Insurance scheme helps fight epidemics and pandemics
The world was unprepared for the Ebola crisis in West Africa in 2014. The international response was too slow in coming, thus failing to avoid a humanitarian and economic disaster for the countries affected. This should not happen again: with the Pandemic Emergency Financing Facility (PEF) launched by the World Bank with the support of Munich Re, Swiss Re and GC Securities, a division of MMC Securities LLC, the global community will have an effective instrument for a swift pandemic response – saving lives and limiting the adverse economic impact.
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.
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.
Much-needed surge funding
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.”
A vital pillar in global healthcare
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.”
In case of need
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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.