Pandemics And The Failure of Finance

Catastrophe Q&A: Researcher

Harvard Global Health Institute’s Olga Jonas

The threat of COVID-19 becoming truly a global pandemic will be a real test of the World Health Organization’s (WHO) Pandemic Emergency Financing Facility (PEF), designed to provide financing to help the “world's poorest countries respond to cross-border, large-scale outbreaks” by incorporating private market insurance mechanisms.

However, there are growing questions whether the program can truly be effective.

To understand the issue Risk Market News spoke with Olga Jonas, Senior Fellow at the Harvard Global Health Institute. Earlier she coordinated the World Bank’s operational responses to avian flu and pandemics and served as a macroeconomist for policy-reform programs. She now focuses on pandemic and epidemic risks to societies and economies, and on the role of One Health approaches in mitigating these risks.

Risk Market News: Could you describe the likely effectiveness of the “insurance” component of the Pandemic Emergency Financing Facility (PEF) at the World Bank given the current coronavirus outbreak?

Olga Jonas: It’s too early to tell whether the payouts from the bonds and the swaps will be triggered for the current COVID-19 outbreak. One of the triggers is that 12 weeks need to elapse from the start of the outbreak. The outbreak was first reported to the World Health Organization (WHO) on December 31, so this condition cannot be met before late March.

Clearly, this will be is too late to help the world’s 76 poorest countries to respond to the threat. They should be doing this now.

So, by design it’s too late.

The announcements made about the PEF when it was launched – that it would stop outbreaks early and prevent pandemics - were misleading and did not correspond to the design. And it is hard to tell how much money will be available.

If there are fewer than 2,500 confirmed deaths in the countries that borrow from the World Bank’s International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), the initial pay-in could be either $113 million or $131 million, depending on the “number of countries affected” which the Prospectus defines as reporting at least 20 deaths in at least two or at least eight countries, respectively.

The PEF triggers are designed to only count deaths in countries that borrow from the World Bank. But these are the low- and middle-income countries with the lowest capacity to detect cases and deaths due to the coronavirus and to report them. Diseases know no borders, but the PEF is design to ignore any deaths reported in Japan, Singapore, Europe, US, Australia and Canada, for example. Unreported deaths do not count toward the triggers, either, though they do matter for real threat.

Understanding The Pandemic Triggers of PEF

For the full document click here.

Then the pay-in amount would be divided among countries that apply for the funds. Only the 76 poorest countries that borrow from IDA are eligible to apply. When you consider that China has already allocated $10 billion to control the outbreak, a pay-in of $113 million or $131 million is far short of the likely needs, considering that the 76 IDA countries have a total population of 1.64 billion people. Even the maximum pay-in of $196 million, if it occurs, would be equivalent to just 12 US cents per capita in IDA countries. The PEF advertising campaign was misleading when it said that the scheme provides pandemic insurance to the poorest countries.

So too late and too little, by design.

But there are many other conditions in the 386-page Prospectus, which is a veritable maze of confusion. One refers to the growth rate of the outbreak and another to the “confirmation ratio threshold,” for instance, either of which may not be met in time before the July 15 maturity date.

RMN: What are your thoughts about the PEF trigger, in terms of both timing and measurement?

Jonas: One of the advertised benefits of the PEF was that it would make financing of outbreak responses transparent and  predictable. These objectives have  not been achieved because of the complexity of the triggers.

RMN: How would -- or could -- you change the PEF to make it practically useful?

Jonas: It was clear from the outset that this was a dubious experiment  because of the high uncertainties in the modeling. It’s an uninsurable risk.

More fundamentally, any entity should always source its risk financing from its reserves first and then from borrowing. Buying bespoke insurance for the IDA -- which is a large fund with  $29 billion of liquid assets at any time and which now has resources to provide an average of $27 billion a year to the same countries that were to benefit from the PEF -- just makes no sense, to be polite about it.  It was inefficient and ineffective ex ante.

Both IBRD and IDA are also creditworthy, they issue bonds at interest rates corresponding to their AAA ratings. The World Bank had no risk of not having funds to  promptly finance outbreak control in IDA countries. The risk instruments – the catastrophe bonds and swaps– were nevertheless created. According to the bond Prospectus, $61 million of risk was transferred to the market. The cost of coupons and fees was $115 million, with the coupon for the riskier tranche set at LIBOR+11.1%.  Despite the substantial cost, the public benefit was either $61 million or even zero, since buying unnecessary ‘insurance’ is just that – unnecessary.

With more data, the modeling of the risks would be better. Unfortunately, adequate public-health data from developing countries can be expected in about 2050 because we need to first ensure that all countries have the core public-health capacities that can generate such data. All countries have to comply with the International Health Regulations, which require well-defined core veterinary and human public-health capacities to detect, diagnose, and control disease outbreaks. Veterinary public-health systems are critical because the vast majority of pandemic-potential diseases originate in animals. Few developing countries comply with the requirements.

Unless $3.4 billion a year is spent on the necessary core public-health capacities starting now, we will not even get there by 2050. So reforming the PEF would be just a costly distraction, coming on top of the considerable costs of the PEF so far– both financial and reputational.

Only the reinsurers and investors may have come out ahead. They can’t be proud of that, though, because the costs were paid by public monies intended for the poorest countries. The total cost was $115 million for premiums, interest, and fees. If we are lucky, and it’s perverse to call a worsening epidemic “luck”, the poorest countries will recover $113 million or as much as $196 million. But even if the maximum pay-in of $196 million is made by July 15, the pandemic bond experiment will have lacked an economic rationale from the start. This is because the World Bank spent $115 million of public funds in order to get an expected return of only $61 million.

RMN: Do you feel there is a role for the private market (capital markets, insurers) in providing for pandemic solutions?

Jonas: Definitely.

Many entities, unlike the World Bank, are at risk from uncontrolled outbreaks and do not have resources to cope. For example, insurance for hospitals could be an incentive for better infection prevention and control. As it is, coronavirus spreads readily in hospitals and amplifies contagion. This happened with SARS and MERS and probably is a big risk with COVID-19 as well as the next new coronavirus or other pathogens that emerge. It’s also essential for containing antimicrobial resistance, which is a major threat to public health and economies globally. Hopefully insurance products can be developed to help hospitals reduce these risks.

What is clear, however, is that governments and entities like the World Bank should first use their reserves and borrowing, which are less costly sources of risk financing than insurance. IDA is a source of borrowing for emergencies for the 76 poorest countries.IDA’s financial capacity is adequate to fund outbreak responses.

The PEF was not needed at all. Globally, the main priority are the core public-health capacities I mentioned.

Next, we should make sure that the WHO has sufficient resources for responses to global threats.  It does not. WHO has a contingency fund with a target balance set at $100 million, but it cannot work because contributions have been grossly inadequate. All governments agreed there should be such a contingency, but few pay. This gap has been a key “weak link” for years, and it poses a large risk to the world economy and public health.

A new risk-financing facility at the World Bank, was therefore a low priority also because essential parts of the global risk-financing infrastructure remain underfunded.