Fighting Emerging Pandemics With Catastrophe Bonds

By Dr. Gordon Woo, catastrophe risk expert

When a fire breaks out in a city, there needs to be a prompt firefighting response to contain the fire and prevent it from spreading. The outbreak of a major fire is the wrong time to hold discussions on the pay of firefighters, to raise money for the fire service, or to consider fire insurance. It is too late.

Like fire, infectious disease spreads at an exponential rate. On March 21, 2014, an outbreak of Ebola was confirmed in Guinea. In April, it would have cost a modest sum of $5 million to control the disease, according to the World Health Organization (WHO). In July, the cost of control had reached $100 million; by October, it had ballooned to $1 billion. Ebola acts both as a serial killer and loan shark. If money is not made available rapidly to deal with an outbreak, many more will suffer and die, and yet more money will be extorted from reluctant donors.

Photo credits: Flickr/©afreecom/Idrissa Soumaré

An Australian nurse, Brett Adamson, working for Médecins Sans Frontières (MSF), summed up the frustration of medical aid workers in West Africa, “Seeing the continued failure of the world to respond fast enough to the current situation I can only assume I will see worse. And this I truly dread”

One of the greatest financial investments that can be made is for the control of emerging pandemic disease. The return can be enormous: one dollar spent early can save twenty dollars or more later. Yet the Ebola crisis of 2014 was marked by unseemly haggling by governments over the failure of others to contribute their fair share to the Ebola effort. The World Bank has learned the crucial risk management lesson: finance needs to be put in place now for a future emerging pandemic.

At the World Economic Forum held in Davos between January 21-24, 2015, the World Bank president, Jim Yong Kim, himself a physician, outlined a plan to create a global fund that would issue bonds to finance important pandemic-fighting measures, such as training healthcare workers in advance. The involvement of the private sector is a key element in this strategy. Capital markets can force governments and NGOs to be more effective in pandemic preparedness. Already, RMS has had discussions with the START network of NGOs over the issuance of emerging pandemic bonds to fund preparedness. One of their brave volunteers, Pauline Cafferkey, has just recovered from contracting Ebola in Sierra Leone.

The market potential for pandemic bonds is considerable; there is a large volume of socially responsible capital to be invested in these bonds, as well as many companies wishing to hedge pandemic risks.

RMS has unique experience is this area. Our LifeRisks models are the only stochastic excess mortality models to have been used in a 144A transaction, and we have undertaken the risk analyses for all 144A excess mortality capital markets transactions issued since the 2009 (swine) flu pandemic.

Excess mortality (XSM) bonds modeled by RMS  
Vita Capital IV Ltd 2010
Kortis Capital Ltd 2010
Vita Capital IV Ltd. (Series V and VI) 2011
Vita Capital V 2012
Mythen Re Ltd. (Series 2012-2)XSM modeled by RMS 2012
Atlas IX Capital Limited (Series 2013-1) 2013

With this unique experience, RMS is best placed to undertake the risk analysis for this new developing market, which some insiders believe has the potential to grow bigger than the natural catastrophe bond market.

Catastrophist, RMS
Gordon is a catastrophe-risk expert, with 30 years’ experience in catastrophe science, covering both natural and man-made hazards. Gordon is the chief architect of the RMS terrorism risk model, which he started work on a year after joining RMS in December 2000. For his thought leadership in terrorism risk modeling, he was named by Treasury & Risk magazine as one of the 100 most influential people in finance in 2004. He has since lectured on terrorism at the NATO Center of Excellence for the Defense against Terrorism, and testified before the U.S. Congress on terrorism-risk modeling. As an acknowledged, international expert on catastrophes, Gordon is the author of two acclaimed books: “The Mathematics of Natural Catastrophes” (1999) and “Calculating Catastrophe” (2011). Dr. Woo graduated as the best mathematician of his year at Cambridge University and he completed his doctorate at MIT as a Kennedy Scholar and was a member of the Harvard Society of Fellows. He also has an Master of Science in computer science from Cambridge University.

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