Scalable solutions in pandemic and epidemic risk finance

Author: Cristina Stefan

Community health workers during a door to door Covid-19 vaccination session, Tanzania. Photo credit: Ericky Boniphace/Shutterstock

Cristina Stefan is Lead Risk Finance Adviser at the Centre for Disaster Protection. Her journey into development and epidemic risk financing began nearly a decade ago. In this blog post, she highlights the need for pre-arranged financing, fit-for purpose instruments and the right incentives to facilitate timely and effective outbreak response, if the world is to be ready for the next pandemic. 

Throughout my eight years in development and epidemic risk financing, I have witnessed one constant theme: the financial and human impact of epidemic risk is rarely acknowledged. Whether in the solvency calculations of life insurance companies, in assessing business interruption risk to the hospitality industry, or its share on governments and development partners’ budget sheets, epidemic risk remains the poor cousin in disaster risk finance. 

My journey into this field began in helping to develop epidemic models that bridged epidemiology and insurance by using the historical outbreak data to predict disease outbreaks. Despite our and the insurance markets’ ability to conceptualise and quantify the likelihood of epidemic events – for example, for the pricing of the Pandemic Emergency Facility of the World Bank – in reality, less than 3% of international funding was pre-arranged for the scenario that eventually unfolded in 2020. 

The global covid-19 pandemic served to demonstrate the immaturity of the epidemic and pandemic risk financing space, with the bittersweet realisation that the modelling predictions turned out to be true – with glaringly inadequate pre-arranged financial solutions in place.  

The default response from international actors has remained reactive: responding to immediate events as they unfold and seeking to pick up the pieces afterwards. And too often, the conversation around practical, scalable financing solutions to respond to deadly disease outbreaks is displaced by calls simply for more money in the system. 

In the wake of September’s UN General Assembly (UNGA) High-level Meeting and Political Declaration on Pandemic Prevention, Preparedness and Response, it is time to regroup and refocus efforts on three concrete issues paramount to enabling more effective outbreak response:  

• The imperative of pre-arranged financing: Pre-arranged funding that facilitates timely and effective outbreak response is critical, so implementers on the ground don’t need to negotiate budgets before they can act. 

• The need for instruments that are fit for purpose: While it’s great to see more contingent finance available on paper, we must scrutinise the appropriateness of the mostly climate-focused instruments adapted for use in response to the global covid-19 pandemic. 

• The power of incentives: Measuring the impact of response financing and understanding the role of incentives for the actors involved in driving effective responses are critical aspects of any solution. 

The right kind of finance for adequate and effective response is pre-arranged finance

Disaster risk finance covers a range of pre-arranged finance instruments: contingency funds, contingent loans, and other budgetary mechanisms, as well as formal insurance contracts and derivatives. However, most funding for outbreak response is discretionary grant funding, often issued post-event in response to a funding appeal. I was part of the team at the African Risk Capacity (ARC), tasked with designing the first sovereign parametric insurance – a type of insurance where, under agreed conditions, the insured automatically receives some money without having to wait to prove the full extent of the damage – product in Senegal against high-impact epidemic risks. Launched in 2022, and still small in scale, the product aims to deliver predictable funding during the early response phase of an outbreak or epidemic. This is the only prearranged finance mechanism engaging the private sector, and it aims to fill the gap left by the now-defunct Pandemic Emergency Fund.  

But it will not achieve this ambition unless it is scaled up significantly. For this product, and others like it to achieve meaningful scale, we need to see pre-arranged response finance grow from less than 3% to closer to 20% before the next pandemic strikes. 

Commitment does not equal disbursement

Pre-arranged financial instruments all share a common characteristic: predefined conditions for release underpinned by objective triggers, which are specific conditions that dictate when funding should be disbursed.  

But well-designed triggers alone are insufficient. When dealing with epidemic risks, the importance of timeliness cannot be overstated. Given the rapid transmission of infections, we must rigorously test instruments’ effectiveness in disbursement. Every day counts in seeking to outpace the exponential spread. It is essential to align the finance with costed national and subnational response plans. Robust national-level planning is crucial to reduce reliance on discretion, enhance predictability and expedite disbursement. 

When we look back to the Ebola outbreak in the Democratic Republic of Congo in 2019, and the financial management of the response, we saw that despite significant financial commitments, a multimillion World Bank grant sat idle in a bank account, because there were no institutional arrangements in place that would enable the government to accept the grant and disburse it. It took months for the grant to be active and ready to spend on stopping the outbreak. This three-month delay incurred not only additional costs but potentially hundreds more deaths. This real-world scenario underscores a critical point: commitment through pre-arranged financing alone does not guarantee efficient disbursement and lives can still be lost when money sits in a bank account. 

The road to resilience is paved with clear incentives

Incentives are levers that policy makers and finance providers can use to ensure that the positive effects of pre-arranged finance last beyond pilot initiatives. Taking inspiration from the insurance industry, we recognise the potency of market-based pricing in signalling the level of risk and incentivising risk reduction measures among the insured —similar to how homeowners install sprinklers or alarms to protect against fire.  

In the case of outbreaks, for incentives to be effective, we need concrete evidence that quantifies the positive link between the timing of a health emergency intervention, investments in preparedness or pre-arranged finance and the reduced severity of an outbreak.  

More so, if finance is not embedded in a government’s incentives or doesn’t account for the distressed fiscal space and the need for local ownership, then money will be spent with the best intentions, but without intentionally checking the right boxes of the response. If the separation of duties between responders, implementers and financers is clear in advance, then money can be predictably put in the hands of those who are best positioned to implement the response. First responders shouldn’t have to waste time during the crisis navigating a political minefield and negotiating with donors on funding allocations and timelines. 

From vision to action

Photo: Roundtable of leading experts and practitioners met to explore disaster risk financing innovation in the context of epidemic and pandemic risk. Credit: Enzo Barracco

On the sidelines of the UN General Assembly in New York this September, and the adoption of the world’s first Political Declaration on Pandemic Preparedness, Prevention, and Response, the Centre for Disaster Protection convened leading experts and practitioners to explore disaster risk financing innovation in the context of epidemic and pandemic risk.  

Raising pandemic and epidemic financing from its ‘Cinderella’ status in disaster risk finance, requires us to put together the pieces of what is an overly fragmented system. A lot of work still lies ahead of us, but as I looked around the table, I was humbled to see committed leaders representing the whole outbreak risk finance ecosystem willing to push the disaster risk finance agenda for epidemics and pandemics. Action would build on what already exists, whether through anticipatory action, sovereign insurance, or public-private partnerships, where the public sector and the private sector come together to bridge finance for businesses and communities and make options affordable. 

Development banks have added significant contingent and concessional finance to their suite of products, building on emerging climate finance solutions, seeking to assist countries to invest in preparedness measures and better surveillance. Powerful interventions from regional bodies from both Latin America and Africa demonstrate how their members are mobilising collectively to pool procurement of therapeutics and vaccines, for example, and building contingent response plans.  

The work of the Joint Finance and Health Task Force established by the G20 also serves to signal a step in the right direction, helping bridge the divide between Ministries of Finance and Ministries of Health in risk finance through shared analysis of economic vulnerabilities.  

As we move forward, it’s imperative to continue building on these foundations to ensure a resilient and timely response to the challenges that lie ahead. Whichever way we go, whichever solutions we bet on, we’d better make sure we build in metrics for measuring finance impact for those most vulnerable - so that next time we’re better prepared and not left blindsided facing the same hard decisions and budget reallocations.