Coronavirus and Catastrophe Bonds: The Securitization of Catastrophic Risk in a Time of Pandemic

The rapid spread of COVID-19 since its initial appearance in Wuhan, China in November of 2019 has witnessed a variety of responses to the virulent disease by numerous governments globally. These responses have ranged from incredibly stringent and effective, such as the decisions of Prime Minister Ardern and her government that have allowed New Zealand to recently declare itself free of the virus, to the callous lack of concern of President Trump and his administration that led the United States to become the global leader in terms of infection and deaths from the disease.

While there has been a great deal of coverage and discussion of these actions, or lack thereof, in the face of the crisis, one area of response that has received scant attention is the relationship between COVID-19 and the securitization of catastrophic risk. Specifically, what the outbreak of this particular novel coronavirus tells us about ongoing processes focused on transforming catastrophic risk exposure. These processes include the securitization of catastrophic risk, such as vulnerability to the outbreak of pandemic diseases, into catastrophe bonds (cat bonds) and other types of insurance-linked securities (ILS) and transferring that risk to the global capital markets. Despite the increasing spread and adoption of ILS and cat bonds by a variety of state and non-state actors, including most notably the World Bank, the turn towards policies that treat the symptoms of exposure to catastrophic risk do not directly address the deeper roots of that vulnerability. This is especially so as ILS and cat bonds can act as sources of global systemic financial risk. More troubling is the contradiction implicit in the turn towards technocratic ‘solutions’, like securitization, given the historical legacy of exploitation of the most vulnerable and the production of that vulnerability which processes of securitization are built upon.

Just as COVID-19 is a novel coronavirus, ILS and cat bonds are novel insurance-finance instruments that attempt to provide protection to governments, particularly those in the global south, by allowing them access to a form of insurance powered by global capital flows. In exchange, investors both diversify their holdings into securities that are lowly correlated with general economic trends and gain access to greater sources of yield.The turn towards ILS and cat bonds as a mechanism to address catastrophic risk through processes of securitization has witnessed widespread adoption globally since the first bonds came to market in the early-to-mid 1990s. Since that time the number of bonds as well as the types of risk they allow investors to buy has also expanded.

ILS grew to include securitized pandemic disease risk with the establishment of the World Bank’s Pandemic Emergency Financing Facility (PEF) in 2016 and the launch of the first pandemic bonds in 2017. The PEF was created in the aftermath of the 2014 Ebola crisis as a mechanism to help vulnerable states leverage global capital markets to supplement their capacities to respond to future pandemic disease outbreaks. The 2017 pandemic bond issued $325 million USD worth of notes to investors therefore providing the PEF with $325 million worth of insurance protection in the event of a pandemic. In such as scenario, the PEF then distributes the funds to assist member states of the International Development Association (IDA) stricken by outbreaks.

The spread of COVID-19 resulted in just such a scenario and prompted the transfer of approximately $195 million of the bond holders’ capital to the PEF to help IDA member states address the crisis. Despite the default of the PEF’s inaugural bond due to COVID-19, proponents of the securitization of catastrophic risk argue that the global pandemic has demonstrated the utility of these instruments. However, pursuing further securitization of catastrophic risk in light of the COVID-19 crisis should be challenged.

The securitization and transfer of catastrophic risk, including pandemic disease risk, is not a panacea nor even necessarily an effective choice in terms of strategy. As some analysts have observed, the PEF’s pandemic bond is largely ineffective in terms of the level of assistance provided to IDA member states to address the COVID-19 pandemic.

Additionally, the transfer of catastrophic risk to the global capital markets does not actually address the root causes of vulnerability to diseases like COVID-19. Efforts that rely upon global capital pushes further integration of those forces that helped produce that vulnerability in those societies in the first place; vulnerability to pandemic diseases is linked to the historical legacy of structural adjustment programs (SAPs). Connecting these processes with the development of the global economy means that larger structural questions on the root causes of vulnerability to pandemics are left out of the conversation. In their place, attention has been directed towards technocratic approaches like ILS and cat bonds which rely upon the production of that very vulnerability to securitize catastrophic risk.

This contradiction which lies at the heart of technocratic approaches to future catastrophes demonstrates why we must rethink the securitization of catastrophic risk. As the global pandemic continues to spread it has created a great deal of discussion on how best to protect the most vulnerable from future outbreaks of disease and the World Bank has already begun work on the PEF 2.0. Rethinking this contradiction must be part of these ongoing discussions as ILS and cat bonds continue to evolve in a COVID-19 world.