The coronavirus disease (COVID-19) pandemic and associated social and economic costs have placed infectious disease at the top of sovereign and corporate risk registers. The high level of infections and recorded deaths, along with extensive fiscal and social policies to control outbreak spread and provide support, illustrate some of the impacts from a disease outbreak. The uneven global response confirms that many countries lacked the necessary systems, infrastructure, and policies to mitigate such impacts. Yet, the most damaging effects of outbreaks can be avoided through improved pandemic preparedness to enable quick and aggressive action at the earliest stages, and through systems for identification, contact tracing, and quarantining of initial cases. The dramatically different morbidity and mortality impacts across Central Asia Regional Economic Cooperation (CAREC) member countries exemplify the potential positive influence of early action through planned, proactive crisis management.
The CAREC region was badly affected by COVID-19. Although infections and deaths vary significantly, all countries experienced an enormous economic shock. Asian Development Bank (ADB) economic modeling estimates a 2.1% contraction in the economic growth of Central Asia in 2020. Estimates made in 2019 for 2020 anticipated a 4.5% growth rate, revealing the six to seven percentage-point swing induced by COVID-19. Like others around the world, CAREC governments had few well-designed emergency plans to enact and no specific fiscal support measures on the shelf. Improved infectious disease risk management is essential to safeguard future aspirations of economic development.
This study is part of ADB’s support to CAREC member countries to strengthen their disaster risk management strategies and public sector budget resilience. The technical assistance targets the development of a regional risk transfer solution, and infectious disease risk is being scoped in this context. Potential future scenarios for COVID-19 and the risk profile of other outbreaks have been modeled and presented to governments. This report advances such work to explore possible regional and national risk financing solutions for infectious disease outbreaks. It reviews global practice and develops recommendations for CAREC member states to progress toward a risk financing structure. We anticipate that the pilot phase of the regional risk transfer facility is likely to provide flood and/or earthquake risk financing as a first stage. The opportunity to develop infectious disease coverage is significant and urgent following the impacts of the COVID-19 pandemic, and we encourage fully leveraging the regional risk transfer pilot to fast-track implementation of an infectious disease risk financing solution.
A critical pillar of disaster risk management is risk financing. Many governments found financing for infectious disease outbreaks had not been formalized. This prompted a wave of rapidly designed and implemented programs, such as procurement of medical equipment, small and medium-sized enterprises (SMEs) credit and tax measures, and income support. Fiscal rules were altered to enable such extraordinary expenditure. There is broad agreement that, although such structures were necessary, this ad hoc approach is suboptimal in terms of effectiveness and cost-efficiency.
The prearrangement of financing for shock events greatly enhances the timeliness, cost-efficiency, and effectiveness of response. Global evidence indicates that disaster risk financing for natural hazards such as floods, earthquakes, and droughts has provided protection for public and private sector balance sheets following event occurrence. Reserve funds, contingent credit, and risk transfer can provide much needed liquidity for response, recovery, and, in some cases, reconstruction. The ex ante nature of risk financing increases the predictability of the volume and timing of payments that can support contingency planning.
Financing arrangements for pandemic risk were virtually nonexistent before COVID-19. The difficulties with private sector risk transfer, namely insurance, have constrained availability. A respiratory pandemic such as COVID-19 brings extreme risk to lives and livelihoods, as well as the potential for global accumulation of losses; it is the ultimate covariant risk. The maximum possible economic loss from such an event could exceed the total capital of the global insurance industry. This makes the full risk profile of a global pandemic effectively uninsurable with conventional insurance market tools. Insurance can, however, provide targeted and robust financing for aspects of infectious disease risk, including rapid response and containment of infectious disease spillover events which could cause epidemics or pandemics.
Examples of infectious disease risk financing do exist, and are notable given their rarity. Motivated by the West Africa Ebola outbreak in 2015, the African Risk Capacity (ARC) is developing an outbreak and epidemic (O&E) insurance product for member governments. Following capacity building and contingency planning activities, countries would be eligible to become insured under a parametric program, with payouts to help fund agreed contingency plans designed to avoid the further growth of an outbreak. Another approach is the Pandemic Emergency Financing Facility (PEF). Enacted in 2017 as a catastrophe bond supported by the World Bank, PEF targeted fast financing for developing-country government response following an outbreak of one of a number of infectious diseases. Coronaviruses were included and PEF paid the full amount eligible for COVID-19 ($195 million). This payment, however, lagged the outbreak by a couple of months, not meeting the original intention of the program. An earlier series of Ebola outbreaks in the Democratic Republic of the Congo also did not pay out due to the lack of multicountry mortality, which was a condition of payment. The PEF has not been renewed following the maturity of the bonds. Serving the private sector, and aside from ad hoc coverages that included infectious disease risk (e.g., for sports events such as Wimbledon), a single product was developed, PathogenRx, offering nondamage business interruption insurance to SMEs. However, no PathogenRx cover was ever sold and, at the beginning of 2020, there was a vanishingly small volume of pre-identified infectious disease risk transfer taking place globally outside of the life insurance sector. These programs underline the importance of product simplicity for a complex risk such as infectious diseases. They also illustrate that innovative insurance solutions for tranches of risk can be developed and implemented.
The onset of the COVID-19 pandemic may prove to be a turning point in formal risk financing for infectious disease outbreaks. Interest in financing for a future infectious disease outbreak is unprecedented: an array of public–private risk financing partnerships in India, the United States, the United Kingdom, and across Europe have been rapidly proposed. The diversity of schemes demonstrates the willingness to explore what is possible and what associated initiatives (e.g., improved modeling and surveillance) may be required to improve risk management and financing of outbreaks. Proposals vary in how risk is shared between government and the private sector, the target beneficiaries, the implementation mechanism, and the overall financing commitment. There are similarities with other risks of large socioeconomic impact, such as flooding and terrorism, which necessitated public–private partnerships to find an acceptable and durable balance of responsibilities between the state and the insurance market, and such programs have acted as a starting point for many of these proposals. Although none have progressed beyond concept stage, the sheer number of schemes investigating potential public–private partnerships mirrors the process undertaken following extensive flooding and severe terrorism events to develop durable risk financing solutions for both risks.
A review of these proposals is instructive for CAREC member countries. The proposed schemes broadly require significant government responsibility for risk, with some including ultimate backstopping of the solution via a government guarantee. The use of parametric triggers is popular to provide objectivity in conditions for, and speed of, payment, as well as to reduce operational costs. Many proposals logically aim to help SMEs, who were particularly impacted by COVID-19 control measures but are the backbone of CAREC economies.
Proposals also harness the existing infrastructure of insurance companies as distributors: to access and contact beneficiaries, to administer policies, and to make payouts. With a low insurance penetration, it is unlikely CAREC member states will be able to capture these benefits in quite the same way. Finally, most proposals are deliberate in incentivizing or requiring investment in preparedness for future outbreaks, understanding that risk financing works most effectively as part of a holistic risk management strategy.
A series of lessons emerge for CAREC member countries following a review of previous risk financing solutions and newly developed proposals. Identifying the function of financing is the first step. Coverage for emergency response costs is one standout option, much like the motivation of PEF and ARC’s product. A CAREC regional facility could build on the progress made by the four sovereign catastrophe risk pools: the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company, ARC, the Pacific Catastrophe Risk Insurance Company, and the Southeast Asian Disaster Risk Insurance Facility. To appropriately plan financing for response costs, countries need to identify and assess their projected needs. It is this process that links improved preparedness and management of outbreaks to risk financing; early funds, successfully deployed, are hugely cost-effective in infectious disease risk management. A future regional mechanism could provide payment to a government to implement pre-agreed and mutually supportive contingency plans, with a reward for successful control. The regional pool could also be a catalyst and convener for coordinated disease surveillance, laboratory capacity, and catastrophe risk initiatives.
The study proposes three infectious disease risk financing mechanisms for CAREC member countries.
First is a spark risk cover, to provide rapid financing for countries to manage an outbreak and aim to contain spread within as small an area as possible. This can be designed to access the reinsurance or insurance-linked securities market. Second is a containment financing mechanism, to finance activities in neighboring countries to a country claiming under the spark risk cover. Mobilizing and implementing activities in neighboring countries are to further strengthen the initial early response, with the focus on preventing the development of a regional or global outbreak. This is likely to rely on donor financing, and ADB can play a leading role in the development and verification of pre-agreed response activities, as well as to convene donors. Third, is a domestic focused SME business interruption program. Economic impacts fall heavily on this sector and support is likely to be necessary in a medium-sized outbreak. A public–private partnership framework is most suitable for this third option.
The enabling environment for a CAREC infectious disease risk financing mechanism should be advanced. A comprehensive approach to future outbreaks requires the integration of risk financing and risk management. Alone, a risk financing mechanism is unlikely to be sustainable or durable. Therefore, key next steps include the following: assessing country and regional outbreak preparedness, identifying areas of high risk and vulnerability, analyzing gaps to determine and prioritize preparedness investments, assembling data on costs, ensuring local and regional laboratory capacity and surveillance systems, developing a centralized platform for infectious disease outbreak control and response, developing contingency and response plans, and discussing financing and response costs in a CAREC forum. Formally linking risk management to risk financing provides scope to strengthen incentives for proactive identification of outbreaks, and fast and aggressive action when necessary. Cross-region collaboration adds value in such activities.
The CAREC region is exposed to future infectious disease outbreaks. Aspirations for future economic development are intertwined with increased trade, connectivity, and mobility. These exacerbate the exposure of individual countries to a future outbreak and affirm the importance of a regional approach. The COVID-19 experience is just one type of infectious disease outbreak. Epidemics and pandemics vary in their morbidity and mortality impact and in the response measures required. Preparedness, surveillance, and contingency planning for future outbreaks need to be developed to safeguard against the multiplicative nature of infectious disease risks.
Source: Asian Development Bank