The future of pandemic financing: Will the Pandemic Emergency Financing Facility create a global market?
by Daniel Clarke, Director, Centre for Disaster Protection and Joanne Meusz, Lead Risk Finance Specialist, Centre for Disaster Protection
Safety suits for the Ebola decontamination team. Photo: Corporal Paul Shaw / Ministry Of Defence
Lawrence Summers, former World Bank Chief Economist, called the Pandemic Emergency Financing Facility (PEF) a symptom of “financial goofiness” within the World Bank. But was this criticism fair? Or, will history show that the PEF played an important part in creating a global market for pandemic instruments that protect the world’s poorest people?
When the idea of the PEF was first proposed by Jim Yong Kim, the then President of the World Bank Group in January 2015, the idea was simple: to move from passing round a begging bowl once a pandemic struck a low-income country, to an approach where surge financing was arranged in advance, all with the intention of reducing the human and economic cost. It was a response to the West African Ebola epidemic in Sierra Leone, Liberia, and Guinea, where the response of the international crisis financing system was late and inadequate, leading to many deaths that could have been averted.
Part of the PEF’s approach was to include an insurance-like transaction, where donors would essentially pay insurance premiums, and if there was an event with pandemic potential, the insurance would pay out to the PEF, who would in turn use the money to fund a response. This blog is about the ‘insurance window’ of the PEF.
The PEF’s stated objectives did not help its cause
In the public sector, stated objectives really matter. They announce to the world what you and your partners are trying to jointly achieve. And, they set out what you will hold yourself to account over. Having the right stated objectives is particularly important for crisis financing instruments, given how contentious crises can be.
The PEF has two stated objectives:
To make available surge financing to key responders, including governments, multilateral agencies and civil society organisations, to respond to an outbreak with pandemic potential and to minimise its health and economic consequences.
To help catalyse the creation of a global market for pandemic insurance instruments by drawing on resources from insurance, bonds and/or other private sector financial instruments.
The PEF’s first objective is a little vague, but otherwise uncontroversial. International public health experts comment that everyone concerned with public health agrees that pre-committed pandemic funds are a good idea. Faced with a pandemic, it is not the only important thing, but in the midst of covid-19 you would be hard pushed to find anyone who thinks that pre-arranged pandemic finance is a bad idea.
By contrast, the PEF’s second objective has been highly controversial. Much mud has been thrown, including accusations that the PEF prioritises investor interests over global health security (e.g. these BMJ and Nature articles, countered in this Artemis article).
The problem is that the PEF’s stated objectives do not fully clarify its priorities – it is unclear whether the PEF was trying to make as much surge financing available at the right time and at the lowest social, or economic cost, or the extent to which using innovative finance to catalyse a market was the priority. On the face of it, the PEF could meet its two objectives even if it overpaid for insurance.
It would have been much better for the PEF to have one objective—its first objective—and to leave the question of how the financing was structured to the solution rather than the question. In practice this would have probably forced the PEF team to provide a clearer explanation as to why they chose to include insurance in the solution rather than just have a larger contingency fund. And it would have given the PEF team a mandate to try to shift the global discussion, without others impugning its motives.
Will the PEF catalyse a market?
We believe that the PEF should not have had market-making as an objective, but given that it did, how has it fared on that front?
If you want a well-functioning pandemic insurance market, you need both buyers and sellers of pandemic insurance. Developing a pandemic insurance product that is acceptable from the seller-side is technically challenging but doable, particularly if index-based approaches are acceptable to the buyer. In high-income countries, index-based markets, which include cover for pandemic risks, have been in existence since at least 2003.
Before covid-19, the binding constraint on the pandemic insurance market was the lack of people, businesses, or governments willing to buy the products that were on offer. Insurance products that would have provided protection to businesses were offered in high-income countries, but no-one bought them. The situation became even more difficult when looking at insurance to protect people in the world’s poorest countries against pandemics, as the PEF did. Who would pay the premium?
In this context, the PEF managed to mobilise US$114.5 million from Japan, Germany, and IDA for its insurance window. Mobilising this amount of funding was no small feat. Donors have underlying political and behavioural disincentives that bias them towards visible need rather than to fund pre-agreed financing deals for a pandemic that has not happened yet, and might never happen. Other similar pandemic insurance offers remain unfunded. Yet, the PEF and its funders seemed able to overcome that, with logic and a splash of charisma from Jim Yong Kim.
Yet, since this funding was mobilised, the PEF insurance window has come under sustained attack, first by global health policy experts, and more recently by mainstream media. The World Bank seems to be developing a PEF 2.0, building on the first three years of the PEF, and is presumably having conversations with its partners and funders about lessons learned and changes that will be made. But these conversations are happening in private. The PEF has shied away from engaging with public debate about PEF 2.0. This is a mistake. The PEF is one of the most transparent risk finance schemes in the world. It has published full details of its triggers and its operations manual. It should also be transparent in the design process for PEF 2.0. As Zoë Scott argues in a companion blog, an independent evaluation of the first three years of the PEF is critical to inform future efforts to better protect the world against pandemics. It is also going to be critical for informing the development of any other crisis risk finance instruments that aim to protect the poorest in a way that is both politically and commercially sustainable.
The way forward
The monumental impact of covid-19 will catalyse demand for ways of managing pandemic risk and we see an important future for crisis financing instruments in protecting people against complex, contested risks. By itself, the insurance market will not be able to provide the sole solution—for example, if they insure people and businesses against the economic cost of pandemic-related shutdowns, what is to stop a government from extending those shutdowns and letting insurers foot the bill? Insurers are wary of entering into contracts where there is the possibility of such moral hazards. Equally, governments are poorly placed to fully insure their people and economies against these risks—in particular, governments typically do not have internal skills or political will to implement risk-based pricing. Efficient financial protection solutions are likely to involve various forms of public-private-people partnerships.
In high-income countries, partnerships that provide insurance-type protection can, and do exist – for example, for agricultural or terrorism insurance. However, in low and middle-income countries creating these partnerships is often challenging. The multilateral system should help countries set up the right governance and partnership frameworks for these.
The PEF’s experience can offer useful lessons. Solutions to pandemic risk should have a clear focus and be developed through open dialogue between stakeholders, including those they seek to protect.
The PEF has had a faltering start and it is unclear what form PEF 2.0 will take, or how substantial it will be. However, the global reach of covid-19, the pandemic itself, is likely to boost demand for solutions to pandemic risk, and in this context the experience of the PEF will help. People and businesses will want protection against future waves of covid-19 and future health outbreaks. Since outbreak and epidemic risk is so intimately linked with national health policy, commercial insurance markets will be unable to deliver this fully by themselves. Governments and international organisations will be asked to step in. For those that do, the PEF can offer useful lessons.
The Centre’s Glossary of Terms can be found here.