Lessons for a post-COVID-19 world
I am Italian and my cousin is on the front-line of the war against COVID-19 working as a reanimation anesthesiologist in Northern Italy. Thankfully, Italy's curve seems to be flattening and my cousin, while still dealing with many critical cases, is safe for now. But across the world the 'wins' are fragile and in some countries, it will get worse before it gets better.
Much has been said already about the virtuous pathway to an 'exit ramp', that allows us to leave this global epidemic behind us for good. Only a mobilisation on a global scale will allow us to make our way to that exit ramp; any population left behind could be the epicentre of a new virulence. Surely, that's enough incentive for global action, aside from the obvious moral imperative.
Undoubtedly, the COVID-19 pandemic is testing our resilience, like no other event in the post-World War era, highlighting strengths in the world's response but also ruthlessly exposing weaknesses. Macroeconomically, the deep impact on the global economy should not surprise us: even before COVID-19 the world was less resilient to absorb exogenous shocks of this magnitude. Excessive debt, lack of growth-enhancing reforms and monetary policy pushed beyond its limit have led to many countries becoming more vulnerable over the last decade.
Our collective lack of preparedness to contain this pandemic should make us take stock. Unlike natural disasters, which have regional impacts at most, and occasionally reverberate in short-lived sector specific shocks, COVID-19 allows us to compare the risk management response across countries as the pandemic sweeps the globe. Early observations suggest that pandemic preparedness exists in pockets, elsewhere it is inadequate or made up on the fly.
Pandemic Emergency Financing - A first of its kind
Three years ago, the World Bank imagined a better global pandemic response, especially in the context of securing support for the most vulnerable countries. In collaboration with the World Health Organisation (WHO), the World Bank designed an innovative response mechanism, the Pandemic Emergency Financing facility (PEF), featuring a $425 million parametric insurance coverage against infectious disease outbreaks. The PEF's risk was placed with investors and (re)insurers. Swiss Re Capital Markets acted as joint structurer and sole bookrunner of the cat bond.
On 17 April that coverage was triggered by the virus outbreak and will pay out $196 million to the World Bank, the full limit allocated to this specific peril. The money will be used to support the public health response in the neediest countries, in collaboration with agencies such as the United Nations.
Now that we witness the world struggling to respond to the current pandemic, what reflections can we offer on PEF as a viable complement to the existing measures?
Bold ambitions at its core
Alas, the global response to COVID-19 did not prevent a pandemic, and neither did the PEF. But the World Bank's effort on PEF showed us an alternative model for pandemic emergency response that challenges the status quo on transparency and economic value.
The bold ambition behind the PEF was to accelerate the response to outbreaks of viruses most likely to cause a pandemic, including new influenza, Coronavirus, Ebola and others. Specifically, it aimed to overcome the typical delays of post-event donation-based response funding for the world's most vulnerable countries. It did so by establishing a novel parametric insurance cover that would tap into a different source of grant financing and established it ex-ante with clear trigger and payout mechanisms. Its trigger criteria focused solely on cases (as reported by WHO) in 140+ of the poorest countries, most of which, as we know, have not yet been at the epicentre of the COVID-19 outbreak. The core of the cover design was speed of disbursement to these target countries rather than curbing the spread of the disease.
Indeed, PEF funds have been delivered earlier than the world's humanitarian response to the Ebola outbreak in West Africa in 2014, which is the event that exposed our humanitarian system weaknesses and inspired the work on the PEF. PEF illustrates both the value of challenging traditional emergency response and offers a now-tested proof of concept on how to think more broadly in the future about our collective preparedness.
Clear signals, clear incentives, better effectiveness
I believe that the use of insurance mechanisms to complement emergency response funding is fundamentally sound. The PEF squarely aligns the risk takers incentives with the public health interest. Risk takers hope that an outbreak is quickly contained, in which case their risk capital is safe. In addition, they lose money when the outbreak continues and reaches the pay-out criteria, and thereby fund the response without expectation of reimbursement.
The cost of PEF's insurance puts a price tag on the risk of infectious disease outbreaks, something we are now all learning to better appreciate. Besides the leverage illustrated by the PEF's payout, the sensitivity of market-based risk financing to underlying risk can anchor an efficient mix of risk financing instruments and incentivise risk comprehension and mitigation measures. Unlike debt and donations - the traditional pillars of response to exogenous shocks - risk transfer clearly encourages ex-ante response plans. If anything, COVID-19 reveals that the world could use such plans and should focus on improving their effectiveness over time.
Relative to other perils, pandemic risk modelling is still in its infancy and will remain tricky: pandemics are both frequent and severe. No two outbreaks will look the same because the outcome is reliant upon the interventions on the ground, including timeliness and accuracy of data. Baseline environmental level determinants - such as social norms, nutrition, climate - remain largely untested (see our CUO blog on Swiss Re pandemic modelling). Pandemic outbreaks also know no borders and highlight the systemic nature of such risks. For all these reasons, it's insurability as a peril is limited but there is no substitute for continuing to invest in improving our scientific understanding to better drive our actions.
The PEF did not seek to privatise pandemic response, which will continue to be led by the public sector. It was designed to complement traditional sources of response financing, and to incentivise public investments in preparedness in the process. By leveraging savvy financial innovation, implementing a robust governance framework and setting up a clear protocol for the use of funds before a pandemic strikes, the PEF is an inspiration for the post-COVID-19 world for its anticipation of our collective vulnerability. It remains to be seen whether there is sustained investor appetite for this type of cover going forward and how much 'stable' capacity could be secured over time to establish PEF type instruments as a staple item in the financing mix of public institutions.
I can only hope that the virus does not spread as widely in more vulnerable countries as it has in my native Italy, a G7 nation where over 24'000 people have died, leaving a deep economic, social and moral wound. When we take that 'exit ramp' out of this crisis, and the focus eventually does shift to our resilience building effort, I believe we should continue to explore innovative public - private cooperation and build on the lessons learned from PEF. The principle remains sound, the effectiveness has been tested and the experience gained today will result in improved design choices the next time around. If we act together across countries, business sectors and levels of government we can make our world more resilient. PEF is a step on that journey towards a whole-of-society approach.