It All Started Around A Table In Zurich, Switzerland…
In mid-November 2018, the Danish Red Cross and British Red Cross convened colleagues from Mitiga Solutions (a spin-out of Barcelona Supercomputing Centre), ILS and insuratech adviser REplexus, and a clutch of asset managers to attend a meeting in Zurich, Switzerland.
The outcome of that meeting has resulted in a unique, collaborative, and trusting public-private partnership that, for the past 24-months, has focused exclusively on the design, development, and placement of the world’s first blockchain enhanced parametric volcano catastrophe bond (CAT bond).
All over the world, losses resulting from catastrophic environmental, health and weather-related events require vast sums of financial assistance and humanitarian interventions to rebuild infrastructure and homes, economies and communities, and lives and livelihoods.
In emerging markets, where roughly US$149 billion Official Development Assistance (ODA) and US$29 billion in Humanitarian Assistance exchange hands, annually, the occurrence of catastrophic events regularly wipes out hard-won development and humanitarian gains (OECD, 2019). Indeed, disaster risk models developed by insurance market Lloyd’s of London and RMS, a risk modeling company, suggest that natural catastrophes alone cost the world’s poorest countries on average US$30 billion a year.
Humanitarian organization, like the Danish Red Cross (DRC), where established to aid people and communities at risk. However, over the past decade, humanitarian interventions have become more protracted, expensive, and frequent, such that the quantum of financial risk has jumped exponentially. In fact, the DRC, like almost every humanitarian organisation, is not completely aware of its relative financial and operational risk exposure (i.e. uncovered).
Humanitarian organizations, like UNICEF and the Red Cross, have other tools at their disposal that are commercially viable, regulated, and liquid, such as catastrophe bond (CAT bonds). These risk-transfer ILS mechanisms not only alter how disasters are financed but also reduce the amount of capital required to mitigate loss. Indeed, research from RMS, a risk modeling company, found that for every US$1.00 in insurance premium spent, US$3.50 in humanitarian assistance is saved (RMS, 2018).
Clearly, research alone from RMS is not going to mainstream innovative financing solutions, like CAT bonds, across the humanitarian sector. What is needed are actual ILS products sponsored by the Red Cross and placed with regulated professional investors.
New innovations in technology, such as blockchain, combined with mainstream risk-transfer products, like Insurance Linked Securities (ILS), offer humanitarian organizations an opportunity to anticipate future losses while tapping global capital markets and lessening their exposure to perpetual disaster and conflic t risks.
The most prevalent form of ILS traded on capital markets are Catastrophe Bonds (CAT bonds), a privately placed security that transfers risk of financial loss from a sponsor arising from a catastrophe (i.e. volcanic eruption) to a capital market investor.
To this end, the Danish Red Cross, together with Mitiga Solutions, and REplexus, are sponsoring and developing the world’s first volcano parametric catastrophe bond.
This parametric CAT bond is structured such that the principal is paid to the DRC if specified trigger conditions are met. The trigger for this cat bond is the occurrence of a volcanic eruption as measured by the column height of the ash plume.
The higher the column height, the greater the expected loss, and so the greater the pay out to the DRC; who, together with community stakeholders, can use proceeds to immediately begin a loss mitigation strategy on the ground.