Insurance scheme helps fight epidemics and pandemics

There is little doubt that we will likely experience a severe epidemic outbreak sometime in the future – probably in our lifetime even a global pandemic with the potential to destabilise societies and economies. Even limited epidemic outbreaks have the potential to severely affect economies in terms of sickness-related absenteeism, disrupted work schedules and lost productivity, as the outbreaks of SARS and Ebola showed so dramatically.

There are significant similarities between insuring countries against natural disasters and insuring them against pandemic outbreaks. We have learned from experience that low- and middle-income countries in particular are significantly underinsured. Consequently, when disaster strikes there are not enough financial resources to fund emergency relief and cope with the financial losses, let alone pay for the reconstruction of destroyed assets. It was thus a logical step for the World Bank to develop insurance mechanisms to help their member and client countries to address this challenge, for example through the Turkish Catastrophe Insurance Pool, the Caribbean Catastrophe Risk Insurance Facility, the Pacific Catastrophe Risk Assessment and Financing Initiative and a number of other schemes. However, all of these mechanisms are designed specifically to cover natural catastrophe risks.

Definition
Epidemic: The incidence rate (i.e. new cases in a given human population) of a certain disease substantially exceeds what is "expected", the spread is regionally limited.
Pandemic: An epidemic of an infectious disease that spreads through human populations globally.

The PEF, developed by the World Bank in collaboration with the World Health Organization and other public and private sector partners, and promoted by G7 and G20 countries, is now able to provide the much-needed funding to help prevent rare, high-severity disease outbreaks from becoming more deadly and costly pandemics. Michael Roth, Senior Manager for Public Sector Business Development at Munich Re, said: “Munich Re values the World Bank as a unique partner, acknowledging its outstanding expertise in addressing complex development finance challenges. We are very happy to be one of the drivers of the PEF from the beginning, working with the World Bank on idea generation, concept development, assessment of the insurability of epidemic and pandemic outbreak risks, as well as structuring the insurance component of the PEF.”

Past crises have revealed a critical financing gap between the limited funds available in the early stages of an outbreak and the financial help mobilised once an outbreak has reached crisis proportions. Gunther Kraut, Project Lead for Munich Re’s Global Epidemic Risk Business: “If the PEF had existed in 2014 during the Ebola outbreak, the world could have mobilised necessary funding as early as July to accelerate the emergency response. Instead, money did not begin to flow until three months later – during which time Ebola cases increased tenfold. Donors ended up committing more than US$ 7bn to Ebola response and recovery, and the overall economic impact of the crisis in Guinea, Liberia, and Sierra Leone reached US$ 2.8bn, according to the latest World Bank estimates.”

By guaranteeing more transparency and increasing public awareness, the PEF framework ensures better planning and faster response times. Addressed early, epidemics are – for the most part – containable, with money and support delivered at the right time making a significant difference. Rebecca Cichon, Senior Manager Origination at Munich Re’s Capital Partners unit in Zurich: “The PEF establishes an explicit framework for the flow of funds from risk takers, via the World Bank to implementing agencies and governments for specific actions aimed at containment. It clears the path for a swift, effective response to epidemic and pandemic outbreaks.”   
 
The PEF combines pay-outs from the reinsurance and insurance markets with the proceeds of World Bank-issued pandemic bonds. The bonds are issued under the “capital at risk” programme of the International Bank for Reconstruction and Development (IBRD). The insurance component of the PEF also features swaps that embed the terms of an insurance policy into the PEF. The PEF insurance component was developed with Munich Re and Swiss Re, using modelling provided by AIR Worldwide. 
 
By providing resources swiftly to countries and international responders to contain an epidemic outbreak before it reaches pandemic proportions, the PEF can help save thousands of lives. 
Thomas Thumerer, Senior Manager Structuring at Munich Re’s Capital Partners unit in Munich: “This is one of the most complex and first cat bond transactions of its kind to transfer pandemic risks in such an innovative way to the capital markets. From the initial conceptual idea to the final product, numerous challenges had to be overcome, not least the design of a suitable parametric pay-out trigger.”

Countries eligible for financing under the PEF are members of the International Development Agency (IDA), the arm of the World Bank that provides concessional finance for the world’s poorest countries. The PEF covers the viruses that are most likely to cause a pandemic. These include new Orthomyxoviruses (new influenza pandemic virus A), Coronaviruses (SARS, MERS), Filoviruses (Ebola, Marburg) and other zoonotic diseases (Crimean Congo, Rift Valley and Lassa fever). PEF financing to eligible countries will be triggered when viruses reach a certain level of contagion, including number of deaths, the speed of the disease spread and whether the disease crosses international borders. The trigger points are based on publicly available data as reported by the WHO.

The PEF represents a unique combination of different risk transfer formats to exploit the strengths of each of them in a first-of-its-kind solution. As such, the PEF is an important element for pushing the development of an epidemic risk insurance market. Gunther Kraut: “Presenting investors and (re)insurers with the PEF insurance solution has the potential to support the development of epidemic and pandemic insurance solutions for a broader group of private and public sector entities. Over time, we will increasingly be able to offer our clients a wide range of innovative epidemic risk transfer solutions, thus further strengthening the resilience of societies.”

The PEF will provide more than US$ 500m to cover developing countries against the risk of pandemic outbreaks over the next five years, through the insurance component with a maximum coverage of US$ 425m with the combination of bonds and derivatives, a cash window, and future commitments from donor countries for additional coverage. The insurance component, with premiums funded by Japan and Germany, was developed together with Munich Re and Swiss Re and uses modelling provided by AIR Worldwide. To complement the insurance component, a cash component will be available from 2018, for which Germany provided initial funding of € 50m. It will provide funding for diseases that may not be eligible for funding under the insurance scheme.