30+ humanitarian relief cat bonds in pipeline: Howden

In March 2021 Howden Group, via its charitable foundation the Howden Foundation, was instrumental in arranging a world first: a cat bond specifically designed to ensure that funds for humanitarian relief are made available faster and more efficiently, potentially saving lives and livelihoods in the process.

That deal also made headlines because it involved volcano risk—another world first. It was done on behalf of the Danish Red Cross and will enable humanitarian relief in the event of a volcanic eruption at 10 specific sites across three continents.

David Howden, chief executive officer of Howden Group and one of the brains behind the deal, says there are now another 20 to 30 deals with a similar ethos and purpose in the pipeline. This is significant because of the huge potential of the concept: a new asset class could be born for the risk transfer industry, one that has the potential to do a great deal of good in the world.

“We are now working on another 20 to 30 disaster relief projects,” said Howden, speaking in a video interview with Intelligent Insurer.com, the website and digital hub for news, interviews, analysis and debate.

“That deal was the acorn; we’ve proved the concept, and how it works. Now, it is a case of how can we take that acorn and grow an oak tree? Maybe not just one oak tree—how can we grow a whole forest of oaks to cover this enormous gap?” he said.

The “gap” is partly the protection gap (the gap between economic and insured losses) and partly the inefficient and often dislocated way humanitarian aid is coordinated and delivered in different parts of the world. The protection gap is widening—in 2021 alone, there was $343 billion in economic losses in 2021, $329 billion of which resulted from weather and climate-related events, of which only 38 percent were covered by insurance.

The concept, proven in the 2021 volcano deal, leverages the principles of securitisation, as it is applied to risk, unlocking private capital to meet the sudden liquidity needs of aid agencies worldwide in times of natural disaster.

Howden advocates the idea that the expertise and knowledge in the insurance industry’s toolkit can be used to address the dramatic needs that increasingly define the work of aid agencies, especially as climate change takes its toll.

“The real value of insurers is the ability to unlock capital,” he said. “We do that very well as an industry; we’d never done that with disaster relief.”

Key questions stood as barriers, such as: “how to unlock that private capital, a lot of which is seeking to do good, and put it together in an insurance wrapper”, all without offending sensibilities at the intersection of for-profit finance and not-for-profit initiatives.

Enthusiasm abounds

The March 2021 issue brought in a trial investor panel including Plenum Investments, Schroder Investment Management and Solidum Partners in a bid to raise just $3 million for aid in the aftermath of an eruption from any of 10 volcanoes across three continents.

The issue drummed up enthusiasm sufficient to put aside any doubts: enthusiasm among relief agencies tired of liquidity worries, among charitable foundations (including within the industry) seeking to leverage their charitable contributions, and even among insurance sector employees who admire the capacity of their industry and wish to combine that with their own desire to make a contribution, Howden said.

The big problem is not interest or capital, both of which seem plentiful, but finding deals large enough to pass capital market litmus tests, he stated.

“To the aid agencies I say: ‘bring us some really big projects’. Our biggest issues is finding projects big enough. Investors are mostly complaining that they can’t dip into deals with headlines below the low- to mid-nine-digits,” he said.

Meanwhile, environmental, social and corporate governance (ESG) ratings on such instruments should be, by any imaginable metric, quite attractive

If the relief aid liquidity solution weren’t sufficient innovation, the March 2021 volcano bond brought in blockchain as well, a feature which Howden indicates is likely to become a staple. A private blockchain for dematerialising the bonds was crafted by Replexus, reducing issuance costs by a six-digit figure versus traditional settlement systems.

The Red Cross may have additionally taken benefit from fresh modelling systems designed by Mitiga Solutions to embed a trigger mechanism in the cat bond and anticipate vulnerabilities to direct potential relief flows.

All this is exciting news for an industry seeking growth and a way to cement and make tangible its own ESG credentials. For Howden, this is an obvious path for the industry to travel, focused as it is on talking about climate change.

Howden tires of hearing climate spoken of as a set of future risks, as opposed to ongoing losses, and of raw climate injustices whitewashed under the banner of “low-income insurance gaps”, as he describes them.

So, when Howden speaks climate, as he did in a keynote address at the COP26 meeting in November 2021, he chooses to speak of humanitarian disaster relief. And after he had spoken disaster relief with aid agencies such as the Red Cross and heard of struggles with sudden liquidity needs, he saw an obvious role for his industry.

That obviously means claims payments, risk management, and liquidity. But it also means marshalling huge sums of money from across the full breadth of capital markets.

And not to forget, among the potential beneficiaries, 700,000 people living within 60 miles of the 10 volcanoes covered to date by the March 2021 issue.