The UK Government’s Department for International Development (DFID) and Global Parametrics have agreed in principal to support the world’s first pure-volcano catastrophe bond, launched by the Danish Red Cross.
Global Parametrics, a parametric and index-based risk transfer startup backed by the UK and German governments, advised the DFID’s Natural Disaster Fund (NDF) to provide some of the capital to back the cat bond.
NDF has been granted an option giving it the first right to subscribe for up to $5 million of the issued volcano cat bond notes.
It is anticipated that the total size of the volcano cat bond issue will be around $10-15 million.
By issuing a privately placed catastrophe bond, the Danish Red Cross, with support from the British Red Cross, is aiming to tap into investor appetites for insurance-linked securities (ILS) to secure contingent financing to support its work around the world.
Additionally, the Red Cross said that it recognises the potential benefits of parametric triggers backed by efficient ILS capital as a way to secure funding where capital and capacity can be delivered quickly and effectively to support the best possible humanitarian response, after disaster strikes.
“Cat bonds are steadily proving their position as alternative investment strategies and an innovation such as the new volcano catastrophe bond will not only support asset class diversification, but enable investors to demonstrate their commitment to ESG-led investments by supporting the resilience of communities that are vulnerable to the effects of volcanic eruptions,” said Hector Ibarra, CEO of Global Parametrics and the Portfolio Manager of the NDF.
“Our partners at the Red Cross have created one of the most relevant and system-changing solutions in the humanitarian aid universe as well as driving the development of new, relevant insurance-linked securities,” he continued. “We are proud to support this huge step forward.”
The mechanism underpinning the cat bond tiers the parametric triggers across three determined ash plume heights from a volcano.
Mitiga Solutions, a volcanological organisation spun out of the Barcelona Supercomputer Centre, has developed the long-term hazard assessments to calculate the pay-out formulae that would apply following a trigger event.
Ongoing work will include early warning eruption notifications as well as post-eruption risk scenarios for volcanic ash impacts, enabling the Danish Red Cross to quickly identify and allocate proceeds from the cat bond to those most in need.
Birgitte Bischoff Ebbesen, International Director, Danish Red Cross, commented: “The volcano cat bond has the potential to be a game changer, as we, with this promising initiative, explore a new approach of engagement between the humanitarian and the financial sector in a mutually beneficial way; ensuring quick response to people affected by volcanic eruptions.
“With underling support from dynamic partners like NDF and Global Parametrics, the Red Cross is creating new opportunities for global capital markets to invest in value-driven humanitarian aid,” she added.
Adam Bornstein, Global Innovative Finance Delegate for Danish Red Cross further stated: “Whereas most cat bonds pay out after a risk event has created a loss, our volcano cat bond pays out before ash hits the ground and serious loss occurs.
“With this cat bond, we’ve leveraged the funding attributes of insurance with the benefits of early action protocols – the world’s first blended cat bond.”
Finally, Rachel Turner, Director Economic Development at DFID, said: “This is an innovative programme that takes a huge step in the shift to preparedness which is vital to building resilient communities.
“The programme showcases the value that both Global Parametrics and the NDF brings to this nascent sector, but also the active, innovative and solutions-driven nature that the Danish Red Cross has imbued, an approach that is required from partners to tackle such challenges.”