Analysis: Pandemic bonds


  • The 2014/2015 Ebola outbreak inspired the pandemic bonds as emergency funding would have helped contain the virus
  • Like catastrophe bonds, the Pandemic Emergency Financing Facility is activated by parametric triggers
  • The PEF has met such investor appetite that the bonds are oversubscribed

Pandemics bonds have launched, with the help of the insurance market, to channel surge funding to developing countries dealing with a disease outbreak.

As well as causing millions of deaths, a severe pandemic can destroy up to 1% of global economic performance, estimates from the World Bank show.

As even a moderately severe pandemic can result in annual global costs of $570bn (£430), the World Bank has worked with the insurance market, including Swiss Re and Munich Re, as well as government organisations to deliver the first pandemic bonds. These are meant to provide financial support to the Pandemic Emergency Financing Facility, which is designed to channel surge funding to developing countries dealing with a disease outbreak.

PEF purpose

Getting money in at an early stage can help to save lives, reduce economic costs and prevent a pandemic. Ivo Menzinger, client executive at Swiss Re, explains the 2014/2015 Ebola outbreak in West Africa triggered the development of the PEF.

“The outbreak illustrated just how difficult it is for the humanitarian mechanism to provide cash on the ground quickly,” he explains. “It took more than six months from the first cases being confirmed in Sierra Leone in March 2014 before money started flowing. Over that six months, there were 1500 deaths and the response agencies’ request for funding grew from around $100m to $1.5bn. If the PEF had been in place then, the bonds would have paid out $150m in the first few months. This would have been sufficient to contain the virus.” 

To enable funding to reach developing countries facing a major disease outbreak, the PEF has two windows, one for insurance, which is financed by the bonds and reinsurance and supported by the Japanese and Germany governments, and one for cash, which has initially been funded by the German government.

Insurance mechanics

Menzinger, who headed up the team responsible for Swiss Re’s work on the PEF, explains how the insurance element works: “It’s clearly structured with parametric triggers that determine the circumstance under which payments would be made to the PEF. Structurally, it can be compared to some of the catastrophe bonds that are available for events such as hurricanes and earthquakes.”  

Triggers for the insurance window were determined by modelling work undertaken by AIR Worldwide and set specific requirements based on details such as the level of contagion, including number of deaths; the speed of the spread of the disease; and whether it crosses international borders. 

Coverage is limited to six viruses including several strands of flu, Ebola, and Lassa and Crimean-Congo fevers. Similarly, as the aim of the facility is to support the poorest countries, funding is limited to members of the International Development Association

Flexible cash

While the insurance window is governed by rules, the cash window, which sits alongside it and has received funding of €50m (£45m) from the German government, has a much more flexible remit. Menzinger explains: “The cash window could make a payment for an outbreak that isn’t covered or where a virus hasn’t yet reached the threshold required to trigger the insurance payment. This means that funding could be available really quickly.”

The PEF has been well-received. Matthew Connell, director of policy and public relations at the Chartered Insurance Institute, describes it as an excellent example of governmental and commercial organisations working together to protect vulnerable people from life-threatening risks. “Some risks, such as pandemics and terrorism, are too large and complex for one sector of society to manage on its own, especially where this is no established market,” he says. “This combines the capital-raising powers of both governments and markets while also harnessing risk expertise in the public and private sectors.”

There’s also been plenty of appetite from investors for this type of mechanism for funding disease response, with the bonds oversubscribed by 200%. “It makes more sense to pre-finance than to scramble around afterwards,” says Menzinger. “The funding is there: in the West African Ebola outbreak, the ultimate pledge was $7bn.”

New market

The scale of this interest may help to encourage a new insurance market specifically for pandemic risk. This is certainly the view of Metabiota, a firm which analyses and models infectious disease data to help identify risk transfer and intervention opportunities.

“We look at historical disease outbreak data for catastrophic but also more frequent events, to inform businesses and government about the risks associated with infectious diseases,” explains Nita Madhav, head of data science at Metabiota. “This analysis creates a really good picture of what could happen.”

For example, this data can be used by life and health insurers to have a better understanding of the risk they already carry, but it could also help to shape products to help a government or business cover the cost of an epidemic.

“A business could face supply chain disruption as a result of an epidemic,” says Cristina Stefan, product manager for insurance solutions at Metabiota. “It’s exciting that the World Bank has launched a product specifically for pandemics. It puts this risk on the map.”

Model answer

While the PEF may be concerned with a specific set of diseases, Connell believes it will lead to other innovative insurance solutions. “This type of initiative not only addresses current problems, but it creates market structures and centres of expertise that can develop solutions well into the future,” he explains.

Using the same structure could lead to insurance products that help with other challenges such as famine, drought and the refugee crisis. Nigel Brook, partner at Clyde & Co, is also excited about the potential for the development of more insurance products that do good. “The Centre for Global Disaster Protection in London is a partnership between the UK, Germany and the World Bank,” he explains. “Its remit includes advising on and designing new financial tools, including insurance, that help reduce the economic effect of a disaster.”

And, with the World Bank showing how insurance can be used to save lives and money, it is likely to be the catalyst for much more development in this space.        

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