Catastrophe risk-management and modeling firm RMS, design firm re:focus partners, reinsurance giant Swiss Re and the Rockefeller Foundation announced the framework for a new financial product called a “resilience bond.”
According to these organizations, the bonds are designed to help manage the financial risk from catastrophes, while promoting investment in infrastructure that mitigates physical risk.
The new framework is set out in a report called, “Leveraging Catastrophe Bonds as a Mechanism for Resilient Infrastructure Project Finance,” which was released yesterday.
RMS said the bonds could offer dual insurance and resilience benefits for disaster-risk prone cities by providing financial protection via catastrophe insurance for a city or public utility. As cities or utilities invest in protective infrastructure, such as seawalls or flood barriers, they could capture the insurance savings or reduction in cost from one year to the next for projects that reduce economic losses from disasters during the term of such bond, RMS said.
An analogy is a life insurance policy offering rebates for actions that lessen health risks, such as quitting smoking or exercising regularly, the Newark, Calif.-based risk modeler said.
Tool for financing
“At the Rockefeller Foundation, we recognize that to solve today’s challenges, communities need new and innovative tools that can transform how they think and operate through a resilience lens,” said Judith Rodin, president of the New York City-based foundation. “The new resilience bond highlighted in the RE.bound paper is an innovative way to bring private sector financing to help communities grow resilient and ultimately recover more quickly from severe shocks.”
Shalini Vajjhala, founder and CEO of La Jolla, Calif.-based re:focus partners said that the approach offers a tool for financing resilient infrastructure projects and for setting risk-based design standards for future capital investments.
“It can help communities and cities around the world better protect themselves against the physical and financial risks of disaster,” she said.
Ben Brookes, vice president for capital markets at RMS, said that resilience bonds have the potential to be powerful tools for encouraging the creation of a more resilient society.
“It’s critical, however, for the bonds to be underpinned by accurate risk modelling,” he added.
“It’s only through meticulous risk quantification using advanced catastrophe modelling methodologies that the design criteria of the instrument, as well as decisions around future risk mitigation and resiliency investments, can be agreed with confidence.”
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