Coronavirus multilateral insurance markets in everything

As financial markets fretted over the spread of a coronavirus outbreak in China this week, one security was in the firing line more directly than any other. Holders of the World Bank’s pandemic bond will lose principal if the disease spreads by a sufficient amount, writes Jasper Cox.

The World Bank’s pandemic bond, issued in 2017, provides funding for the development bank’s Pandemic Emergency Financing Facility (PEF) if an outbreak of one of six viruses meets certain conditions.

Here is the link (gated), here is a more detailed John Dizard FT story:

The event triggers were calculated on a complex formula based on deaths in the country of origin, a smaller number of deaths in neighbouring countries, and a relatively rapid increase in infection and mortality. Interest charges were assumed by rich-country donors including Germany and Japan. The riskier bonds pay 11.5 per cent over Libor, since they required only 250 deaths to reach the trigger. Not bad, considering the “expected loss” for the tranche was only 7.74 per cent. The less risky tranche required 2,500 deaths, so only paid 6.9 per cent over Libor, compared with an expected loss of 3.57 per cent.

Here is a pre-coronavirus discussion of the bonds, mostly with reference to Ebola.


LOL, and I bet the buyers of these bonds have no clue about virology, anymore than the buyers of AAA rated CDOs in the 00s.

Why should the buyers of AAA rated CDOs in the 00s have any clue about virology?

@SA - I can tell English is not your native language; it's cool, I speak two languages badly as well. "Anymore" is the adverb to consider.

According to very famous Webster's Dictionary ( ), "anymore" means "no longer".

@Samuel Adams: Ray meant "any more", not "anymore".

The elliptical construction is:

"buyers of these bonds have no clue about virology, any more than buyers of CDO's [had a clue about mortgage default]."

Most dictionaries are badly written.

Just saying.

The OED is particularly bad on easy words like "get" and "have".

It is sort of like what you see when monkeys try to waltz or do the jitterbug.

I wonder what the beta of these bonds is. :-)

do these things give someone an incentive to spread a pathogen?

Virtually every insurance contract creates dangerous incentives. I always refused to accept to be insured for the companies I worked for in case of my death or incapacity.

But in this case, being the beneficiaries useless parasites of the World bank or some western country cooperation bureaucrats, I’d say it is the safest insurance contract I can imagine in terms of fraud. Regarding bio-tech companies with a viable cure, I think it is a James Bond scenario. They could make much more money treating herpes.

It's not an insurance contract. Instead, it's an offer of a gamble, like going to Las Vegas. One can guess at the odds, and decide whether it's worth it to oneself.

Thus, the World Bank is selling gambles. Great job, World Bank.

so thats the concern. bet or hedge, somewhere people are on both sides of the deal.

whether via somebody hedging their exposure, or laying off their book. somewhere in the derivatives world, or the dark web, or maybe as a spread on the 13th harness race somewhere with 12 races, somebody has money on a horse named epidemic

Well put!

Yes, the Bank is betting on a horse named Epidemic.

Well, the obverse of a gambling contact is indeed an insurance contract: The World Bank is insuring itself! Thus, it has less incentive to help prevent viral outbreaks.

I am not a specialist, therefore technically I might be wrong. But from a business perspective, this is a crowd-sourced insurance contract. Interests are the premiums, the principal is what the insurer pay in case of accident.

People that pretend to be actuaries, and on phenomena with such little historic data, are little more than game junkies in Vegas.

Isn't this a skinny/fat tail story? Betting on pandemics is like betting on collapsing asset prices: it's unlikely, but it happens, especially when conditions are ripe. My view, at least about collapsing asset prices, fits with the view of Cowen's Austrian friends (aren't we friends anymore?). Are conditions ripe for a global pandemic? Are conditions ripe for a global collapse in asset prices?

I do not know anything about Tyler’s friends, but if I have to judge on his writings, they are perhaps ski-enthusiasts. Definitely not economists.

You're on a slippery slope to getting deleted my fiend... ;)

I think I remember a Mickey Mouse comic where he ate peanut cookies.

What ... this is a thing? Why is this a thing? I mean sure, but ... like can there not be anything in this world that someone isn't trying to profit off of?

I'm with Larry Summers in calling this "financial goofiness". Tyler's posted about some weird bonds before, e.g. social improvement bonds (although Dismalist is right that these are more like gambles/hedges than bonds) and this seems of a similar ilk. Makes Spencer Dinwiddie's plan to securitize his NBA contract look tame by comparison.

So the meta question is: what's going on with all this financial goofiness? After taking enough economics classes one realizes that "everything is a contract" or even "everything is an option" but some of these so-called bonds have clauses and incentives that don't seem to make sense. Some of them evidently are not meant to make economic sense but instead are ways to donate or subsidize something. Not sure what's going on with these pandemic bonds.

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Nice information and analysis. This coronavirus issue has stunned the whole world and many medical, economical as well as finance emergencies have been arise due to this. It is essential to make sure that your health is in good condition. For that, health checkups, medicines from time to time is a must. Thanks.
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