The President of the World Bank Group David Malpass has highlighted the importance of financial preparation for pandemic emergencies, of the kind provided by the Pandemic Emergency Financing Facility (PEF), which is backed by insurance including the now much-discussed World Bank issued pandemic catastrophe bonds.
With the two tranches of notes issued as part of the IBRD CAR 111-112 pandemic cat bond transaction now marked down in the secondary market due to the threat posed by the spreading global novel coronavirus (2019-nCoV or Covid-19) outbreak, the chances of the cat bonds being triggered appears to be rising all the time.
As we explained earlier this week, the secondary market price for the higher-risk tranche of the World Bank’s pandemic catastrophe bond, so the one most at-risk of paying out due to the spreading global coronavirus outbreak, has now plummeted.
At the same time, the more remote risk tranche has now also been marked down as the growing coronavirus crisis poses an increasing threat to that tranche as well.
Much has been said about the effectiveness of these pandemic catastrophe bonds, as some critics say they should have paid out sooner, while others question the need for insurance and reinsurance capital solutions when it comes to global health emergencies.
But it is clear that financing is required and enabling the private markets to bear a portion of the financial burden of disaster level events, as they do in natural catastrophe risks thanks to catastrophe bonds and insurance-linked securities (ILS), is still seen as beneficial, no matter how much liquidity global institutions could pump into the financial system.
While questions remain over the effectiveness, or responsiveness, of the Pandemic Emergency Financing Facility (PEF) to the specific potential payout scenarios it has now faced (Ebola in the DRC and now coronavirus globally), the beneficial effects of an additional financial boost to resources is still clear, as capital flows are needed and opening the capital markets as a source of extreme disaster risk financing has time and again been proven to be beneficial.
World Bank President David Malpass commented on this at a press briefing this week, on the day that the World Bank Group made available an initial package of up to $12 billion in immediate financial support to help countries as they battle the health and economic impacts of the global Covid-19 coronavirus outbreak.
Commenting on the PEF and its effectiveness Malpass said, “I want to mention the importance of prevention and preparation by countries. Whatever the answer is on financing facilities, I think we want to emphasize that going forward the importance of countries preparing for various eventualities including this kind of event.”
He continued, “Now turning to PEF. I want to be the layman here on PEF. For those that haven’t followed this, it was set up in 2017. It was approved by the World Bank Board and basically IDA, which is the part of the World Bank, the International Development Association, was insuring itself against this kind of risk.
“IBRD—the part of the World Bank that operates financing facilities—will be the recipient into the PEF fund of insurance proceeds, if it’s declared. I want to be careful because we’re not the ones that declare whether the insurance is triggered.”
Malpass also importantly clarified one of the pieces of misinformation that has been spread widely in mainstream media about the pandemic catastrophe bonds, that someone needs to declare a pandemic, which we explained is not accurate last week.
“As a side note, the WHO— there’s been talk that the WHO has to declare a pandemic, but that’s not correct. The triggers are stated in the prospectus and so on for this type of insurance.
“But the bottom line for people to understand is the IDA portion of the World Bank, which is the portion that’s dedicated to poor countries, insured itself in 2017 against the against this type of extreme need for financing.
“So, it’s possible, if it’s triggered, that money will flow into the World Bank—or really into the PEF, the pandemic facility—that money would flow in, let’s say, in the second quarter of this year and could be used and would be additional to the $12 billion that I was announcing today,” Malpass explained.
The PEF was considered a first attempt to set up a capital markets backed financing facility for global pandemic events, as a way to secure capital that could be channelled specifically to assist poorer nations in dealing with global outbreak events.
Leveraging insurance and reinsurance market technologies, alongside capital markets structuring and the catastrophe bond structure itself, the PEF sought to secure additional backing from capital market investors through its so-called insurance window, which was designed to augment the PEF trust itself, providing additional capacity.
As a first attempt it was always clear that the PEF structure and design may need revisiting and amending in future.
In fact, a second iteration of the Pandemic Emergency Financing Facility, an improved PEF 2.0 as it has been called, was expected to be marketed around May 2020, prior to the maturing of the first transaction.
It’s not clear now whether that will happen at this time, as the current pandemic bonds look increasingly likely to face a payout of some description in the coming weeks.
But with the PEF insurance window set to mature in July this year, it is to be hoped that another attempt to leverage the capital markets to bear some of the burden of future global pandemics is made.
While some believe that paying a premium for coverage of this kind is a waste of global resources, it is undeniable that when the worst outbreaks, or disasters, occur, having a contingent source of financing available to call upon is invaluable.
How it is structured and how its payout terms work is of course key and its responsiveness is vital, as too is ensuring its triggers are clear, transparent and well-understood by those that need to.
Whether the PEF 1.0 has been a success or not is a point of much discussion. But if the pandemic cat bonds default and payout the liquidity they provide will immediately prove useful to beneficiary countries.
It’s important to remember what the PEF was designed for, a tool for bringing capital in from external sources.
The reasoning was that, during pandemic crises and outbreaks of the past, capital had been too slow to flow. The 2014 Ebola outbreak was seen as an example, as had the PEF’s insurance window existed at the time it could have paid out relatively quickly and before much capital had flowed into the affected region.
The insurance or reinsurance financing for the PEF consists of $105 million of pandemic risk linked swaps (ceded to reinsurance and ILS funds we believe) and the $320 million of pandemic catastrophe bonds.
Trigger design is everything, of course, and there is no way the structurers of these pandemic cat bonds could have second-guessed every potential scenario of outbreak or epidemic.
But clearly the coronavirus outbreak and the Ebola outbreak in the DRC need to be considered as learning for any PEF 2.0 iteration, to ensure any second version of the pandemic financing facility is made even more robust and responsive.
Commenting on the future of the PEF, World Bank President Malpass said, “As far as the question of what tweaks might be needed in the future, I think there needs to be lots more experience and evaluation of the concept of financial insurance.
“I want to end with my point that prevention and preparation by countries is going to be by far the most important step and lesson that comes out of this tragedy.”