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Reinsurance industry helps World Bank secure $500m pandemic facility backing

29th June 2017 - Author: Luke Gallin

The global reinsurance industry has collaborated with and assisted the World Bank’s launch of specialist bonds to support the $500 million Pandemic Emergency Financing Facility (PEF), which is designed to rapidly disburse funds to eligible countries facing a major disease outbreak.

The World Bank logoIn response to the high financial, social and economic loss driven by outbreaks of infectious disease, such as the 2014 Ebola outbreak in West Africa, the PEF was announced in 2016 by the World Bank as a facility designed to channel funding to member countries of the International Development Association (IDA) facing a major disease outbreak.

The World Bank has now announced that with the help of the global reinsurance industry and the broader risk transfer markets it has launched specialist bonds, also known as catastrophe bonds, designed to provide financial support to the PEF.

The facility will provide over $500 million of cover to IDA countries against the risk of pandemic outbreaks over a period of five years, and is the first time World Bank bonds are being utilised to finance efforts against infectious disease outbreaks.

World Bank Group President, Jim Yong Kim, commented; “With this new facility, we have taken a momentous step that has the potential to save millions of lives and entire economies from one of the greatest systemic threats we face.

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“We are moving away from the cycle of panic and neglect that has characterized so much of our approach to pandemics. We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world’s poorest people.

“This creates an entirely new market for pandemic risk insurance. Drawing on lessons from the Ebola Outbreak in West Africa, the Facility will help improve health security for everyone. I especially want to thank the World Health Organization and the governments of Japan and Germany for their support in launching this new mechanism.”

Launched in May 2016 at the G7 Finance Ministers and Central Governors meeting in Sendai, Japan, the financing structure works through a combination of bonds and derivatives, a cash window, and “future commitments from donor countries for additional coverage,” explains the World Bank.

The transaction was actually oversubscribed by 200%, underlining the positive response from the investor community, and enabled the World Bank to price the deal below initial guidance from the marketplace, with the total volume of risk transferred to the market via derivatives and bonds standing at $425 million.

Of the $425 million transferred to the global risk transfer market, $320 million is in the form of pandemic catastrophe bonds, with an additional $105 million of pandemic risk linked swaps, or derivatives.

So it’s apparent the core of the financial support for the PEF is from the capital markets, so catastrophe bond investors, the insurance-linked securities (ILS) market, and other institutional investors such as pension funds. This in turn suggests that global reinsurers such as Swiss Re, Munich Re and GC Securities, which have announced their support of the facility, didn’t actually put up the bulk of the capacity, with their roles being more focused on facilitation and acting as service providers.

Group Chief Executive Officer (CEO) of international reinsurer Swiss Re, Christian Mumenthaler, said; “We are very proud to have supported the World Bank over the past two and a half years in the endeavor to build an innovative insurance vehicle to better respond to epidemic outbreaks. Swiss Re was co-mandated by the World Bank to develop and design the “insurance window” of PEF and lead the marketing efforts of the transaction in its role as sole book-runner for the capital market placement.

“The combined derivative/capital markets structure is just one of many pioneering elements of this transaction. Addressing one of the world’s most systemic risks, it underpins Swiss Re’s commitment to making the world more resilient and its continued leadership in the insurance linked securities market.”

Swiss Re and global reinsurance giant Munich Re developed the PEF’s insurance window in cooperation with the World Bank Treasury, with GC Securities also acting as a service provider for the transactions. The facility consists of two windows, with the first, an insurance window, having premiums funded by Japan and Germany, which includes bonds and swaps.

The second window is a cash window, and will come into action from 2018 “for the containment of diseases that may not be eligible for funding under the insurance window,” explains the World Bank.

Chairman of the Board of Management of Munich Re, Joachim Wenning, said; “The PEF shows how close collaboration between the public sector and insurers can help limit the negative effects of catastrophes in developing countries. Munich Re is proud to have played a major part in this proactive and reliable financing mechanism from the very beginning.

“I’m confident that our core competences in risk modelling, identification and management will further this very good cause – strengthening the resilience of companies and societies alike. We truly hope that the PEF will become a sustainable and integral part of a global health architecture to make our planet more resilient to dangerous epidemic and pandemic risks.”

Pandemics often occur in places with very low insurance penetration that is a result of numerous factors, including a lack of awareness, inadequate modelling as a result of minimal data, and low incomes where insurance simply isn’t a priority when compared with food and shelter.

Furthermore, pandemics are among the most likely uninsured risks around the world to take place, with the annual cost of moderately severe to severe pandemics at an estimated $570 billion, according to data from the World Bank.

The PEF is designed to cover six viruses that are the most likely to result in a pandemic. The World Bank explains that this includes new Orthomyxoviruses (new influenza pandemic virus A), Coronaviridae (SARS, MERS), Filoviridae (Ebola, Marburg) and other zoonotic diseases (Crimean Congo, Rift Valley, Lassa fever).

When an outbreak reaches predefined levels of contagion, which is linked to the number of deaths, the speed the disease spreads, and if the disease crosses international borders, PEF financing for eligible countries is triggered, and funds are disbursed rapidly.

Thomas Blunck, member of Munich Re’s Board of Management, said; “In any case of a pandemic outbreak, time is of the essence: With a robust global risk management facility in operation, funds will be released much more quickly to countries and qualified international responding agencies. This will allow and facilitate effective countermeasures.”

While Peter Hearn, President and CEO of Guy Carpenter, added; “Our capital agnostic perspective delivers an innovative combination of catastrophe bonds and swaps, giving the World Bank a diverse range of cost-effective risk transfer products supported by both capital markets investors and traditional (re)insurers.

“This facility will enhance funding for emergency response and give ILS investors and (re)insurers greater access to a non-correlating class of risk, and we are honored to have assisted the World Bank with implementation of its financing.”

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