Tag Archives: Catastrophe Bonds

All about pandemic catastrophe bonds

In previous articles, we discussed how communicable diseases and pandemics are (or are not) addressed in personal and commercial insurance policies. Today, we’ll talk about pandemic catastrophe bonds.

The Ebola outbreak between 2014 and 2016 ultimately resulted in more than 28,000 cases and 11,000 deaths, most of them concentrated in the West African countries of Guinea, Liberia, and Sierra Leone.

The outbreak inspired the World Bank to develop a so-called “pandemic catastrophe bond,” an instrument designed to quickly provide financial support in the event of an outbreak. The World Bank reportedly estimated that if the West African countries affected by the Ebola outbreak had had quicker access to financial support, then only 10 percent of the total deaths would have occurred.

But wait, what are “catastrophe bonds” and what’s so special about a pandemic bond?

“Traditional” catastrophe bonds

Like good old-fashioned insurance, catastrophe bonds are a way to transfer risk, often for natural disasters. They usually work like this: investors buy a high-yield bond issued by an insurance company. If a specific qualifying event occurs, such as if claims from a natural disaster exceed a certain amount (an “indemnity trigger”), the bond holders forfeit the principal of the bond, which goes to the insurer to help defray costs.

Catastrophe bonds are high-risk investments – hence the high yields they pay to investors to compensate for that risk. After all, there’s a pretty good chance a sizeable hurricane will hit in any given year.

Pandemic catastrophe bonds

Pandemic catastrophe bonds are similar. An entity (like the World Bank) sells a bond, which pays interest to the investors over time. If certain triggers occur, then the principal from the bond sale is quickly funneled to medical efforts to contain and quell the disease outbreak. That way, affected regions don’t have to wait for aid money to be raised and coordinated.

Pandemic bonds are somewhat different from traditional catastrophe bonds, though. Remember, traditional catastrophe bond triggers are usually based on insurance losses (indemnity triggers), which don’t make much sense in the context of a disease outbreak. Insurance losses can take quite some time to adjust and finalize.

There’s no time for that kind of thing when we’re dealing with a pandemic. Capital needs to move quickly to the affected region. So if a trigger can be quickly determined, then the capital payouts can be made quickly as well.

That’s why pandemic bonds are triggered by, for example, the number of patients or the speed of disease spread (a “parametric trigger”). Parametric triggers are usually objectively verifiable, such as how many cases of a disease have been reported in a given time. Once that trigger is activated, the bond gets to work. No further adjustment needed.

Why are catastrophe bonds useful for fighting pandemics?

And that’s what makes pandemic bonds attractive for addressing disease outbreaks: speed. Since pandemic bonds are not triggered by losses, but rather by the actual, real-time spread of the disease, capital can flow much faster than if it had to wait until insurance losses began rolling in. That means near-immediate financial support for health clinics, aid workers, containment efforts, and more.

Indeed, the speed of capital flow to emergency response is crucial for pandemics. Global supply chains and interchange, not to mention the exponential growth in international travel, mean that disease outbreaks can spread much faster and can cause much more widespread damage than in the past. The faster a disease can be nipped in the bud, the fewer people infected – and the less disastrous the outbreak.

Pandemic bonds in the real world

In 2016 the World Bank developed the Pandemic Emergency Financing Facility (PEF), which created, in part, a pandemic catastrophe bond to help provide capital in the event of another disease outbreak in West Africa. The PEF is triggered by number of deaths, speed of disease spread, and the spread of disease across international borders, and provides coverage for six viruses, including Ebola. The program has been supported by private reinsurers as well, including Munich Re and Swiss Re.

You can learn more about the PEF here.

First ever flood risk catastrophe bond launched

On July 16, FEMA launched its first catastrophe bond to transfer risk from the National Flood Insurance Program (NFIP) to the capital markets, reports the Artemis blog. This will be the first catastrophe bond to solely provide reinsurance coverage for flood risks.

FEMA is seeking $275 million of reinsurance protection from a FloodSmart Re Ltd. (Series 2018-1) issuance. FloodSmart Re, a Bermuda domiciled special purpose insurance vehicle, will seek to issue two tranches of notes that will be sold to insurance linked securities funds to collateralize underlying reinsurance agreements to cover a portion of the National Flood Insurance Program (NFIP) U.S. flood exposure.

The transaction will cover NFIP losses from flood events that are directly or indirectly caused by a named storm event impacting the United States and also Puerto Rico, U.S.  Virgin Islands and District of Columbia.

Ebola outbreak in the Congo may be eligible for pandemic catastrophe bonds

The unfolding outbreak of the Ebola virus in the Democratic Republic of Congo may activate pandemic catastrophe bonds, said a recent Artemis blog post.

Last year, the World Bank launched a “pandemic bond” to support the Pandemic Emergency Financing Facility (PEF). The cat bonds are designed to payout when an outbreak gets to a stage where emergency aid financing would be required, enabling the mobilization of capital rapidly to help prevent further spread of any eligible disease outbreak.

Pandemic cat bond notes cover a range of pandemic perils including, Coronavirus, Crimean Congo Hemorrhagic Fever, Filovirus, Lassa Fever and Rift Valley Fever, with Ebola falling within the Filovirus category.

The current Ebola outbreak appears to be an eligible event under the terms of the transaction, although it’s probably too early for a formal announcement. The number of confirmed deaths remains well below the trigger point which can only begin to payout for a Filovirus like Ebola once the confirmed deaths pass 250.

Pandemics are one of the most certain uninsured risks in the world today, according to the World Bank site. There’s a high probability that the world will experience a severe outbreak in the next 10 to 15 years that could destabilize societies and economies. The annual global cost of moderately severe to severe pandemics is roughly $570 billion, or 0.7 percent of global income. The cost of a severe pandemic like the 1918 Spanish flu could total as much as 5 percent of global GDP.

CA Workers Comp Earthquake Cat Bond Launched

Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.

This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 — Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.

Artemis blog says:

The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”

The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.

While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.

The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.

An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.

A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.

The report  suggested that the losses would affect 15.6 million employees working during a major earthquake.

Check out I.I.I. facts and stats on workers compensation insurance.

New York MTA in Storm Surge Catastrophe Bond First

Superstorm Sandy highlighted the enormous risk of storm surge along the Gulf and Atlantic coasts, so we’re interested to read that the captive insurer of the New York Mass Transit Authority (MTA) has accessed the capital markets to cover it in the event of storm surge resulting from a named storm.

Artemis blog reports that this is the first time in the history of the catastrophe bond market that a transaction has provided cover just for storm surge:

Hurricane and tropical storm induced storm surge is included in many U.S. wind cat bonds, so it is not particularly diversifying, but it has never been structured into a cat bond as the sole peril in this way and is an interesting addition to the market that could spur more issuance of storm surge cat bonds. It’s another sign of the increasing maturity and flexibility in the cat bond market, as well as the increasing appetite investors are showing for catastrophe risk.†

Artemis adds that the sponsor, the captive insurer of the New York Mass Transit Authority (MTA), has significant exposure to storm surge, as evidenced by the losses it faced from last year’s hurricane Sandy:

The MTA suffered a loss in the region of $5 billion from the storm, predominantly from surge due to flooded transit tunnels and subways, so it is encouraging to see it turn to the catastrophe bond market for a new source of reinsurance protection.†

The $125 million catastrophe bond will be issued by First Mutual Transportation Assurance Co. (FMTAC), the MTA’s captive insurer and sold via MetroCat Re Ltd, a Bermuda domiciled special purpose insurer.

Artemis says the deal offers protection against named storms that generate a storm surge event index that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B. Area A includes tidal gauges located in The Battery, Sandy Hook and Rockaway Inlet, while Area B includes tidal gauges in East Creak and Kings Point.

Business Insurance has more on this story.

Check out I.I.I. facts and statistics on catastrophe bonds.

Isaac and Catastrophe Bonds

As Hurricane Isaac hit the Gulf coast as a Category 1 storm, an interesting tidbit came across the wires regarding state-run property insurer Louisiana Citizens Property Insurance Corp.

In a press release, think tank R Street Institute noted that Pelican Re – a $125 million catastrophe bond issued by Louisiana Citizens – would be triggered if the storm produces more than $200 million in losses for the residual market entity.

If these conditions are met, Isaac would be the first storm ever to trigger a catastrophe bond issued by a state-run insurer.

Over at Artemis blog, there was more discussion:

Pelican Re does not cover pure flood damage so that is in its favour, however we believe storm surge caused by hurricane is covered and wind damage most certainly is. Louisiana Citizens has a great amount of exposure in the coastal areas where hurricane Isaac is currently making the greatest impact. As Pelican Re is an indemnity cat bond it is unlikely we will understand whether there has been an impact for some time as claims come in and losses to Louisiana Citizens are quantified.†

An updated paper on the residual market property plans from the Insurance Information Institute (I.I.I.) notes that a growing number of plans are accessing the capital markets as part of their reinsurance strategy, bolstering their ability to fund losses during hurricane season.

As well as Louisiana Citizens, Florida Citizens also accessed the capital markets in 2012, issuing a $750 million catastrophe bond – making it the largest single peril catastrophe bond in the history of the insurance-linked securities market.

They join a growing list that includes North Carolina’s Beach and Windstorm Plan and the Massachusetts Fair Plan.

For more information on the catastrophe bond market, check out this I.I.I. backgrounder on alternative risk-financing options.