RMS reveals framework for resilience bond
Risk Management Solutions (RMS) alongside re:focus partners, Swiss Re, and The Rockefeller Foundation, has revealed the framework for a new financial product it has called a ‘resilience bond.’
According to the firm, these bonds are designed to help manage the financial risk from catastrophes, while simultaneously 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’.
The report is designed to inform the industry and public sector officials at all levels of government about how resilience bonds can work, to demonstrate why they are important for communities facing increasingly frequent and severe storms and floods. It also aims to inspire risk managers to explore applications that help protect their own communities.
RMS said resilience bonds could offer dual insurance and resilience benefits for disaster-risk prone cities.
“Firstly, a resilience bond could provide financial protection via catastrophe insurance for a city or public utility,” said the firm.
“In addition, as cities or utilities invest in protective infrastructure, like 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.
“An analogy is a life insurance policy offering rebates for actions that lessen health risks, such as quitting smoking or exercising regularly.”
Judith Rodin, president of The Rockefeller Foundation, added: “At The Rockefeller Foundation we recognise that to solve today’s challenges, communities need new and innovative tools that can transform how they think and operate through a resilience lens.
“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 chief executive officer of re:focus partners said that the RE.bound approach offers not only a tool for financing resilient infrastructure projects, but also 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, capital markets at RMS also claimed 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.
“We are excited about the opportunity to lend our risk expertise in this area to the RE.bound programme.”
Alex Kaplan, vice president, Swiss Re, also commented that improving society's resilience is core to its business.
According to RMS, the next phase of RE.bound will bring together policy, project design, and finance experts to explore options for applying the modelling approach and resilience bond mechanism to help governments and international organisations reduce dependence on disaster aid, improve protection for the most vulnerable countries and communities, and support global climate finance commitments.
