Resilience bonds can help entities capture the insurance value of catastrophe resilience projects.
A new bond framework
can provide dividends
that boost resilience.
By Michelle Kerr
Healthy cities, like healthy people, are less risky to insure. So if insurers offer people tools and incentives to meet their health goals, why not do the same for cities and regions? That’s a simple but clear way of explaining the purpose of resilience bonds, a unique variation of catastrophe bonds being
developed through the Re:Bound initiative, the brainchild of Re:Focus Partners,
a design and finance firm focused on developing and brokering public-private
partnerships for sustainable infrastructure around the world.
Resilience advocacy is still a relatively nascent trend. In fact, the formal role of
chief resilience officer didn’t even exist before 2014. But resilience projects like
seawalls and other coastal protections are now finding their way onto the agendas
of cities and regions with catastrophe exposures.
In the process of designing some of those projects, the team at Re:Focus
Partners noticed a marked disconnect. Founder and CEO Shalini Vajjhala
said: “We were creating insurance benefits that weren’t really capturable at the
retail level. If you rebuild 63 miles of seawall along Miami Beach you should be
reducing risk — that’s the point of the whole project. But it occurred to us that no
one was really thinking about this problem this way.”
Vajjhala and her team launched Re:Bound to establish a direct method for
tying infrastructure investment to risk transfer vehicles, using catastrophe bonds
as a jump-off point.
“Our goal with the program was to test and validate whether we could rework
a CAT bond into a new structure so that we could capture the benefits of resilient
infrastructure projects in an insurance linked finance mechanism,” Vajjhala said.
Re:Focus teamed up with RMS, Swiss Re, The Rockefeller Foundation and
Goldman Sachs to study, develop and validate the framework for the bonds.
Alex Kaplan, senior vice president at Swiss Re, took part in the initiative. “The
challenges our cities and communities face globally are changing,” said Kaplan.
“This means the solutions our industry can provide must also evolve.”
Resilience bonds, like CAT bonds, serve an insurance purpose, providing
a payout if a catastrophic event occurs and meets the bond’s predetermined
triggering criteria, whether that be a certain threshold of losses, a specific storm
surge height or a certain wind speed, for example. That financial assurance enables
entities or communities to reduce their dependence on federal relief and disaster
But unlike CAT bonds, resilience bonds also benefit their holders when
disaster doesn’t strike. Reduced premiums based on lowered risk are tied to the
completion of the resilience project during the bond term, creating “resilience
rebates” that can applied in a variety of ways depending upon the needs and goals
of the entity.
At the completion of a resilience project, the bond holder has achieved reduced
physical disaster risk while maintaining the financial protection of the bond and
earning a return on its premiums, which would continue through subsequent bond
issuances — creating a long-term resource for funding continued resilience efforts.
“Resilience bonds could not only
support a faster recovery,” said Kaplan,
“but would also help to improve
national and city preparedness in a very
substantial way, and fast-track resilience
from idea to reality.”
MODELING FOR IMPACT
The framework for resilience bonds,
like CAT bonds, relies on sophisticated
models, which are broadly understood
and deliver a high level of confidence
for investors. The difference for
resilience bonds is the use of project-
“If you rebuild 63 miles of
seawall along Miami Beach
you should be reducing risk
— that’s the point of the whole
project. But it occurred to us
that no one was really thinking
about this problem this way.”
—Shalini Vajjhala, founder and CEO, Re:Focus
• Resilience bonds can help
entities capture the insurance
value of resilience efforts.
• Rebates generated by the bonds
can help fund additional resilience
• The first resilience bonds will
likely be issued within the next
year and a half.