Transferring Outbreaks and Epidemics Risk to the Capital Markets
Transferring African Sovereign risk for Outbreaks and Epidemics to the Capital Markets through the implementation of parametric insurance solutions
Robert Agyarko, Expert in Public Health, Lead Advisor on Outbreaks and Epidemics (O&E) for the African Risk Capacity (ARC)
- Recover (Improve health & economic system resilience), such as: Best protective interventions, especially for vulnerable populations, Avoid/mitigate negative second-order consequences, Integrate true costs of pandemic risk into economic systems
Amid high mortality rates and social disruption, the financial and economic damage of outbreaks and epidemics is devastating. Epidemics exacerbate economic and social vulnerabilities, slash investment, hamper private-sector growth; threaten food security and agricultural value chains; and burdens cross-border trade with the restrictions of people and goods. The phenomenon is global, a study of the 1968 Flu, SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014), and Zika (2016) indicates that real GDP growth falls by an estimated three percentage points in affected countries.
In Africa, the 2016 Ebola outbreak in West Africa reveals that amid weak health systems, slow and unpredictable funding contributed to the inability of Guinea, Sierra Leone, and Liberia to respond. The World Bank estimates the three countries lost $2.2 billion in GDP in 2015 alone. An earlier response by two months, could have reduced the total number of deaths by 80% in Liberia and Sierra Leone.
Slow and unpredictable financing has also affected Africa’s response to Covid-19. African economies are expected to shrink by 1.4% in GDP, with smaller economies facing contraction up to 7.8% (UNCTAD).
The African region counts with a population of 1.341bn and a fertility rate of 4.7%, the highest of the world.
The final beneficiaries will be the population of African countries through the financial support to their respective countries. As of today, African countries rely mainly on the financial support brought by the international donor community. However, this has proved to be inefficient as support usually comes late and early interventions are key to address social and economic effects.
Through the ARC’s solution, countries will be better prepared to manage this sort of crisis, as capacity building in preparedness, early intervention and contingent financing will be provided. Countries will learn of best practices to improve, react, and finance those strategies. The combination of these activities with a risk transfer solution will strengthen the country’s unique resources to manage these crises.
In addition, and through the activities earlier described, African countries are key partners in the drafting of the final solution. This is one of the main differentiators when ARC’s solution is compared to others that were developed in the past which did not bring countries into the project, but just offered a pre-packaged solution without any feedback from the affected parties.
- Growth: An initiative, venture, or organisation with an established product, service, or business/policy model rolled out in one or, ideally, several contexts or communities, which is poised for further growth
- Software and Mobile Applications
ARC O&E solution will be a public good per se. It will develop a solution for African countries to receive quick financing in case of an outbreak and epidemic. At the end of the day this translates into financial support to protect vulnerable population.
Furthermore, the initiative works towards the United Nations Sustainable Development Goals (SDGs), specifically Goal#3 (Good Health and Well-Being) to ensure healthy lives for all at all ages. The ARC’s initiative addresses directly target 3.D. under this SDG, by strengthening the capacity of developing countries, for early warning, risk reduction and management of national and global health risks.
As mentioned by the UN, before the pandemic, major progress was made in improving the health of millions of people, but more efforts are needed to fully eradicate a wide range of diseases and address many different persistent and emerging health issues. Health emergencies such the current one with COVID-19 pose a global risk and have shown the critical need for preparedness in a scenario of sustainable development throughout the years.
ARC has been providing parametric insurance since its inception. Just for the risk transfer of drought, ARC transferred $64mn in payments since 2014 to a variety of countries. The latest beneficiaries receiving these funds have been Madagascar to cover anticipated losses to livelihoods of its vulnerable population. Also, in 2020, Zimbabwe received financial support through parametric insurance, by the cooperation between ARC and the World Food Program (WFP) for the support of the drought crisis faced that year. Previously, similar successful stories were accomplished for Senegal and Mauritania in two occasions, in addition to the financing of events in Cote de Ivoire, Malawi and Niger. The specifics of paid-outs and their impacts and feedback coming directly from the countries’ responsible bodies and its vulnerable population can be checked at https://www.africanriskcapacity.org/impact/.
The other example that has worked in the event of a pandemic is the World Bank’s PEF. Despite the challenges and the criticism from some parties, the facility deployed quick funds for the world’s more fragile countries. The facility sent $61.4m to contain the 9th and 10th Ebola outbreak in the Democratic Republic of Congo and $195.84m to 64 of the world’s lowest income countries affected by COVID-19.
There are different ways to scale the impact of the program already contemplated by the team, and these will be carried out as the project succeeds in securing additional resources. Some of the avenues contemplated are:
- Increase the pathogens covered by the program to other key diseases that can have an impact in the lives and sustainable development in Africa. Coronavirus could be the next addition as soon as it becomes an insurable risk at a reasonable price. Ongoing Covid-19 pandemic does not allow for the proper transfer of risk into the capital markets
- Increase the countries participating in the project, investing in capacity building so countries can take leadership in the solution
- Intensify the work in preparedness, early intervention and better use of contingency financing
- Models’ updates, making sure they are up to date with latest developments in the field such as the availability of new vaccinations or medicines or new research on disease transmission
As more countries and pathogens are included in the program the larger the number of lives and the lower the impact that future outbreaks could have in the region.
ARC expects to achieve the following impact goals through the solution presented:
- Reduced morbidity and mortality through better preparedness and early response
- Enhanced Recovery through early intervention funds through the risk transfer to the market
- Reduced direct costs of outbreak response.
To measure the above, ARC has established a Preparedness Index (PI) of 158 indicators (which pathogen-specific versions of indicators with pathogen variance), collected across sub-national, regional, and national levels. The PI measures both health and non-health systems and is organised into seven domains: surveillance, response, laboratory capacity, risk communications, governance, financing, and infrastructure. Structurally, each of the seven domains is comprised of several subdomains, which in turn are divided into different components and their constituent indicators.
Data is collected from different sources: primary data collected by ARC through engagement with country focal points, and secondary data, compiled from existing reporting sources, such as the African Union, WHO, and country ministries.
Performance of that index through the years will track the solution’s progress and impact.
Furthermore, the team needs to meet certain goals related to interactions with countries, investors and donors, development of the user’s interface for countries, implementation of specific guidelines, milestones in the structuring of triggers, etc.
- Guinea
- Uganda
- Côte d'Ivoire
- Guinea
- Kenya
- Mali
- Rwanda
- Senegal
- Uganda
- Zambia
The main constraint to develop ARC’s project in the next 3 years is the funding gap the project is facing for this and the following years. The team is constantly working to extend the donors currently supporting the project as it is key to keep the right staff to lower the rotation of the team and keep deliverables within expectations. These will allow for the effective country engagement strategy, capacity building, and count with the right resources for the structuring of the market transaction. Additional investments in modelling, research and subsidies for the premiums will be needed to scale up the project, and every time ARC launches a new risk transfer transaction, the project incurs additional transactional expenses.
The availability of securing multiyear funds will provide stability to the project, internally and in its relations with beneficiaries and other multinational organisms the team wants to collaborate with.
- Nonprofit
ARC is a Specialized Agency of the African Union. It is comprised of two entities: the African Risk Capacity Agency and ARC Limited. In addition, ARC counts with an administrative agreement with the World Food Organization since 2012 for the support in administrative, technical, and financial services.
The main barrier for the project is not having the financial resources needed to execute all phases of the solution. The Trinity Challenge will help to overcome this barrier by covering the funding gap (approx. $2m) of operational and transaction expenses forecasted for 2021.
This lack of resources translates in the late delivery of the solution as it is difficult to plan for resources in the medium term. By receiving the Trinity challenge’s award, the team expects to mitigate some of the project’s burning issues:
- Retaining the right human capital as most of the staff is only hired as short-term consultants with minimal employee benefits. This poses risks to the retention of the team.
- Hiring class A firms to access state of the art advise for the structuring, modelling and legal advice. The ARC solution is breaking the barrier of the re-insurance and ILS industry with a new peril (epidemics) addressing the specific challenges of developing countries.
- Strengthening the resilience of countries when dealing with the disaster management of pandemics. As outbreaks can happen at any time, delays in the program might leave countries without the necessary tools to address that next episode.
The ARC team is actively reaching to new partners that can support the project from different angles: financially, from a technical point of view, increasing the visibility of the product, improving the communication or talking to partners willing to have a candid and constructive conversation about the challenges and future approaches of the product.
ARC is flexible enough as well to develop these conversations and initiatives through different environments, from a formal one such as the quarterly meetings scheduled with the team’s Expert Advisory Panel, and those more informal through the many one-on-one conversations with any institution that has approached the team for a better understanding of the initiative like investors, the press, public agencies, foundations, academic world, and specific think tanks.
The Trinity Challenge Member organisations are a new network that ARC wants to collaborate with, including other organisations participating in the challenge that are developing projects supporting sustainable development through the effective control of outbreaks, epidemics, and pandemics.
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Financial Market and Product Structuring Specialist