Aon taking cat bond cover further beyond physical assets: Andersen

Catastrophe bonds are typically a risk transfer structure protecting an insured or reinsured against losses that affect its portfolio, which normally means a focus on loss and damage to physical assets. But increasingly interruption and people’s humanitarian needs are coming into the coverage equation, with broker Aon pioneering some of these moves according to its President.

Eric Andersen, President of insurance and reinsurance broker Aon, has highlighted the use of catastrophe bonds and similar structures to protect people-related risks for major employers in a recent speech before the United States Senate Committee on Budget.

Andersen explained the role of insurance and reinsurance in mitigating climate risk and pointed to the role of catastrophe bonds in disaster risk protection, as an example of innovation that could be more broadly applicable.

While a catastrophe bond may often look like a pure property damage cover, the motivations of the sponsor can be very different.

In the past we’ve seen corporations accessing the cat bond market to protect against business interruption type risks and this has increasingly become a motive in recent years.

We’ve seen a cat bond that provided business interruption and loss of revenue for the owners of Tokyo Disneyland as long ago as 1999, and a cat bond that protected FIFA against the cancellation of the World Cup back in 2003.

More recently and moving closer to cat bonds covering people-related risks, the Acorn Re cat bonds protect a workers compensation captive, while the Danish Red Cross’ volcano cat bond would provide capital to fund relief efforts if it were triggered.

So, catastrophe bonds have seen application to cover business interruption type risks for years now, while a shift towards protecting risks people face is more recent. But neither are particularly prevalent as of yet in the outstanding cat bond market, with property reinsurance and retrocession still the main focus for cat bond deals.

But there’s always been a push to try and expand the remit for catastrophe bonds, as well as to use catastrophe bond technology in new and innovative ways.

Aon’s President Eric Andersen discussed two examples during his recent speech to a Senate committee on climate risk.

“Currently we are pioneering the first employee resilience bond,” Andersen explained, saying that is is being developed for a large employer in a “developing, climate volatile country”, that wants to secure a bond that can provide cash assistance directly to its employees in the event of a disaster, in order to help meet its staff’s recovery needs.

Which sounds like an ideal use of a cat bond structure, as a premium can be paid to secure capital from the capital markets, while a trigger can activate the payout and disbursement process, with the beneficiaries set to be the employees.

A similar, more people-focused use of cat bonds has also been achieved for a US technology company, Andersen said.

He explained that, “Recently, Aon worked with a large technology firm in the U.S. to adapt the trigger for a catastrophe bond (an earthquake, in this case).

“Instead of only paying a claim to rebuild the physical office, it now will allocate a one-time payment to the firm’s employees to help them through a disruption to their lives due to the earthquake.”

Again, that’s a perfect cat bond use-case and as large employers around the globe increasingly recognise the value of their human capital and of supporting their employees in times of need, cat bonds could become a viable product for securing contingent capital to pay out after disasters to support the recovery of the work-force.

“The catastrophe bond was created 20 years ago to address the loss of physical assets, but now can help people as well,” Andersen said.

Adding that, “Together, risk, health, and human capital stakeholders can develop innovative ways to help companies protect their people after natural disasters.”

During his speech, Andersen also made a recommendation, saying that, “Congress should work with FEMA to ensure that states have the certainty they need to buy budget insurance to protect rainy-day funds used to make residents whole after natural disasters.”

States can sometimes disburse funds to their residents after severe weather disasters and the budget for this could be protected, using insurance or even a catastrophe bond, another example of how risk transfer can protect more than just the physical assets that are impacted.

It’s encouraging to hear of these novel ideas for the use of catastrophe bonds to protect and support people’s recoveries after disasters, something that may become a more urgent need and could raise the profile of securitization as a tool for preparing stores of capital for humanitarian needs, with payouts contingent on disasters occurring.