Insurance solutions provide for rapid response to Ebola
In April, new outbreaks of the much-feared hemorrhagic fever Ebola shook the world again. The last major outbreak in West Africa 2014-2016 caused more than 11,000 deaths, and dealt a devastating blow to the long-term economies of several countries in the region. The effects were largely due to slow and insufficient response by the world community. However, this time, it appears that the lessons learned have provided for a much faster response, based on insurance principles and backed by cat bonds, rather than reliance on foreign aid.
While the 2018 outbreak in the Democratic Republic of Congo (DRC) is ongoing, and the World Health Organization reports that the risk is still high, a rapid response, including funding to contain the disease through vaccination and screening programs, appear to successfully contain the disease.
Slow response in 2014 worsened the crisis
This is largely due to the lessons learned from 2014-2016, when the WHO, as well as individual donor countries, were harshly criticized for their slow response and inadequate initial funding to contain the outbreak. When the outbreak was internationally noted, in June 2014, a few hundred people were infected. But it took the international community three more months to react. In this time, the number of infections had increased tenfold.
Not only did the slow response contribute to the devastating effects on people and economy, but it also proved much costlier to the global community.
Ultimately, the total expected cost to donors (international organizations and national aid agencies) was in 2016 estimated at more than $3.6 billion. The slow response was not only due to lagging international aid, but also the lack of proper response readiness by the WHO.
The total economic effect for the three worst affected countries – Sierra Leone, Guinea and Liberia – was estimated at $2.8 billion by the World Bank, with economic effects outlasting the epidemic itself.
Lessons learned and the emergence of a new insurance facility
Following the 2014-2016 crisis, the World Bank, together with WHO, initiated an insurance program to enable rapid response, the Pandemic Emergency Financing Facility (PEF). The PEF is an insurance scheme designed to make early payouts at an outbreak of a pandemic. The scheme covers the world’s 75 poorest countries with approximately 1.6 billion people, providing insurance for a number of diseases that are likely to cause major pandemics, such as SARS, Ebola, Lassa Fever and other diseases, defined by the virus family.
The setup is a novelty, not only as an insurance, but also in using a cat bond to back up the insurance obligation. The $320 million IBRD CAR 111-112 bond covers escalating events, defined by the number of deaths. In addition, another $105 million risk-linked swaps (derivatives) were sold to private investors. Insurance premiums have been paid in advance by donor contributions, including Japan and Germany.
In addition, a “cash window” provides insurance below for smaller events that do not qualify for a cat bond payout, but with a risk of becoming pandemics. The cash window became operational in 2018, following a grant from Germany.
The setup means that the insurance for the first three-year period will be free for the covered countries. In the meantime, future financing is being explored by the World Bank.
Response to the 2018 Ebola Outbreak
With the memory of the last major outbreak, international institutions have been closely monitoring the development in the DRC from the first reported cases. Funds were also swiftly released from a number of sources, including the WHO’s contingency fund ($2.6 million) and the UK (£3 million), establishing a base funding to get the response started.
In May, a number of efforts were launched, including a vaccination scheme, deployment of technical experts and facilities for treating infected people. Following the national and international response, it appears that the infection is contained. Until 3 June, a total of 56 cases, including 25 deaths, had been reported, and almost 900 people remained under active follow-up.
At the launch of the vaccination program, the PEF made its first financial commitment, approving a $12 million grant towards the Ebola response in the DRC. In addition, $15 million were reallocated from the disease surveillance program in DRC to the current effort, mobilizing a total of $27 million in a matter of weeks.
The rapid response has so far kept the number of deaths far below the trigger for the PEF cat bond, which would trigger at 250 confirmed deaths.
The setup of the PEF and the response to the DRC Ebola outbreak shows that the international community learned an important, albeit expensive, lesson from the previous outbreak, and that alternative capital can play an important role in enabling rapid response to pandemics and other disasters in developing economies.
Note: Entropics has currently no position in the IBRD CAR 111-112 cat bond, as pandemics are not included in the current mandate of the Fund.