A new report from Global Parametrics has noted that, while catastrophe bond structures can be robust and replicated across different triggers and territories, several hurdles still remain to their effective application in the context of humanitarian organisations.
The parametric climate risk insurance provider, part of CelsiusPro Group, has therefore called for a “comprehensive assessment” of risks and organisational objectives to determine whether catastrophe bond adoption can be justified within a humanitarian context.
According to Global Parametrics, humanitarian organisations are starting to adopt climate- and disaster-linked insurance to build more efficient responsiveness in their operations.
“With the frequency and severity of climate-related events increasing, there is now a growing interest in exploring the potential of cat bonds to support emergency support as humanitarian needs outpace available resources,” the firm added.
Global Parametrics continued, “There are various forms of risk transfer modalities available in the insurance and capital markets.
“For comparison, cat bonds and parametric insurance contracts are underpinned by similar objective climate- and hazard-linked triggers for the disbursement of payouts but differ in providing access to two different sources of private sector capital: capital and insurance markets, respectively.”
While stating that the cat bond structure appears robust and replicable across a range of triggers and territories, and has already been piloted in a sovereign context, Global Parametrics said several hurdles still remain for its application within humanitarian organisations.
Namely, Global Parametrics believes that cat bonds may typically be much more expensive than re/insurance for non-peak zones.
From their perspective, humanitarian support in the event of a catastrophe needs to be deployed at speed, and any payout from a bond or reinsurance product must be structured to match this urgency; delays in processing proceeds may significantly reduce their potential value add.
They also note that while cat bonds, re/insurance, and other risk transfer instruments can potentially provide fast liquidity, their adoption can introduce new operational and administrative complexities within humanitarian setups.
Global Parametrics continued, “Cat bonds may be useful for humanitarian organisations in a narrow role, and only after other cheaper options have been explored.
“While there is some momentum to pre-arrange finance, cat bonds for non-peak perils may be costly, requiring very large limits with high recurring costs that can crowd out core donor-funded programs.
“They may make economic sense only above what re/insurance can cover efficiently. Even then, their value depends on fast, pre-agreed spending plans.
“Adding on other organisational complexity involved in integrating risk transfer instruments in general, cat bonds are unlikely to be the initial choice for the sector’s financing challenges. They could risk becoming an expensive distraction rather than an effective pre-arranged financial instrument.”
Simant Verma, Disaster Risk Finance and Insurance Principal at Global Parametrics and author of the report, commented, “Cat bonds are one part of a suite of financial instruments, and an optimal combination of these instruments is how many humanitarian organisations are financing emergency response and recovery.
“With increasing frequency and severity of climate-linked hazards, cat bonds may play a part in finding a sustainable solution to the problem of humanitarian financing. But humanitarian organisations may consider all their merits, and these should include a range of other options.”
Mark Rueegg, Chief Executive of CelsiusPro, said, “The decision to adopt a particular financial instrument should be preceded by a comprehensive assessment of risks and organisations objectives.
“Such an assessment can ensure a targeted engagement with capital (and (re)insurance) markets when the time, and rationale, is right.”
