncorrelated sources of risk.

The insurance-linked securities (ILS) market and institutional investor appetite was leveraged alongside the reinsurance market, to provide the risk capital necessary to back the so-called three-year initial term of the insurance window of the PEF facility.

The $500 million PEF set up involved issuance of $320 million of pandemic catastrophe bonds and a further $105 million of pandemic risk linked swaps as the core of its risk transfer arrangements, providing the reinsurance capacity to back the parametric insurance window’s risk transfer to protect developing countries against pandemic outbreaks.

Of course, the PEF has faced some questions recently related to its trigger, given it has so far not paid out for the Ebola outbreak in the Democratic Republic of Congo.

But, while some have questioned the design of the parametric trigger, the structure itself continues to be a source of protection that can be utilised by nations seeking pandemic risk financing. It’s important to note the significant challenges in designing a one-size-fits-all  risk transfer solution that can respond effectively to so many major pandemics and diseases.

The World Bank said that in the case of the Maldives, the risk financing instruments are “quick disbursing sources of financing that will support the government to take immediate response, relief and recovery activities following a disaster or an emergency, including health.”

“The agreements are part of integrated risk management options to improve the country’s resilience to shocks and safeguard macroeconomic sustainability,” Idah Pswarayi-Riddihough, World Bank Country Director for Maldives, Nepal and Sri Lanka commented. “In addition, it is for the first time that a country in South Asia has prepared a Cat DDO that is linked with this new pandemic emergency financing. This is a kind of insurance for the future.”

The Maldives will benefit from access to the PEF’s financing upon the occurrence of a disease outbreak in the country as reported by the Ministry of Health.

Financing could be drawn from the PEF’s insurance and/or cash window.

“While the CAT-DDO has been designed to support response to natural disasters including health emergencies, the PEF has been designed to specifically support response to large-scale qualifying disease outbreaks through its insurance and cash windows,” the World Bank explained.

Of course the PEF already covers the Maldives for events that meet its specific triggers, but this addition means that the Maldives could potentially claim from the PEF for other public health emergency pandemic type events.

As such, it doesn’t appear that this would trouble the layer that the pandemic catastrophe bonds protect, rather hitting the insurance window more generally, or coming out of cash given the relatively small size of this CAT DDO-PEF at $10 million.

The strict PEF triggers still have to be met for any payout from the capital markets backed reinsurance protection it seems.

The combining of catastrophe and pandemic protection in a single financial instrument, this CAT DDO-PEF, perhaps provides us with a glimpse of where the World Bank may look to expand the range of disaster risk financing products it offers further in years to come.

The Bank could look to combine natural catastrophe risk and pandemic risk within a single country, or multi-country, catastrophe bond in the future, which might give a way to calibrate the triggers more closely to the specific needs of one nation, rather than trying to capture all possible outcomes within the parameters used.

This small risk financing solution for the Maldives is a good example of where the World Bank may explore potential solutions in future.

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