The World Bank created an insurance mechanism in 2017 to help some of the world’s poorest countries deal with a possible pandemic. The coronavirus outbreak could lead to its use for the first time – but there are doubts about how effective this tool would be.
The so-called “pandemic bonds” were created in response to the Ebola outbreak in Africa that killed more than 11,000 people between 2014 and 2016 – and the idea was to transfer some of the economic risks caused by disease outbreaks from under-developed countries to the financial sector.
They work in a similar way to insurance: as long as there is no pandemic, the buyers of these securities make money from high annual interest and premiums, but if an outbreak occurs, they must return all or part of their investment to a specific World Bank fund intended to fight pandemics. In this way, there would be no need for fraught political negotiations when states raise funds to respond to the crisis.
However, pandemic bonds have lost more than 50 percent of their value since the beginning of the coronavirus outbreak originating in the Chinese city of Wuhan.
For NGOs and healthcare workers, the new coronavirus – which has infected nearly 80,000 people worldwide, including more than 2,600 fatally, represents a critical test for the viability of this very controversial insurance mechanism.
In April 2019, Larry Summers, the influential former chief economist at the World Bank and former treasury secretary under then US president Bill Clinton, described pandemic bonds as “financial goofiness” and an “embarrassing mistake”.
Olga Jones, a senior fellow at the Harvard Global Health Institute, a former economic advisor at the World Bank and among the most vocal critics of pandemic bonds, has argued that investors have been the only winners – describing them to the Financial Times as a “gamble with taxpayers’ money” at “terrible odds”.
The World Bank has issued two types of bonds. The first covers a wide range of potential pandemics – such as coronaviruses, Ebola, Crimean-Congo hemorrhagic fever and Rift Valley fever. It is considered riskier – and more lucrative – than the second pandemic bond because the conditions triggering reimbursement by investors are easier to meet. The second type covers only the influenza epidemic and potential hypotheses for what could happen with the coronavirus.
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What the Coronavirus Outbreak Means for Pandemic Bonds ( Bloomberg Markets and Finance)