A chunk of private investors’ money will pay for COVID-19 response efforts in developing countries after a World Bank pandemic insurance scheme criticised for its stringent thresholds finally paid out.
Devised after the 2013-2016 outbreak of Ebola in West Africa cost more than 11,000 lives and took $3 billion to contain, the scheme emerged in 2017 as a World Bank financial instrument designed to pay investors a return as long as various types of disease did not flare up. Under the terms of the bond, which was oversubscribed, the World Bank would get some or all of the capital for medical response if a pandemic did happen.
The 2018-2020 Ebola outbreak in the Democratic Republic of Congo did not spread far enough to trigger a payout, prompting one critic to write of the PEF: “It was a good deal for investors, not for global health”.
Specific criticisms, including an October 2019 study by the London School of Economics, included allegations the PEF was too slow, did little to strengthen public health systems, and its thresholds were set so high it ended up only benefitting private investors and consultants.
But the COVID-19 pandemic has now met every requirement in the 386-page rulebook for the deal, wiping out the capital of those who bet on the riskier tranches of the investment scheme, before the end of the three-year deal in July. The whole package offered a maximum of $425 million in payments, for various disease scenarios.
Steve Evans, owner of insurance-linked securities (ILS) publication Artemis.bm said the COVID-19 payout demonstrated how donor aid funding could be leveraged alongside the capital markets to improve the response to a “world-changing” event.
Adil Imani, a manager at AIR Worldwide, a risk modelling company contracted by the World Bank to help design the PEF, said: “We believe this could very well be a catalyst for parties throughout the risk transfer chain to explore ILS as an avenue to better protect themselves against these types of events.”
Insurance-linked securities like the PEF allow companies and governments to insure against natural “perils”. A related World Bank scheme delivered payouts to Caribbean countries hit by hurricanes in 2017.
The PEF was a “one-of-a-kind” in the market, said Evans of Artemis, bundling the hard-to-model risks of flu, Ebola, and other diseases into a kind of shared insurance scheme for over 70 developing countries, with its premiums paid by major donors.
The PEF thresholds are an example of parametric insurance: a set of parameters – deaths, countries affected, rates of increase in cases – determine if an event is severe enough to trigger a payout. The more likely the event, the greater the annual interest (or “coupon”) payments are.
Daniel Clarke of the Centre for Disaster Protection, a UK-funded policy unit focused on better international risk management, said it was “extremely positive news that the PEF has finally been triggered”. However, he said he would be watching whether the money actually goes to the “very poorest or fragile countries”.
Clarke, co-author of a book on hazard insurance called Dull Disasters, told TNH via email: “We need to stop 'doing' seemingly innovative finance to low-income countries without engaging governments, people, and communities... to ensure that financing like the PEF does actually protect the most vulnerable in sensible ways."
As well as the interest fees, critics of the PEF have pointed to hefty legal, advisory, and handling fees ultimately paid by the taxpayers of Japan, Germany, and Australia, the backers of the experiment. Total costs of the insurance scheme stood at $114.5 million at the end of 2019, including interest payments – pegged as much as 11 percent above international base rates – of about $37 million per year.
Evans of Artemis said the experiment had largely been a success, showing the potential of capital markets to help diversify risk, even for situations that are particularly complicated to model. He said the prospectus had always been clear about the time lag in triggering payouts.
While acknowledging that the “money-printing” in response to COVID-19 made the amount seem less impressive, he said “the clear winners are the countries that will get some additional funding”.
Last year, the World Bank was considering “PEF 2.0”.
Evans warned it would be hard to repeat the venture, as the pricing of insurance-linked securities for pandemics next year might run a lot higher.
Whatever its strengths and weaknesses, he added, the PEF is “paying out a lot more than anybody ever paid into it in premiums”.
– Ben Parker