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Resilience bonds: a secret weapon against catastrophe

The costs of natural disasters are becoming too much to bear – and it’s driving up premiums no matter where you live. The solution may be a transformative type of insurance never seen before.

In a conference room overlooking downtown Miami, British executives are talking about why they know south Florida’s streets so well. It isn’t because of the sunshine. It’s because of the area’s risk for disasters like hurricanes and flooding.

“There are hundreds of my colleagues… who know the zip codes of these counties in this part of the world almost as well as the residents here,” says Rowan Douglas, head of capital, science and policy at the London-based risk management group and insurance broker Willis Towers Watson. “This area of the world is protected to some degree by a global community of everyone else who buys their insurance policy. My mother-in-law in northwest Spain is sharing risk with Florida.”

It will be a financial and scientific revolution, and it will save billions of dollars and thousands, if not millions, around the world of lives – Rowan Douglas

Enter a new idea that could transform not only the global economy, but how disasters affect us: a resilience bond. As well as guaranteeing help to communities after a catastrophe, it would help fund projects and strategies they need to become less vulnerable to begin with. “Resilience bonds are, in my view, the next exciting and innovative frontier in infrastructure and resilience finance,” says Samantha Medlock, former senior advisor to the Obama White House on resilience and now senior vice president at Willis Towers Watson.

The concept is part of an overall trend, experts say, that could transform how communities work: as risk modelling has become more and more sophisticated, the private sector is getting closer to being able to turn not only risk, but resilience, into numbers.

Resilience bonds could help places vulnerable to natural disasters, like Mexico, better prepare for catastrophe – not just help clean up after it.

It’s like a life insurance company being able to tell you not only how likely you, specifically, are to have a heart attack in the next five years, but also exactly how much walking a half hour a day or cutting out red meat could reduce that risk… and what that increase in health is likely to be worth, in cash, to your future.

That ability to put ‘hard numbers’ on what previously have been seen as ‘soft’ concepts, like the value of resilience, is huge, industry insiders say. “It will be a financial and scientific revolution, and it will save billions of dollars and thousands, if not millions, around the world of lives,” says Douglas.

Fix-it mentality

When it comes to preparing for future disasters, humanity tends to be woefully optimistic. In the same way that it’s difficult to convince individuals to fork out money for a life insurance policy, it’s tough to get governments to carve out spending for just-in-case scenarios when they also need to prioritise streets and schools.

Worldwide, just 26% of economic losses due to natural disasters were covered by insurance in 2016. “That means people dying or suffering, and governments and aid agencies and charity and philanthropy filling that gap. Or not filling that gap, as the case may be,” says Daniel Stander, managing director of consulting company Risk Management Solutions (RMS), which works with companies and governments to model and manage catastrophe risk.

Buying insurance for your household (or city) is one thing. Another is making your community resilient to begin with. Here’s the problem: it’s difficult to pay for something when the risk of doing nothing is hard to quantify.

In 2012, Hurricane Sandy cost the New York City area some $19 billion in damages.

Pilot project

A resilience bond is “an innovative variation on the cat bond”, says Medlock. It would work like this: imagine City X wants to build higher seawalls or fix its levee, but doesn’t have access to funds. When it goes to buy a multiyear, parametric cat bond for flooding, the insurer takes the expected impact of that planned investment into account and lowers the premium the city has to pay. With that cost saving in the budget, City X now has the money to fund its seawalls and levee – even if no disaster ever occurs.

At the moment, this hasn’t happened yet. But it’s close. “We’re probably not years away from this sort of a concept becoming real,” says Medlock. “We could be months away.”

Source: BBC

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