The World Bank issued the first pandemic bonds in 2017. Pandemic bonds are a type of catastrophe bond that's popular in the insurance industry. For example, an insurance company may sell catastrophe bonds to raise funds in the event of a natural disaster like an earthquake. As with catastrophe bonds, the payout for pandemic bonds is activated when certain predetermined conditions are met.
What are pandemic bonds?
Pandemic bonds are a relatively new funding scheme and investment security. Some investors may still wonder what pandemic bonds are, how they work, and how to invest in them. The World Bank came up with the idea of pandemic bonds as a way to raise funds from private investors to fight serious disease outbreaks in poor countries.
The Ebola outbreak in West Africa in 2014 killed more than 11,000 people and disrupted economies. The outbreak inspired the World Bank’s pandemic bonds scheme. Investor interest in the World Bank’s first pandemic bond sale was so strong that it was oversubscribed by 200 percent.
The goal of pandemic bonds is to support struggling health systems in developing countries. A disease outbreak in one corner of the world threatens the whole world. As a result, there's a need to assist nations that can’t effectively combat serious outbreaks on their own.
When is there a payout from pandemic bonds?
Pandemic bond funds are released to eligible countries where a disease outbreak threats to snowball into a pandemic. Certain triggers must be met before there can be a payout. The triggers include the number of deaths reaching a certain level in the eligible country and the speed of the disease outbreak’s spread.
The capacity of the eligible country to deal with the outbreak is also taken into account when distributing the payout. The payout for pandemic bonds can only be activated after 12 weeks from the time of the outbreak.
How to invest in pandemic bonds
The World Bank’s pandemic bonds are high-yielding securities. The bank sells two types of bonds. Low-risk bonds pay interest rates of 6.5 percent, while high-risk bonds pay interest rates of more than 11 percent. The pandemic bonds pay higher interest rates than most normal bonds sold by corporations and governments.
The World Bank’s pandemic bonds trade in the private market and investors go through specialized brokers to buy them. Pandemic bonds' prices tumbled as much as 80 percent when it became imminent that the COVID-19 outbreak would trigger a payout. While pandemic bond investors enjoy high yields, disease outbreaks resulting in huge payouts can wipe out their investment.
Do pandemic bonds work?
The payout to poor countries struggling with the COVID-19 pandemic may show that pandemic bonds work because many developing nations weren't prepared to deal with the health crisis.
Officially reported numbers of both confirmed cases and deaths are required to trigger payouts from the World Bank ‘s pandemic bonds (#catbonds) issued in 2017. Will the “outbreak growth” condition be met by July (bond maturity)? No payouts after that. https://t.co/35o0N4iEs1 https://t.co/M3NGfHorUO pic.twitter.com/uRlflF7zhC— Olga Jonas (@olga_02138) February 19, 2020
Since a disease outbreak in a poor country can spread rapidly and slow down or shrink the local and global economy, pandemic bonds can work towards the global good.
New #Ebola outbreak declared in Democratic Republic of the Congo— WHO African Region (@WHOAFRO) May 8, 2018
The #DRC🇨🇩 MoH informed WHO that two out of five samples collected from five patients tested positive for #Ebola Virus Disease. More specimens are being collected for testing. https://t.co/L7BKAdRYT2 pic.twitter.com/aNCq4MIxyt
However, the World Bank’s first pandemic bond faced criticism. Some critics argue that the scheme was too slow to respond to the COVID-19 outbreak. Critics think that the bank designed the scheme to favor investors at the expense of poor countries. The bank also came under fire for not making the payout from the pandemic bond scheme in the 2018 Ebola outbreak in the Democratic Republic of the Congo.
The World Bank planned a follow-on pandemic bond sale in 2020. However, the World Bank scrapped the plan following criticism of the scheme, especially in relation to the response to the COVID-19 pandemic.