Risk transfer to change the post-disaster trajectory

Back in 2011, Swiss Re's business dedicated to risk transfer for governments was founded around a powerful principle: with risks growing, countries needed new options to move from reacting to natural disasters after they struck to proactively preparing for them, enabling faster recovery while building resilience

A few things have changed over the past 15 years. What was originally known as Swiss Re Global Partnerships is now Swiss Re Public Sector Solutions. And since its early days, PSS has completed more than 1,800 transactions, from Caribbean hurricane protection and financial backstops for African pastoralists to covers for energy projects needed to drive economic growth.

What hasn't changed is Public Sector Solutions' purpose: partnering with governments, international institutions and the broader public sector community on solutions that build long-term financial and societal resilience. That's a lot better than simply waiting for bad stuff to happen and picking up the pieces.

This enduring purpose is why we're so eager to talk about an innovative risk-transfer solution that we at Swiss Re call insurance-linked loans (ILLs). They are designed to provide peace of mind and meaningful financial breathing room to nations that carry sovereign debt while also being vulnerable to natural catastrophes that can place extreme strains on their finances.

No country should be forced to choose between servicing development loans and helping hurricane- or earthquake-stricken residents recover. With ILLs, we have an efficient, cost-effective protection solution that can take over loan payments for countries hit by qualifying disasters, freeing up cash for recovery efforts.

On a recent episode of Swiss Re's Risk REconsidered podcast, we discussed a real-life case study illustrating what can happen when disasters hit countries without pre-arranged disaster finance. When Hurricane Ivan hit Grenada in the Caribbean in 2004, it precipitated financial and humanitarian hardships that persisted for years. Grenada defaulted on its debt obligations twice during the following decade.

Lenders, including multilateral development institutions and governments, realised that something new was needed. What followed was a debt restructuring process that introduced hurricane clauses in 2015, and eventually the broader emergence of so-called "pause clauses", which allow a country with sovereign debt to suspend loan payments for a period following a disaster, helping prevent an acute natural catastrophe from becoming a prolonged financial catastrophe.

We think pause clauses are an important development. Even so, they are not permanent debt relief, but rather a mechanism that pushes debt obligations into the future. That's why we believe the true risk transfer provided by insurance-linked loans is a powerful additional tool that can make a difference without forcing countries into a painful choice: debt service or disaster relief.

Sometimes we are asked whether a year or two of permanent debt relief can free up enough funds to make a difference when disaster strikes. The answer is clearly yes. According to our analysis, an insurance policy embedded in a loan to cover debt service can meet a significant share of a country's immediate emergency liquidity needs, based on benchmarks that factor in total recovery costs and GDP.

But here's a more concrete way to look at it: take a country whose annual debt service comes to USD 5 billion. An insurance policy covering just 1% of that amount would make USD 50 million available for immediate relief if a natural catastrophe triggered the policy.

That's money that can potentially support the immediate emergency response, community infrastructure repairs or even direct aid to affected individuals. It's not hyperbole to say that insurance embedded within sovereign debt to provide permanent relief can change a country's post-disaster trajectory for the better.

We wrote at the outset that a few things have changed since Swiss Re created Public Sector Solutions. Fortunately, the same goes for the concept behind insurance-linked loans. A decade ago, many officials at organisations and institutions at the heart of international development, as well as many governments, were largely unfamiliar with the idea, asking: "What are you talking about?"

Today, however, people get it. The question has become: "How do we do it?" We think that's great progress, and it's why we want to engage more deeply with our partners on ways to deploy insurance-linked loans to better protect countries with sovereign debt from a wide array of risks. 

The potential to make a difference is massive.