Pandemic Bonds

The World Bank is trying to insure against one of the worst crises in the world: a pandemic.  The Economist reports that the World Bank:

…has issued $425m in pandemic bonds to support its new Pandemic Emergency Financing Facility (PEF), which is intended to channel funding to countries facing a deadly disease.  The bonds cover six viruses likely to spark outbreaks: new influenza viruses, coronaviruses (like SARS and MERS), filoviruses (like Ebola), Lassa fever, Rift Valley fever and Crimean Congo fever. Investors forgo their principal when a virus reaches a predetermined contagion level, based on rate of growth, number of deaths and whether it crosses international borders. The facility covers 77 of the world’s poorest countries.

The World Bank FAQ are here.  These FAQ’s provide some interesting precedents in the world of catastrophe bonds.

One example is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), designed to provide participating countries with access to affordable and effective coverage against natural disasters. Another example is the Pacific Catastrophic Risk Facility (PCRAFI), a risk insurance pool of five small Pacific islands that was also incubated by the Bank. A third example is the Turkish Catastrophe Insurance Pool (TCIP), a mandatory scheme for homeowners’ earthquake insurance, which was backed by WBG financing at inception.

This is a interesting proposal to help developing countries secure funding in the case a pandemic occurs.  However, if the World Bank invests these funds, one may wonder whether financial markets would crash in the case of a large scale pandemic resulting in an insolvent fund.  Let’s hope that does not happen, but I am curious what precautions were taken to avoid this scenarios.

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