Pandemic bonds: what are they and how do they work?

A pandemic bond is a bond where the capital raised is earmarked for responding to pandemic outbreaks. As with ‘normal’ bonds, investors in pandemic bonds receive coupons. However, the repayment of their capital investment at maturity depends on whether a pandemic occurs.

If there is no pandemic outbreak, then investors receive their initial investment on the maturity date. However, in the event of a pandemic, investors lose part or all their capital. That is otherwise used to finance the response to the outbreak in the eligible countries.

The first pandemic bond

Launched by the World Bank in June 2017, the pandemic bond was the first of its kind, transferring pandemic risk in developing countries to the financial markets. Its aim was to provide financial support to the Pandemic Emergency Financing Facility (PEF), a financing mechanism launched in 2016.

The PEF is intended to help fund the fight against cross-border, large-scale outbreaks in the world’s poorest countries. It was set up by the World Bank and raised funds through 2 different routes: the cash window and the insurance window.

Cash window

The cash window provides fast financial support for outbreaks in developing countries. Outbreaks caused by diseases that may not be eligible for support through the insurance window.

Funds to support eligible countries could be transferred merely days after approval. The cash window is entirely separate from the insurance window (and pandemic bonds) and provides a separate source of funding to the PEF.

Insurance window

The insurance window essentially provided the PEF with insurance against pandemic risk in developing countries. The World Bank sold pandemic bonds to the value of $320m and swaps to the value of $105m. This meant the insurance window could provide $425m worth of insurance to developing countries.

The PEF came about after the West Africa Ebola crisis of 2014. The worst Ebola outbreak on record, it crossed borders into multiple countries and led to more cases and deaths than all other outbreaks combined.

The crisis really highlighted the difficulties in internationally financing the response to containing a pandemic outbreak. It led to the creation of the PEF and in turn, the pandemic bond.

How do pandemic bonds work?

Private sector investors bought pandemic bonds in return for annual coupons. There were 2 classes of bonds, both of which offered highly attractive coupon rates and provided insurance for $320 million in total.

Class A covered flu and coronavirus. It offered coupons of 6.5% above 6-month US LIBOR covering $225 million of the pandemic insurance. The riskier bond, known as Class B, covered 5 different viruses including coronavirus, filovirus and Crimean Congo. This offered a 11.1% above 6-month US LIBOR, providing a further $95 million of insurance.

While both classes covered coronavirus, Class A provided cover for coronavirus at a higher level of severity. Coupon payments were funded in part by the World Bank and in part by the governments of the donor nations.

The bonds matured in July 2020, so if there were no pandemics prior to this, investors would have received their initial investment on the maturity date. However, in the event of a pandemic, investors would have lost part or all their capital. This would have then used to finance the response to the outbreak in the eligible countries.

In an outbreak, a set of predetermined criteria had to be satisfied for it to be classed as a pandemic and to trigger a PEF pay-out.

Global pandemic of COVID-19

What happened when COVID-19 hit?

The year 2020 was the real test, when COVID-19 took the world by storm. As coronavirus is covered by both classes of bonds, many investors questioned if, and when, a pay-out might be triggered.

This was the first pandemic to be caused by a coronavirus. There were specific criteria that needed to be met for insurance payments to be made:

Outbreak size: more than 250 cases, with a minimum of 250 deaths in developing countries and over 12 weeks since the start of the outbreak. Confirmation ratio: at least 20% of total cases need to be confirmed. Cross-border spread: at least 2 countries must have cases, with a minimum of 20 fatalities. Positive growth rate: the total number of cases in developing countries must be growing at a faster rate as time passes (as confirmed by a third-party agent, AIR Worldwide).

AIR Worldwide confirmed all the conditions required for pay out were satisfied on 17 April 2020. At that point only 4,653 (0.62%) of reported global cases were in developing countries.

That was the trigger point and c. $195 million was paid to 64 developing countries over the next 6 months. This was the maximum allowable payment for a coronavirus pandemic.

Each country received between $1 million and $15 million to help support the response to COVID-19. They used the funds to pay for everything from drugs and medical equipment, to transportation and communication.

The future of pandemic risk

In the early stages of the pandemic, investors were concerned as the likelihood of pay-out increased and the value of the bonds dropped. This led to investors selling their bonds to prevent potential further losses.

The PEF successfully provided funding for the response to the COVID-19 pandemic with over $195 million paid out. This is just a drop in the ocean compared to the World Bank’s additional funds of up to $160 billion which have been made available to help with the health, economic and social shocks that countries are facing.

Looking for a brighter tomorrow

As you can imagine, demand for the first round of pandemic bonds was extremely high, with the issue being oversubscribed by 200%. Although the World Bank has cancelled the second round of pandemic bonds, there is still an appetite for transferring pandemic risk to the financial markets.

Despite these unprecedented times it’s safe to say the future for similar financial instruments remains bright. There’s hope that future methods of insuring pandemic risk can further improve the support and surge funding offered to developing countries across the world in times like these.


For further detail and expertise from GAD, see our Market data insights. The opinions in this blog post are not intended to provide specific advice. For our full disclaimer, please see the About this blog page.

seen at 16:43, 3 March in Actuaries in government.
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