Leveraging Catastrophe Bonds as a Mechanism for Resilient Infrastructure Project Finance
From the re:focus partners RE.bound Program, this report offers a perspective on how cities and communities seeking to build resilience and mitigate disaster risk can monetize the benefits of resilient infrastructure through catastrophe models and other bond measures. The approach links catastrophe bonds and conventional project finance to support large-scale resilience projects. The report describes the RE.bound Program framework for catastrophe modeling, bond structuring, and bond sponsorship - while providing some key insights and lessons for extending the approach to a range of resilience applications.
Catastrophe bonds or "cat bonds" are financial instruments designed to help manage the financial risks associated with extreme natural disasters. Re.focus explains that a defining aspect of cat bonds, compared to Treasury Bonds or municipal bonds, is that they are triggered in the event of a disaster. Cat bonds provide attractive rates of return to investors to compensate for the risk of a triggering event, and they become more valuable investments when the probability of a triggering event and/or the estimate of its total financial loss to investors goes down.
“Resilience bonds,” as described here by re:focus, are similarly structured as catastrophe bonds, but explicitly evaluate the impact of the resilience project on the investor’s expected loss. Assuming that the resilience project reduces the expected loss to investors, then the project can create a resilience rebate from the reduced cost of coupon payments to investors.
The report is a review of 3 step process developed through the RE.bound Program that includes a strategic resiliency approach for risk modeling, bond design, and structuring sponsorship:
Modeling: The first step is to model the physical and financial risk reductions associated with specific resilient infrastructure projects.
The report provides 3 case studies with details on the approach and results for preliminary catastrophe modeling that was undertaken through the RE.bound Program for:
- Coastal Protection in Hoboken, New Jersey;
- Flood barriers in Norfolk, Virginia; and
- Seawall upgrades for Miami Beach, Florida.
Bond Design: The second step in the RE.bound Program explores options for designing and structuring a new type of resilience bond to help communities improve their resilience to natural disasters. The resilience bond integrates elements of traditional catastrophe bonds with features of social impact bonds - to capture insurance savings that can be converted into a resilience rebate.
This section describes the nine bond design and structuring elements that comprise the core building blocks that any public or private sector sponsor would need to carefully evaluate before pursuing a resilience bond.
Structuring Sponsorship: The 3rd step is to explore how these resilience bonds can support public sector interests and mobilize capital for on-the-ground risk reduction projects.
Sponsors of resilience bonds are parties with interests in both purchasing insurance and mobilizing investments to reduce physical risks from catastrophic events. Any large public or private asset holders with insurance needs can therefore be a resilience bond sponsors - including cities, public utilities, universities, or hospital systems, for example.
Publication Date: December 2015
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