World's first volcano CAT bond launched
The bond, which covers 10 active volcanoes on three continents, was launched on behalf of the Danish Red Cross to raise disaster relief.
The world’s first catastrophe bond for volcano-related disasters has been issued on behalf of the Danish Red Cross and was built on a collaboration between private and humanitarian sectors with the support of philanthropic foundations, according to Howden Group Holdings. It will cover 10 active volcanoes, which were selected based on the significant humanitarian threats they pose.
The CAT bond aims to “mobilize humanitarian assistance from global capital markets, transforming the way disaster aid is activated and deployed,” according to a release. The goal is to raise $3 million in capital from investors, according to Howden, which reported the program will use advanced modeling and blockchain technology to raise funds and release aid more quickly and effectively.
Leveraging blockchain, advanced modeling
“Mitiga Solutions has developed a state-of-the-art model using numerous data inputs to predict where funds will be needed, improving both the efficiency and effectiveness of humanitarian relief,” Alejandro Marti, CEO and co-founder of Mitiga Solutions, said in a release. “Our model can anticipate the trajectory of the volcanic ash cloud using prevailing winds to better estimate the impact and more effectively guide CAT bond proceeds.”
The bond is based on a trigger mechanism that pays-out when volcanic ash plumes reach a certain height and prevailing winds direct the ash toward vulnerable communities.
Howden reported the private blockchain will help reduce costs by $200,000-$400,000 per issue when compared with traditional settlement systems. The blockchain technology being used was developed by Replexus.
“The volcano CAT bond will be placed on an insurance-linked securities (ILS) blockchain, making the transaction particularly cost-effective for the aid agency and enabling secondary market trading among ILS investors,” Cedric Edmonds, founder and CEO of Replexus, said in a release.
He noted additional benefits of using blockchain, including the ability for investors to hold securities on their computer servers instead of having to use a custody bank. This can save five to 10 basis points per year on the value of the securities.
“The volcano CAT bond is an important addition to the ILS market as it has the potential to revolutionize disaster relief finance,” explained Charlie Langdale, managing director of financial lines for Howden Broking. “This product will help to bridge the insurance gap and allow greater access to insurance and the capital markets for the benefit of the charitable sector and those affected by natural disasters.”
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