Catastrophe finance innovators turn attention to pandemics

by Jasper Cox

The World Bank’s pandemic bond has had a bad crisis. It was designed as part of a scheme to transfer cash quickly to poor countries when an epidemic was spreading, but before it reached epic proportions. But its complicated structure meant the release of funds was only triggered on April 17, when Covid-19 was already rampant around the world. Cue much attention and criticism across the financial press.

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Treating the humanitarian aid sector as one that is ripe for financialised solutions, and where perhaps private investors stand to profit, incites controversy. This is particularly true when, as with the pandemic bond, investors receive a high coupon (11.1% plus six-month dollar Libor on one of the tranches).

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Transferring this idea to pandemics presents difficulties. Resilience bonds are designed for discrete events like hurricanes, rather than something like a pandemic, which has a different timescale. In addition, measuring and modelling the expected reduction in loss thanks to infrastructure to protect against a natural disaster would be easier than doing it for a policy related to pandemics.

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It will be difficult to ensure funds can be released at the right time while at an acceptable price. Focusing on prevention rather than purely reaction is also essential.

But it is time for the best minds to get their heads together.