Classification: Confidential

2Disclaimer
This report has been co-produced by Lloyd's and theCentre for Global Disaster Protection (“the Centre”) for
general information purposes only. This does not reflect
the views of the UK Department for International
Development or the World Bank Group and additionally
does not necessarily reflect the views of any of ourpartners. While care has been taken in gathering thedata and preparing the report and the information
herein, Lloyd's, the Centre and RMS do not make any
representations or warranties as to its accuracy orcompleteness and expressly excludes to the maximum
extent permitted by law all those that might otherwise
be implied. Lloyd's, the Centre, DFID, RMS and theWorld Bank Group accept no responsibility or liability for
any loss or damage of any nature occasioned to any
person as a result of acting or refraining from acting asa result of, or in reliance on, any statement, fact, figure
or expression of opinion or belief contained in thisreport. This report does not constitute advice of any
kind. RMS results are included in this report for general
information purposes only and none of the content isintended to constitute risk management advice or arecommendation to make (or refrain from making) any
kind of risk management decision and may not be reliedon as such. Any results of RMS’ contained in this report
are RMS’ proprietary and confidential information andmay not be used by any recipient of this report without
RMS’ prior written consent.
© 2018All rights reserved

About Lloyd’s
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With expertise earned over centuries, Lloyd's is thefoundation of the insurance industry and the future of it.
Led by expert underwriters and brokers who cover morethan 200 territories, the Lloyd’s market develops theessential, complex and critical insurance needed tounderwrite human progress.

Innovative finance for resilient infrastructure

About the Centre for Global DisasterProtection
The Centre for Global Disaster Protection was launchedby UK Prime Minister Theresa May in July 2017 with thegoal of working with governments to strengthen predisaster planning, catalyse innovative finance forresilience and use risk financing tools like insurance toprotect people and speed response and recovery. The
Centre brings together partners including the UK
Government, the World Bank, civil society and theprivate sector with the shared goal of enhancing thefinancial resilience of developing countries to climate
and disasters. The Centre is funded by the UK
Department for International Development (DfID).

About Risk Management Solutions
For almost 30 years, RMS’ mission has remained
constant: to make communities and economies more
resilient to disasters through a deeper understanding ofcatastrophes. Today, RMS is a leading provider of
products and services that help governments, publicagencies, corporations, financial institutions and theirclients to evaluate and manage catastrophe risks
throughout the world. Operating from twelve offices
across the Americas, Europe and Asia, RMS serves
hundreds of clients around the world, collaborating withthem to help them build the capacity required to
manage their risk.

About Vivid Economics
Vivid Economics is a leading strategy economics
consultancy with global reach. We strive to create
lasting value for our clients, both in government and theprivate sector, and for society at large.
Vivid Economics is a premier consultant in the policycommerce interface and resource and environmentintensive sectors, where we advise on the most criticaland complex policy and commercial questions facing
clients around the world.
The success it brings to its clients reflects a strong
partnership culture, solid foundation of skills andanalytical assets, and close cooperation with a large
network of contacts across key organisations.

3

Key contacts
Trevor Maynard
Head of Innovation
innovation@lloyds.com
For general enquiries about this report and Lloyd’s
work on emerging risks, please contact
innovation@lloyds.com
RMS project team− Daniel Stander, Global Managing Director− Charlotte Acton, Director− Conor Meenan, Senior Consultant− Jed Scanlon, Analyst
Vivid Economics project team
− John Ward, Managing Director− Irena Sekulska, Engagement Manager− Luke Kemp, Senior Economist− David Ren, Economist
Lloyd’s project team− Dr Trevor Maynard, Head of Innovation− Lucy Stanbrough, Innovation Associate− Rebekah Clement, Speech and Studies− Flemmich Webb, Speech and Studies
DFID project team− Mark Povey, Infrastructure Adviser− Dr Nicola Ranger, Senior Adviser on Disaster Risk
Financing and Insurance− Daniel Clarke, Actuary− Peter Bentley, Adviser, Private Sector Department− Harvey Naylor, Policy Adviser− Dr Harriette Stone, Financial Sector TeamAcknowledgements
The following people were interviewed, took part inworkshops or roundtables, or commented on earlier
drafts of the report; we would like to thank them all for
their contributions:Innovation lab workshop and consultation− Gilbert Harrap, MS Amlin− Adam Beatty, Nephila− Brendan Plessis, XL Catlin− Emma Radcliffe, XL Catlin− Benjamin Baltesar, Hiscox− Ian Branagan, Ren Re− Emma Whiteacre, Beazley− Andreas Prystav, Swiss Re− Benjamin Antwi-Boasiako, Allianz− Michael Roth, Munich Re− Tony Stubbs, Parhelion− Nigel Brook, Clyde &Co− Jo da Silva, Arup
− Ian Callaghan, Ian Callaghan Associates− Simon Young, GeoSY− Madeleine Rawlins, Mott Macdonald− Espen Nordhus, Securis Investments
Innovative finance for resilient infrastructure

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Peter Buettner, First River Partners
Gavin Newton, Willis Towers Watson
Jacqueline Wharton, Willis Towers Watson
Carlos Sanchez, Willis Towers Watson
David Simmons, Willis Towers Watson
Emily Wilkinson, ODI
Jane Newman, Social Finance UK
Jun Rentschler, World Bank
Rashmin Gunasekera, World Bank
Theodore Purnendu Talbot, Global Partnership
Judith Amar, START Network
Claire Souch, AWHA Consulting
Kerstin Pfliegner, The Nature Conservancy
Federico Berna, European Commission
Nick Lane, PwC
Tom Strickland, PwC
Miroslav Petkov, S&P Global
Peter Datin, RMS
Robert Muir-Wood, RMS
Tony Lloyd-Jones, Westminster University
Jamie Rhodes, re:focus
Shalini Vajjhala, re:focus
Ruth Hughes, NERC
Piran White, York University
Swenja Surminski, LSE
Paul Bispham, Actuarial Regulatory & Tax Advisors
LimitedHarvey Duckers, Actuarial Regulatory & Tax
Advisors Limited
Ian Rogers, GAD

Further thanks go to the authors of the ‘Financial
Instruments for Resilient Infrastructure’ report
RMS project team
− Charlotte Acton, Director− Conor Meenan, Senior Consultant− Jed Scanlon, Analyst
Vivid Economics project team
− John Ward, Managing Director− Irena Sekulska, Engagement Manager− Luke Kemp, Senior Economist− David Ren, Economist
DFID project team− Mark Povey, Infrastructure Adviser− Dr Nicola Ranger, Senior Adviser on Disaster Risk
Financing and Insurance− Daniel Clarke, Actuary− Peter Bentley, Adviser, Private Sector Department− Harvey Naylor, Policy Adviser− Dr Harriette Stone, Financial Sector Team
re:focus project team− Shalini Vajjhala, Founder & CEO− Jamie Rhodes, Director
All icons have been sourced and licencensed from theNoun project.
Date of publication: October 2018

Executive summary

4

Contents

Executive summary............................................................................................................................................................... 5
1. Introduction ....................................................................................................................................................................... 8
2. Trends and context ........................................................................................................................................................... 9
3. Building resilience, building benefits ............................................................................................................................... 14
3.1 Background ............................................................................................................................................................... 14
3.2 The benefits of resilient infrastructure ....................................................................................................................... 15
3.3 Insurance makes disasters shorter, safer and cheaper ............................................................................................ 18
4. Innovative instruments for financing resilience ............................................................................................................... 24
4.1 Insurance–linked loan package .................................................................................................................................... 27
A.

Introduction ............................................................................................................................................................ 27

B.

How would it work in detail? .................................................................................................................................. 27

C.

Worked example .................................................................................................................................................... 30

D.

Assessment against criteria................................................................................................................................... 31

E.

Next steps .............................................................................................................................................................. 33

4.2 Resilience impact bond ................................................................................................................................................. 34
A.

Introduction ............................................................................................................................................................ 34

B.

How would it work in detail? .................................................................................................................................. 35

C.

Worked example .................................................................................................................................................... 36

D.

Assessment against criteria................................................................................................................................... 39

E.

Next steps .............................................................................................................................................................. 40

4.3 Resilience bond ............................................................................................................................................................ 41
A.

Introduction ............................................................................................................................................................ 41

B.

How would it work in detail? .................................................................................................................................. 41

C.

Assessment against criteria................................................................................................................................... 43

D.

Next steps .............................................................................................................................................................. 43

4.4 Resilience company ...................................................................................................................................................... 44
A.

Introduction ............................................................................................................................................................ 44

B.

How would it work in detail? .................................................................................................................................. 44

C.

Assessment against criteria................................................................................................................................... 46

D.

Next steps .............................................................................................................................................................. 46

5. Conclusions .................................................................................................................................................................... 47
References .......................................................................................................................................................................... 48

Innovative finance for resilient infrastructure

Executive summary

5

Executive summary

This report, published by Lloyd’s in association with the
UK’s Centre for Global Disaster Protection, identifies andprovides an outline design of four financial instrumentsthat could be used to incentivise and deliver greater
investment in resilience.
The instruments were developed through the Centre’s
first 'Innovation Lab', which brought together experts froma range of sectors, including finance, insurance,engineering, humanitarian and development. Together
they created initial 'strawman solutions', identified themain challenges to implementation and discussed ways
to overcome these challenges.
The Lab built upon a detailed literature review of the stateof infrastructure finance and analysis of existing financial
instruments, directly and indirectly related to resilience.
Experts worked on hypothetical case studies based onreal-world settings, using background informationand
modelled examples of the resilience benefits for eachcase.

Background
Global economic losses from disasters are substantial
and growing. They will continue to increase, driven by
greater wealth, hazard exposure and, for some events,
climate change. Developing countries are affecteddisproportionately by these events and their losses areoften compounded by poorly designed and constructed
infrastructure, inadequate maintenance, a lack of
insurance and delayed recovery.
However, the severity of impact can be reduced byinvesting in greater resilience, creating a so–called“resilience dividend”. This dividend is the sum of thebenefits of greater resilience, which include both reduced
asset damage and faster economic recovery postdisaster.
Greater resilience also gives confidence to businesses bylowering risk, thereby stimulating innovation andeconomic growth. There are strong and provenarguments in favour of investing in greater resilience –some studies show that the benefits of such investment
exceed its costs by a ratio of four to one.

Innovative finance for resilient infrastructure

Despite the evidence, many countries do not invest as
much as they need to realise these benefits, mainly due
to higher up–front costs, misaligned incentives and a lackof information. This is particularly the case in developing
economies where the benefits of improved resilience areoften perceived as intangible or only likely to materialisein the distant future.
This lack of investment in resilience has a substantial
economic and human cost, and in many cases acts as a
drag on the economic growth of developing nations,particularly those that are prone to frequent disasters. For
example, last year’s hurricane season left Dominica – asmall island state with a GDP per capita eight times lower
than the US – suffering losses of 224% of GDP.

Encouraging greater investment inresilience
One cost–effective way of improving resilience is throughfinancial instruments, including insurance products. Well–designed insurance products can incentivise pre–disaster
response planning, so that when disruptive events takeplace agencies take quick decisions and distributeresources effectively and fairly.
As a result, insurance can be an effective part of alayered risk management strategy to deliver post–disaster finance. Research also shows while uninsured
losses often lead to a drop in economic growth, growth isprotected if these losses are insured.
Another benefit is that with careful design, insurance andinvestments in resilience can be mutually reinforcing.
Greater resilience reduces risk, which is then reflected inlower insurance premiums a, providing a strong financial
incentive to make suitable investments.
As well as providing insurance cover, insurers often playa valuable role in helping governments and otherstakeholders understand and “price” their risk exposurea

As an alternative, insurance provision can be made conditional onundertaking resilience investments.

Executive summary

before events take place. Disasters represent asignificant contingent liability for governments. Thisliability is not clearly defined by law, so governments
often find themselves acting as insurers of last resort, insome cases without knowing exactly what their disasterrisk exposures are (The World Bank & Swiss
Confederation, 2011). By working with insurers,
governments can better assess, understand and manage
these risks.

6

protect against the risk of receiving a smaller pay–out
from the donor, on account of not meeting all of theresilience metrics.
−

Four financial tools to improve
resilience
This report examines four innovative financial
mechanisms that help monetise the resilience dividend
for investors, thereby providing a strong economic caseand financial incentive for investing in greater resilience.
Two were chosen for cash flow modelling – theinsurance–linked loan package and the resilience impact
bond – to help illustrate the viability of promoting
resilience as well as the role that insurance can play inenhancing it. The four mechanisms are:−Insurance–linked loan package: an infrastructureloan, which has a built–in insurance component.
Insurance premium savings based on thesubsequent risk reduction derived from the insurance
cover are used to offset the loan’s interest
repayments.
The product may be well–suited to large
infrastructure projects in high–risk regions, ideallyinvolving a portfolio of multiple assets. It can beeasily modified to include donors keen to reduce
interest costs on loans for critical resilient
infrastructure. This mechanism requires only smallchanges from existing practices to make it applicableto building greater resilience.

−

Resilience impact bond: a pay–for–performance
contract between a donor, funding greater resilienceand social goals, and a group of investors. The donor
makes payments to the investors depending on theirsuccess in delivering physical, operational andfinancial resilience measures, incentivising investors
to be as efficient as possible by transferring thedelivery of the resilience dividend to the investor.
This product is particularly well–suited to cases
where the benefits of resilience are spread widely
across a community, such as services provided byschools, social care bodies and hospitals The
requirement to take out insurance to cover losses
associated with disasters would be specified as oneof the measures of resilience against which the donor
would make a payment.
In addition, the impact investor may also choose to
take out insurance to ensure it has sufficient
resources to implement disaster response andcontingency plans needed to meet the criteria for
payment. The investor may also seek insurance toInnovative finance for resilient infrastructure

Resilience bond: an innovative risk–linked financing
mechanism that builds on the existing catastrophebond model to take account of the positive impact ofresilience measures. Under this structure, whenresilience measures are implemented, coupon
payments on the bond are reduced. The reduction incoupon payments can be securitised, thereby
providing a way of funding investment in greater
resilience.
This product is well–suited to cases where several
different stakeholders have a common interest inenhancing the resilience of services provided by acritical asset, such as a coastal road or port.

−

Resilience service company (ReSCo): thisproduct/business model involves an agent who pays
upfront for an insured asset, in return for a share of
future insurance premium savings. The approach
was inspired by the innovative financing mechanisms
employed by Energy Service Companies (ESCOs).
It may be best suited to situations where there aremany diffuse but similar assets, such as residential orcommercial property assets, that are all subject tofrequent disaster events.

Conclusions
Investment in greater resilience can be a cost–effective
way of mitigating the risks posed by disasters andreduces the costs of recovery from them.
Resilience measures that demonstrably reduce risk can
result in realised cash savings through reductions ininsurance premiums. In other words, where insurance isalready in place, insurance provides a vehicle formonetising the resilience dividend. Public (donor) funding
provides a complementary means of allowing investors torealise a financial return from resilience measures. The
insurance–linked loan package and resilience impact
bond transfer these cashflows to a structure or party who
is able and willing to receive them over a longer
timeframe.
Further work is required to make the four products
analysed in this report applicable for real–world use. In
the case of insurance–linked loan packages andresilience impact bonds, further development and design
could be undertaken by convening a group of interested
stakeholders to pilot the products in a specific context.
This would generate useful information that can be added
to the significant practical experience that already exists.
In the case of resilience bonds and resilience service
companies, more research is needed to demonstrate
proof of concept in a developing economies context,
using similar analysis to that deployed in this report.

Executive summary

Further work can also be done to explore the broader
societal and economic benefits of greater resiliencebeyond the reduction in expected damage and losses
caused by disasters. These benefits have not been
included in the risk and cash flow modelling for thefinancial mechanisms in this report. Quantification ofthese benefits could allow future financial structures tomonetise these benefits more directly. This would
increase the incentive for using these sorts of
instruments.
Policymakers have a critical role to play in driving forward
the development of these and similar products, tailoring
their design and sponsoring pilots. The significant publicbenefits from investment in resilience justify the publicfunding these products often require to be successful.
This work should form part of a broader effort bypolicymakers to invest in risk data gathering andmonitoring, disaster preparation and planning in key
sectors, and implementing systems and tools to improve
resilience. Donors are likely to have a particularly
important role in environments with high discount rates
and in less developed insurance markets.
Risk-based pricing within insurance policies will help
policymakers. The financial mechanisms analysed in thisreport, with the exception of the resilience impact bond,rely on the reduction of risk to physical assets thatinvestment in greater resilience brings and access toinsurance pricing which fully reflects this risk reduction.
Reasonable certainty that investment in resilience will
result in reduced insurance premiums is required tostimulate innovation in this area and insurers must
continue to reflect ongoing improvements to theirunderstanding of the underlying risk in their pricing.
Insurers could also help policymakers by providing risk
modelling and assessment advice, guidance on risk
financing tools, and support to help push resilience up
the political agenda.

Next steps−

Test the four financial mechanisms with developing
countries, the private sector and donors to gaugeinterest and real–world potential.

−

Develop criteria to determine in what situation eachproduct is useful, e.g. for infrastructure such as
schools.

−

Investigate how these financial mechanisms could be
brought to market and what the role of DFID andother donors should be b.

b

For further details please refer to ‘Financial Instruments for Resilient
Infrastructure’ (RMS, 2018a).

Innovative finance for resilient infrastructure7

Classification: Confidential

Introduction

8

1. Introduction

This study explores how innovative financial mechanisms, which combine funding and incentives for resilience withinsurance, can play a critical role in reducing the worst impacts of disasters. The mechanisms do this both by building
resilience before a disaster strikes and by driving a quick and coordinated recovery afterwards.
The products emerged from an Innovation Lab run by The Centre for Global Disaster Protection c, in partnership with
Lloyd’s. This convened experts from across the financial services, development, humanitarian and engineeringcommunities to catalyse new thinking on how innovative financial instruments can help respond to the global resiliencechallenge.
Lloyd’s continues to support this topic and sees the Lab and the products as a pathway to building developing countries’
understanding of and access to the insurance products, in alignment with the InsuResilience and Insurance
Development Forum goals. As part of these efforts a group of businesses at Lloyd’s have launched a Disaster Risk
Facility, which pools $445m capacity along with the expertise to develop reinsurance solutions for natural catastropherisks in emerging economies.
The report is structured as follows:−

Section 2 provides the critical context for the study, highlighting the growing damage caused by disasters, and how
these damages are exacerbated by underinvestment in resilience, underinsurance, and delays in recovery andreconstruction.

−

Section 3.1 explores the concept and importance of resilience measures in more detail and some of the key barriers
that need to be overcome to deliver and maintain resilient infrastructure.

−

Sections 3.2 and 3.3 discuss the complementary role that risk transfer options can play in building resilience andensuring that communities and society can bounce back better and faster after disasters strike.

−

Section 4 outlines four instruments that combine incentives for constructing and maintaining resilient infrastructurewith risk transfer solutions. Their aim is to allow people to build better – and build back better.

c

The Centre for Global Disaster Protection is a partnership between the UK Government and World Bank and works with governments andhumanitarian agencies to strengthen pre-disaster planning, catalyse innovative finance for resilience and use risk financing tools like insurance toprotect people and speed up response and recovery times.

Innovative finance for resilient infrastructure

Classification: Confidential

Introduction

9

2. Trends and context

Global economic losses from disasters are substantial
and growing. They will continue to increase in theabsence of action, driven by greater wealth, hazard
exposure and, for some events, climate change.
Developing countries are affected disproportionately bythese sorts of disruptive events and their losses are often
compounded by poor infrastructure, inadequate
maintenance, a lack of insurance and delayed recovery.

2.1 Disaster trends
The global economic and human losses from disasters
are enormous. The 2017 hurricane season, aside fromthe record–breaking losses, generated losses of large
magnitude in several different classes of insurance andfrom different types of loss events from Harvey, Irma andMaria (HIM). Insured industry losses for Harvey are likely
to represent a relatively small proportion of total
economic losses, with a suggested range of $25–35bn(RMS, 2018) with Lloyd’s net losses being $1.6bn in2017 financial results d.
The 2017 hurricane season was the costliest on record
with losses of $215bn (Munich Re, 2018). As shown in
Figure 1 (overleaf), modelled losses from Hurricane
Maria were in the region of $1.8–2.2bn and those for
Hurricane Irma in the region of $18.4–19.3bn. These
events helped contribute to the costliest hurricane
season on record (Munich Re, 2018).
By the end of 2017 it was recorded that more than
11,000 lost their lives as a result of all disasters (Swiss
Re, 2018) and preliminary estimates suggest total
economic losses range from $300–330bn, 40–60% of
which were not insured (Munich Re, 2018; Swiss Re,
2018).
Global losses due to disasters are rising. 2017 is unlikely
to be an outlier. The average annual cost of damages
has increased by almost 10 times between the 1970s
and this decade, driven by increased wealth, hazard
exposure and, for some events, climate change (Ranger
and Surminski, 2013). Swiss Re (2018) data suggestsdLloyd’s 2017 Annual Results, Analyst Presentation, 21 March 2018.

Innovative finance for resilient infrastructure

annual average losses since 2010 ($203bn) have beenaround 50% higher than in the previous decade, andalmost twice the average losses in the 1990s. RMS
analysis suggests that in terms of U.S. and Caribbean
industry insured wind, storm surge and flood losses, the2017 hurricane season corresponds to a return period of
between 15 and 30 years (RMS, 2018).
Future climate change will exacerbate these trends. In
2017, weather related disasters were responsible formore than 95% of the losses from disasters (Swiss Re,2017). Climate change will make many of these extreme
events more frequent and severe, resulting in
unprecedented, destructive events (IPCC, 2014; IPPC,
2012).
Disasters hit developing and vulnerable countries
disproportionately harder. Last year’s hurricane season
left Dominica – a small island state with a GDP per capita
eight times lower than the US – suffering losses of 224%
of GDP. Direct economic losses e from disasters are 14
times higher in low–income countries than high–income
countries (Ranger and Surminski, 2013), while low– andlow–middle income countries account for 81% of fatalities
from disasters (UNDP, 2014). Low–income, high–exposed countries such as Bangladesh can suffer losses
of approximately 3–5% of GDP every 5–10 years fromrecurring disasters (OECD, 2015).
Many of these losses, especially in developing countries
are not insured. 40–60% of losses from disasters in 2017
were not insured. While the proportion of losses notinsured has been steadily decreasing over time, yetinsurance still regularly covers under half of total losses.
Underinsurance is highest in developing countries.
Today, nearly 90% of economic losses from disasters in
low–income nations remain uninsured. Recent
catastrophes demonstrate both the insurance gap, andthe difference in coverage between developing ande

As a % of GDP

Introduction

10

Figure 1: Hurricanes Irma and Maria, modelled direct economic loss estimates, and loss as a function of GDP, for asubset of Caribbean islands

Map shows RMS HWind 1–min sustained wind speed footprints, with relative modelled impact shown for a subset of
Caribbean countries affected by the hurricanes. Modelled economic loss estimates reflect expected direct damage andloss to residential, commercial and industrial type structures within the islands. Results are derived from RMS’s best
understanding of modelled loss to the region which sits within a range of plausible losses that are defined byuncertainties that still exist in wind speeds, vulnerability, and post–event loss amplification, including non–modelled
effects such as prolonged power outages in Puerto Rico.
Source: RMS in (Centre for Global Disaster Protection, Department for International Development and Lloyd’s, 2018)

Innovative finance for resilient infrastructureIntroduction

developed countries. In Ecuador, the Government
requested $3.3bn for recovery from an earthquake struckin April 2016. It was only capable of covering $2.3bn(67%) of the costs (Pestano, 2016). In contrast, of New
Zealand's estimated $30bn economic losses (direct andindirect) in 2010 and 2011 (Deloitte, 2015), following thedestructive earthquakes in Christchurch, 75% were
picked up by international insurers with payouts totallingover $20bn (ICNZ, 2018).
Loss estimates are often even higher than suggested byheadline statistics. Most estimates do not consider the
impacts of disasters on the informal sector f, or the
knock–on impacts from a disaster on, for example, thefiscal position of the country (United Nations, 2015).
These neglected areas can comprise a significant part ofthe costs of disasters. Losses from disasters might be
50% higher once impacts on informal businesses g and
low–income households are included (UNDP, 2014).
Disaster losses are exacerbated by both poor
infrastructure and delays in recovery. While disasters
cannot be avoided, the economic costs and humanimpacts are often aggravated by two factors:
1. Poorly constructed and badly maintained
infrastructure, and
2. Delayed response post disaster, as explored further
in the following section.

2.2 Underinvestment in resilience
Under investment in resilience is not cost–effective in thelong run. Infrastructure lasts a long time and risk levels
are changing all the time due to ongoing global
megatrends. This makes it crucial to implement building
codes that are robust in the light of both current andfuture risks. Implementing risk assessment and resiliencecan also be particularly challenging in developing
countries where interventions may be less financially
viable, or in places with moderate or low–frequency
hazard profiles, where there can be greater
complacency.
RMS analysis clearly outlines this by suggesting that
Caribbean damage costs from hurricanes Irma and Maria
could have been of the order of $16.5bn less had
impacted buildings across all islands been constructedaccording to 2018 design codes (Centre for Global
Disaster Protection and Lloyd’s, 2018). Proportionate
savings would likely be significantly higher for lessextreme events with a more frequent return period.

11

There are numerous examples in the literature. For
example, Arup (2014) found that a $3bn upgrade of theelectrical grid of New York would save more than $3bn interms of lower maintenance and disaster repairs, andgenerate a further $4bn of economic benefits including
avoided disruptions to business.
Inadequate maintenance further undermines
infrastructure resilience. The challenges are not restricted
to ensuring that infrastructure construction is of a highstandard; maintenance is often not performed, or done
poorly, leaving infrastructure more vulnerable todisasters. In Puerto Rico, high government indebtedness
impacted spending on maintenance, significantly
worsening the impact of Hurricane Maria and helping to
explain why 7% of utility customers were still without
power six months after Maria struck (Irfan, 2018).
After the 2004 tsunami, southern Sri Lankan regions
recovered much more quickly than northern regions, apattern that can be largely explained by the better
maintained infrastructure in the south, as well as its
stronger institutional capacity and political stability(Palliyaguru, et al., 2007).
To better manage risk and recover quickly from futuredisasters infrastructure owners and operators must movebeyond asset–by–asset risk management to build
resilience within, and between, infrastructure systems.
This requires consideration of how infrastructure
performance might change when shock or stress eventsoccur.
Ongoing maintenance of infrastructure assets h can beconsidered from the earliest stages of business caseanalysis to ensure sustainable funding models are inplace, along with contract structures which incentivise
maintenance (such as Public Private Partnerships orPrivate Finance Initiatives) (Arup and Lloyds, 2017).
“Low maintenance design” can be particularly beneficial
in harsh environmental conditions, or where funding is
scarce. “Designing for maintenance” ensuresinfrastructure design supports access and maintenance.
“Effective maintenance” requires properly trained humanresources and systems for accountability (Arup and
Lloyds, 2017).

f

The informal sector refers to those without registration or social
security, (Benjamin, Beegle, Recanatini and Santin, 2014). This might
include, for instance, domestic workers and casual day labourers.
hInnovative finance for resilient infrastructure

Refer to ISO 55000.

Introduction

2.3 Delay has a high price
The costs of disasters are compounded by slow recovery
resulting from a lack of readily available finance.
Recovering infrastructure quickly can save lives,
minimise economic and social losses, and prevent adomino–effect of other connected infrastructure systems
failing (Lloyd’s, 2017). More can be done before an eventto build resilience and reduce the impacts on people.
Donor countries and development banks havetraditionally responded post–disaster. The United Nations
closed 2017 asking for a record $24bn to tackle crises inmore than 30 countries. International donors covered
only 52% of these funding needs (UNOCHA, 2018). The
gap between humanitarian requirements and available
funding has been growing since 2004 (UNOCHA, 2018).
This means that humanitarian relief and recovery funds
are uncertain, typically taking anywhere between one tonine months to be dispersed (World Bank, 2017). A
recent example of how a lack of pre–establishedresponses and agreed finance can escalate costs comesfrom the World Health Organisation (WHO). WHO
research estimated the outbreak of Ebola in West Africa
would have cost $5m to contain when it was firstdetected in Guinea in 2014. This figure increased
exponentially to $1bn eight months later (Woo, 2015).

12

In other cases, the challenge is not a lack of finance but
instead problems of preparedness, regulatory andcontractual issues, or capacity constraints. In Nepal,
many citizens continued to live in improvised shelters
more than 18 months after the 2015 earthquakes (Kumar
2016). Poor management of the recovery from the 1972
Nicaraguan earthquake meant that it took some impacted
by the event up to four decades to receive replacement
housing (Rogers, 2011).
The longer it takes for countries to build back after adisaster, the greater the impact on social, human andeconomic development. Hampered recovery can prolongtransport disruptions and have ripple effects throughout
the economy, including on retail, production and trade(UNDP, 2014). Delayed assistance can also trap poor
people into vicious cycles of poverty as households sell–
off productive assets or take on debt with unfavourable
conditions to recover (IIASA, 2015).

2.4 Responding to the challenge
Responding to these trends, the Centre for Global
Disaster Protection’s first Innovation Lab, held inpartnership with Lloyd’s, focused on developing new
financial instruments that combine incentives forresilience with risk transfer to broaden the evidence baseand provide a framework for products that could be taken
forwards.

Box 1: The Innovation Lab
The Centre for Global Disaster Protection’s (the ‘Centre’) is a partnership between the UK Government and World
Bank, and works with governments and humanitarian agencies to strengthen pre-disaster planning, catalyseinnovative finance for resilience and use risk financing tools such as insurance to protect people, and speed-up
response and recovery.
The Innovation Lab brought together experts from the public and private sector, in an open format, to generate andincubate new solutions to meet identified problems. The Centre’s first Lab was held in January 2018 to investigate
financial products and structures that incentivise risk reduction and resilient rebuilding by bringing together elements
of project financing and risk transfer.
The Lab was a dynamic working session with more than 50 participants working together from across the insurance,
investor, engineering, humanitarian and development communities. Participants worked from real-world use cases
prepared in a pre-Lab session, identifying, developing and stress-testing possible solutions. It was supported by ateam of experts from Risk Management Solutions (RMS), Vivid Economics and re:focus partners, providing
technical analyses. The innovation lab process is described in Figure 2 (overleaf).

Innovative finance for resilient infrastructureIntroduction

13

Figure 2: the Innovation Lab process
Early January

Pre-LabEnd of January

Innovation Lab

Analytical team prepares
frameworks and draft cases

Cases refined, key challenges
identified, use cases created

Real-world use cases
developed from pre-lab
sessionCreative process of building on
use cases, introducing new
ideas, looking at
implementation challenges

Developing initial productconcepts with quantitative
analyses

Feedback to refine productconcepts

Ideas taken forward bypartners, including
multilaterals, private sector or
the Centre

Socialise early results andinvite comment on the outputs

Early March

Innovative finance for resilient infrastructure

Post-Lab

April

CHOGM

Classification: Confidential

Building resilience, building benefits

14

3. Building resilience, building benefits

The role for resilience measures in addressing the rising
impact of disasters is largely untapped, especially indeveloping countries. Resilient infrastructure can save
lives and money. It offers a proven way to reduce theincreasing economic impacts of disasters. Despite thispromise, much infrastructure is characterised by its
vulnerability rather than its resilience.
Building resilience for all stakeholders means finding new
ways to break down silos within and between
government, the private sector and communities. With acommon knowledge base as a foundation, it would bepossible to collectively build a better understanding ofboth present–day risks and those that will arise
tomorrow. This could facilitate better pricing for investors
and more informed decisions by policymakers, andensure smoother progress towards a more resilient
future.
To broaden understanding, this section outlines andexplores the concept and importance of resiliencemeasures, and introduces some of the key barriers thatneed to be overcome to deliver and maintain resilient
infrastructure.

3.1 Background
Building resilience is a central priority for the international
community. The third priority of the 2015 UN Sendai
Framework i emphasises the need to invest in resilienceex ante, ensuring disaster risk prevention and reduction
through structural and non–structural measures.
Likewise, Goal 9 of the Sustainable Development Goals(SDGs) identifies the need to “build resilient
infrastructure” and has more specific aims for resilience
under targets 9.1 and 9.6 (UN, 2015).

i

The Sendai Framework for Disaster Risk Reduction 2015-2030(Sendai Framework) is the first major agreement of the post-2015
development agenda, with seven targets and four priorities for action. It
was endorsed by the UN General Assembly in 2015.

Innovative finance for resilient infrastructure

Resilience has both a static and a dynamic component.
The United Nations International Strategy for Disaster
Reduction (UNISDR) defines resilience as:“the ability of a system, community or society exposed
to hazards to resist, absorb, accommodate andrecover from the effects of a hazard in a timely andefficient manner”– (UNISDR, 2009)
DFID adopted a working definition of resilience as:“the ability of countries, communities and households
to manage change, by maintaining or transforming
living standards in the face of shocks or stresses –such as earthquakes, drought or violent conflict –without compromising their long–term prospects”– (DFID, 2011)
These two definitions capture the idea that resilience hasboth static and dynamic components:
1. Static resilience is the ability of a system to maintainfunction despite a shock
2. Dynamic resilience ensures efficient use of resources
to repair and reconstruct after a shock(Rose and Krausmann, 2013)
While both are crucially important, the focus of this reportand specifically this section is on the ability of systems –especially those reliant on infrastructure – to maintainfunction despite a shock (static resilience).
Resilience can be enhanced by both hard and soft
resilience measures. Creating resilience in the built
environment can be thought of as “hard resilience”, while“soft resilience” relates to improving social systems towithstand shocks. Both are beneficial and mutually
reinforcing (UNISDR, 2007).
For example, new irrigation infrastructure might provide
farmers with greater resilience to flooding and extreme
weather events so they can plant crops with more
confidence; training can help farmers take advantage ofthese new opportunities by adopting different croppingBuilding resilience, building benefits

15

practices and ensuring that the infrastructure is used andmaintained.

recovered more quickly, substantially reducing indirect
damages.

Although the focus of this study is tilted towards hardresilience (infrastructure), it is important to consider thecomplementary character of soft and hard measures tohave a holistic perspective.

3.2.1 The economic benefits of resilient
infrastructure outweigh the costs fourfold

Resilience requires a systems perspective. Thinking
about resilient infrastructure requires going beyond thenotion of an infrastructure asset and considering theservices this asset provides. These services are often
inter-dependent. For example, the loss of power
infrastructure during a disaster could cut energy supply
for the sewerage system and have ripple effects for
hospitals and households.
This implies that creating resilient built systems requires
infrastructure managers to consider both their upstream
and downstream users, and share information on thevulnerabilities and robustness of their capital(Kunreuther, et al., 2016). Such systemic action may bedifficult to achieve but it offers multiple benefits,
extending beyond the infrastructure asset in isolation andcovering all its interdependencies.
To better manage risk and to recover quickly from futuredisasters, infrastructure owners and operators mustmove beyond asset–by–asset risk management to build
resilience within, and between, infrastructure systems.
This requires consideration of how infrastructure
performance might change when shock or stress eventsoccur (Arup and Lloyds, 2017).

3.2 The benefits of resilient
infrastructure
Resilient infrastructure can reduce both the direct andindirect economic impacts of disasters and facilitate
recovery. Where most national and city governments
serve relatively short terms of three to five years, thepolitical cycle can be disruptive to long–term cohesiveplanning and robust, sustainable infrastructure. Withoutcommitted and engaged political and/or wider multi–
stakeholder collaboration, the effective implementation oflong–term strategic planning is challenging.
In 2010, an earthquake of moment magnitude 8.8 off thecoast of Concepcion, Chile resulted in approximately
1,000 fatalities. A lesser magnitude earthquake in Haiti inthe same year resulted in 220,000 fatalities. The single
biggest factor accounting for these differences was theeffective implementation of new, resilience–focusedbuilding codes in Chile (Arup and Lloyds, 2017) that were
not implemented in Haiti.
Resilient infrastructure protects human life and economic
activity and when damage does strike, it can often be

Innovative finance for resilient infrastructure

Resilience actions can have higher upfront costs but tend
to be more cost–effective than disaster relief over the
longer–term (MDBs, 2015). A range of studies suggest
that, on average, the benefits of resilience (broadly
defined) outweigh the costs fourfold (see UNISDR(2007), OECD (2015) and UK Government Office for
Science (2012)).
Figure 2 (overleaf), illustrates a range of analyses forresilience measures, which demonstrate these findings.
All projects contain some infrastructure resilience
component, although often complemented by softer
resilience measures. As illustrated in Figure 3, theaverage benefit–cost ratio average of these projects
significantly exceeds one.

Box 2: Explaining the benefit–cost ratio
The benefit–cost ratio is a simple indicator whichshows by how much the benefits of a project
outweigh the costs. A ratio of 1:1 means the benefits
equal the costs.

Examples−A ratio of 72 (such is the case for mangrove
plantations in Vietnam) indicates that thebenefits outweigh the cost by 72 to 1. For every
dollar spent, the project produces $72 in
benefits.

−

In Nepal a package of strengthening river banks,
upgrading storm shelters and providing new
early warning systems yielded an estimated $19of benefits for every $1 spent.

The evidence demonstrates that preparing fordisaster pays off; it generates a “resilience dividend”.
This dividend means that resilient infrastructure is an
economically logical investment.

Figure 3: The benefit-cost ratio around the world

The role of insurance in development

These numbers capture some of the additional benefits
that resilient infrastructure provide other than reducing
risk to disasters. For example, incorporating ecosystemservices to improve resilience can provide co–benefits
such as improved public health, improved water and air
quality (C2ES, 2018). Such measures can include
cultivating mangroves as a buffer against hurricanes andfloods, and planting “green–corridors” of trees to reduce
the urban heat island effect and provide shade during
heatwaves.
These are available in both the developed anddeveloping world, as Box 3 (below) shows. These makeuse of innovative solutions such as green gutters and“radical” hillside terraces j. Resilient infrastructure does
not just offer disaster resilience; it provides development,
better livelihoods and a better environment.

17

benefits of resilience such as the continuity of ecosystemservices, or the prevention of emotional trauma fromsuch events (OECD, 2015). Resilience also has the
additional ability to catalyse economic activity by
reducing risk and promote greater risk–taking
entrepreneurship (Kryspin–Watson, 2017), encourage
households to build assets and stimulate firms to invest
and innovate (World Bank, 2015b).
Despite the potential benefits from enhancing theresilience of infrastructure, there are numerous,
interlocking barriers to financing and ensuring thisresilience. The challenges operate across all scales andencompass the private and public sector:−

Box 3: resilient infrastructure investments
can generate significant co-benefits
As part of the Green City, Clean Waters initiative
which seeks to make Philadelphia’s storm-water
infrastructure more sustainable and resilient, the city
has made many resilience investments. This
includes 363 public projects totalling $1.2 billion,
such as green gutters (diverting excess water fromrain gutters into rows of soil and vegetation) and rain
gardens which reduce flood risk. Estimates suggestthat these have generated 430 local jobs and $600m
in economic benefits (Econsult Solutions, 2016).
Rwanda’s Vision 2020 Umurenge Program hasestablished several public works such as “radical”
hillside terraces (reverse sloped terraces stabilisedwith plants and trees on both sides) and anti-erosive
ditches (DFID, 2011).

This political disincentive, compounded by theinfrequency of disasters, lowers the perceived
urgency of implementing resilience measures(Kunreuther, et al., 2016). Moreover, making
complex, long–term policy changes on resilience isinherently challenging given short–term focusedpolitical structures (UK Government, 2011). Withoutcommitted and engaged political and/or wider multi–
stakeholder collaboration, the effective
implementation of long–term strategic planning isdifficult.
−

The programme is the Rwandan Government’s
flagship initiative for social protection and poverty
reduction. It has improved local resilience to flooding
and landslides, while improving soil quality and foodsecurity. Their construction and maintenance has
also provided a source of employment and local
economic growth, aided by direct cash-transfer
programs which connect labour from low-income
households to the public works.
However, the economic benefits of resilient infrastructure
may be even higher than these analyses suggest. Mostestimates do not consider the broader non–market
j Locals in Rwanda began referring to this technique as radical due its

significant difference in comparison to traditional terracing practices, aswell as the large benefits in soil and water conservation. ”Reverse
sloping” refers to reworking the topsoil so that it runs against the
downward angle of the hill. This ‘bench’ helps to capture water thatwould otherwise run-off and erode the soil.

Innovative finance for resilient infrastructure

Political disincentives: where most national and city
governments serve relatively short terms of three tofive years, the political cycle can be disruptive tolong–term cohesive planning and robust, sustainableinfrastructure. Governments are politically rewarded
for responding to disasters, and not for prevention.
This can deter investment in resilient infrastructure,and incentivise spending on recovery and emergency
response measures (Neumayer, et al., 2014).

Cognitive biases: Research suggests thatgovernments, investors and individuals are notalways rational (Kahneman, et al., 1991; Tversky and
Kahnemann, 1974). Instead, they face behaviouralbiases which can make long–term investments withhigh upfront costs, such as resilience less appealing.
Hyperbolic discounting, where the discount ratevaries depending on how far into the future a choice
is being made rather than being consistent, will often
lead individuals and developing country governments
to sub-optimally outweigh short–term costs overlong–term gains (Groom, et al., 2005).

−

Moral hazard: recovery programs can create a moral
hazard; there is a disincentive to pay more forresilient infrastructure since losses will be reimbursed(Neumayer, Plümper and Barthel, 2014).

−

Information barriers: policymakers, investors and the
public may not be aware of the benefits of resilience.
This reflects the challenges in measuring resilience(ClimateWise, 2016), security concerns over sharing
information on vulnerabilities and the sparseexperience that some infrastructure managers haveof disasters. (Chang et al., 2014).

The role of insurance in development−

18

As discussed further below, tools commonly used in
the insurance industry such as catastrophe models(Michel–Kerjan et al., 2013) have promise inproviding a common view of risk and risk reductions
achieved by investment in resilience, but are notcurrently applicable to all classes of risk andresilience measures.

This suggests that capitalising on the potential benefits ofresilience will require novel ways to incentivise resiliencefinancing.

Uncertainty: designing resilient infrastructure can beparticularly difficult due to a lack of data anduncertainty over the frequency and severity of futuredisasters (EOD Resilience Resources, 2016). Therecan be legitimate concerns about locking ininappropriate solutions or options that decrease theaverage disaster cost but increase the cost of theworst disaster (Neumayer, Plümper and Barthel,2014).

Insurance can, when well designed, encourage
resilience. It provides protected finance, incentivises
preplanning and promotes protective measures in the
countries involved. Post disaster; structured and wellgoverned payments can flow quickly from insurers to thecentres of need, aiding faster recovery and helping toprotect sovereign stability.

Furthermore, there is significant uncertainty over thecost of technology. Future resilient infrastructures
could be enhanced and cheaper, creating uncertainty
as to whether to wait or invest now (Fay, Iimi andPerrissin–Fabert, 2010).
Developing economies face several additional barriers tobuilding resilience. For some vulnerable countries, there
may be sound economic reasons for underinvestment inresilient infrastructure; for example, high discount rates or
scarce resources required elsewhere.
In addition, however, institutions without strong, clear
regulations and enforcement, business uncertainty and alack of data about both infrastructure investment
performance, and disaster likelihood and severity, canmake investment in resilient infrastructure even morechallenging (OECD and World Bank, 2015).
Figure 4: insurance as a tool to support growth

Source: (Lloyd’s, 2012)

Innovative finance for resilient infrastructure

3.3 Insurance makes disasters
shorter, safer and cheaper

Countries with greater insurance coverage recover faster
after a disaster, but almost as important, they also tend to
be more resilient to future disasters. Stimulating
insurance markets in developing countries is a proactive
risk management approach.
More than half of the world’s future urban spaces are yet
to be built (UN, 2014) so there is an opportunity to build
new cities which are highly resilient to both the pressuresof urbanisation and a changing climate.
While building resiliently can help reduce the damages
caused by disasters, some impacts cannot be avoided.
Extreme events still cause acute damage and disruption
to services and infrastructure. For instance, RMS
analysis indicates that wind speeds from hurricanes Irma
and Maria were so severe that direct economic losses
across all islands would still have been about 80% ofwhat was experienced, even if damaged buildings had
been constructed to 2018 building codes (Centre for
Global Disaster Protection and Lloyd’s, 2018).

The role of insurance in development

In such cases, the imperative is to design infrastructure
and critical services that can bounce back quickly, andfor officials to prepare in advance and put in placecapabilities and systems that are able to deliver rapid
finance to kick–start recovery and reconstruction.

3.3.1 Insurance can assist with thechallenge of delay
Insurance can play a critical role in ensuring rapid
bounce back. This is most evident for “parametricinsurance” – insurance that’s triggered when a thresholdfor impacts such as rainfall levels or wind speed issurpassed – which can be deployed with no costly
verification or on–site assessment in comparison to
traditional indemnity policies (Clarke and Dercon, 2016).
Compared with the four to nine months needed forhumanitarian aid for reconstruction and recovery, pay–outs from such schemes can happen in days or weeks:“In 2015, PCRAFI k paid out $1.9m in emergency
funds within one week of Tropical Cyclone Pam
hitting; in the Caribbean, CCRIF SPC l, which has
paid out just over $100m, has made every one of its
payments within 14 days of the disaster striking”−(CCRIF–SPC, 2017)

This rapid bounce–back can negate or even reverse thenegative macroeconomic impacts of disasters. One 2012
study surveyed economic indicators, disaster data andinsurance levels across 203 countries and 52
jurisdictions (Peter, et al., 2012). It found that while
uninsured losses can lead to a reduction in economic
growth, when losses are insured, growth is protected.
Indeed, they found that for storms, flooding andclimatological events, insurance spurs reconstruction andcan even enhance short–term growth in a disaster’s
wake.
Planning post–disaster finance before the event, as isoften required by insurance, can ensure prudent
spending. Insurance is most effective when it is thecentral part of a coordinated pre–disaster plan. Such aplan can ensure that payments are quickly dispersed,
decisions are speedily made and financing is effectively
and fairly used (Clarke and Dercon, 2016). In the chaotic
aftermath of a disaster, a previously agreed plan cank

The Pacific Catastrophe Risk Assessment and Financing Initiative(PCRAFI) is a regional risk pool with 15 members. It provides disasterrisk assessment and modelling tools, as well as parametric disaster risk
financing.

l

The Caribbean Catastrophe Risk Insurance Facility was formed in2007 as a regional catastrophe fund for Caribbean governments. It was
the first multi-country risk pool in the world. In 2014 it was reformed intoa Segregated Portfolio Company (the CCRIF SPC). It offers parametricinsurance for excess rainfall, tropical cyclones and earthquakes.

Innovative finance for resilient infrastructure

19establish how insurance can play a valuable role inovercoming any disaster–response coordination
problems that inevitably arise.

Box 4: Kenyan Hunger Safety Net
Programme
One example is the Kenyan Hunger Safety Net
Programme which provides a direct, agreed cashtransfer to pre-determined groups when certain
drought indicators, such as reduced rainfall and crop
failures, are crossed. The current arrangements
resemble a parametric insurance scheme and havean additional insurance component. Farmers canpurchase subsidised insurance to cover the loss ofanimals and fund additional resources needed tokeep their livestock alive.
The project has been implemented by the Kenyan
Government along with international donors and has
been successful in reducing the costs of disasters.
The programme likely saved thousands of lives
during the 2011 famine, and has reduced averageannual food gap periods – the time whenhouseholds lack sufficient food – which dropped
from 3.6 to 2.3 months (European Commission,2018).

By providing funds quickly and predictably, insurance isoften a more cost–effective disaster recovery financing
option than donor funding or public finances. Largedisaster losses often outstrip the budgets of developing
countries and the relief that donors can offer, making
recovery slower and more costly.
A recent World Bank study for Ethiopia found that relying
on insurance or insurance–like instruments combinedwith a disaster reserve fund for disaster risk financing,
could be 5–25% cheaper than relying on disaster reserve
fund with or without ex–post budget reallocation (Clarke,2016).
It is also a flexible tool: one study on the potential ofdisaster risk finance instruments for five different
countries and five different risks (drought, floods,
earthquakes, cyclones and crop failures), found that
insurance was the only approach applicable across allcases (Clarke, et al., 2016).
This suggests that the payment of premiums andfinancial resources to establish schemes is an
opportunity for development aid to secure societal
resilience by using insurance to incentivise proactiveplanning and informed investments in risk reduction.

The role of insurance in development

3.3.2 Insurance plays a particularly
critical role for the most severe
eventsThe value of insurance to firms and households – whoare likely to place a high value on avoiding the worst
outcomes (in other words, they are risk averse) – is often
clear. The same can also apply to governments,
especially those in small countries.
While traditional economic theory suggests thatgovernments benefit from exposure to a diversified
portfolio of risks and so are less concerned about thedownside implications of any one event, this theory may
break down in the case of severe events and forcountries of small geographic extent with concentrated
risk. For example, in the case of Hurricane Maria, when
Dominica experienced losses equivalent to 224% of its
GDP, the concept of diversification breaks down, due tothe exceptional severity of the event and the relatively
small size of Dominica in relation to the storm. Thisadditional protection against the impact of the mostextreme events is additional to any benefits insurance
provides as an effective way of financing disasterrecovery. In these cases, a cost–benefit calculation fails
and a focus on protection against extremes is more
important.
Insurance on its own should not be thought of as analternative to more established approaches to resilience.
It should instead be included as part of a broader
framework, and in collaboration with governments. Donor
governments can use the insurance model todemonstrate the value of relief spending to their nation
and when events happen will be able to point to howquickly the funds can flow. For example, by the end of2017 Lloyd’s had already paid out more than $2bn to getbusinesses and communities back on their feet after
Harvey, Irma and Maria (Lloyd’s, 2017).
The case of the Mexican Natural Disaster Fund
(FONDEN) illustrates how insurance can be combinedwith resilience measures and other financing approaches
to provide a comprehensive and cost–effective disasterrisk package. It illustrates the complementary role ofimproved resilience measures to cost–effectively addresssome of the risks of smaller, more frequent disasters,
while using risk financing measures to help respond tolarger, more devastating events.

Innovative finance for resilient infrastructure

20

The role of insurance in development

21

Box 5: Mexican Natural Disaster Fund (FONDEN)
FONDEN is Mexico’s Natural Disaster Fund. Each year, a share of the national budget (0.4%) is allocated to
FONDEN for the post-disaster reconstruction and recovery of low-income houses, the environment and public
infrastructure (World Bank, 2012). In turn, FONDEN has successfully accessed the international reinsurance
markets in addition to the accessing the capital markets several times over the past 12 years through parametriccatastrophe bond structures, providing coverage against severe earthquakes and tropical cyclones.
This combination of reserve funding and insurance is intentional and strategic. The ex-ante budget provides aconsistent and reliable funding base for most disasters while the catastrophe bond program transfers the risk oflarger events that would otherwise outstrip and deplete the allocated budget to capital markets (World Bank, 2012).
Plans are made prior to disaster that include processes for determining damages and how funding can be spent,resulting in clarity for all stakeholders, and faster recovery (Clarke and Dercon, 2016).
This approach has saved lives and money by speeding up disaster recovery. FONDEN has been able to swiftly
make payments following disasters. Indeed, it is legally required to make funds available with 23 days of a disaster.
It also has a mechanism for immediate partial support so that a proportion of funding is provided within 24 hours to
aid emergency recovery needs (World Bank, 2012).
This funding has been used multiple times in 10 different municipalities. This has significant economic benefits.
Municipalities with access to FONDEN grew by 2-4% faster in the year following a disaster than those without
access over the period 2004-2013. They also experienced an additional 76% growth in the local constructionindustry in the years following disaster (De Janvry, et al., 2016).
In addition to pure post disaster recovery, FONDEN also promotes building back better. Funds can be used torelocate infrastructure to safer areas and reconstruct buildings to higher standards (Clarke and Dercon, 2016). Thisis done through FOPREDEN, the disaster risk mitigation mechanism of FONDEN which receives an annual budgetof $25m. For example, in 2007, floods caused by extreme precipitation over the course of a month in Tabasco cost
$2.9bn.
This led to spending of $233m by FORPREDEN and Mexico’s National Water Commission (CONAGUA) to improve
flood resilience through floodways, dikes and protective walls (FONDEN, 2011 in World Bank, 2012). In comparison,
when floods caused by two months of extreme rain hit in 2010, they resulted in losses of $570m a directconsequence of Tabasco’s efforts to strengthen its resilience to extreme hydro-meteorological events.

Insurance and resilience measures
can work in concert
Insurance can complement resilient infrastructure
construction and maintenance. One example, as
FONDEN illustrates, is the different focus that eachbrings in developing a comprehensive risk management
package with risk reduction measures to help manage
smaller, more frequent events, and insurance and risk
transfer solutions for the larger events. But thecomplementarities extend further:−

Insurance tools can help provide the informationneeded to identify and assess risks−

Well–designed insurance policies can provide
incentives to embed resilience

Catastrophe modelling can provide a common language
for stakeholders to discuss risk, qualify investments inresilience, and measure and monitor risk reduction. Risk
modelling provides insight into where the greatest

Innovative finance for resilient infrastructure

resilience needs lie and allows for risk–basedprioritisation of investment in resilience.
Models provide a testbed for understanding thecomparative benefits of resilience measures, be it thebuilding of a sea wall, seismic retrofitting, or the additionof roof anchors. Indeed, measurement of the resilience
dividend is fundamental to cost–benefit calculations – risk
models can be easily adapted to capture a range ofresilience benefits, including reductions in direct
economic damage, downtime and the number of people
affected.
As the number of models and the amount of data
available increases, so does the potential for
stakeholders other than insurers to use that information
to make risk assessments and to anticipate the potential
impacts of hazards.
This allows governments, communities and individuals to
make informed decisions about resilience, insurance,
investment, wider policies and interventions. Risk

The role of insurance in development

quantification is the key to being able to maketransparent statements such as:“This asset is currently resilient to 1 in 10 riskof flooding. To be resilient to a 1 in 200 risk thefollowing is recommended…”
This kind of explicit disclosure of risk could act toencourage stakeholders to understand and maintain theirown detailed risk registers, and to hold open dialogue on
the risks under consideration.
As such, insurance companies can bridge the information
gap needed to better understand risks and hence
encourage individuals, firms and governments to adopt
resilience measures. There are several initiatives in thisspace, such as:−

The Insurance Development Forum (IDF), a public–
private partnership between the insurance industry
and international organisations which seeks toextend the use of insurance and risk management
tools to improve resilience (IDF, 2018).

−

Under the United Nations Environment Program
Finance Initiative (UNEP FI) Principles for
Sustainable Insurance (2018), organisations havepledged to raise disaster awareness and provide newrisk management tools to reduce disaster exposure.

−

Representing a growing global network of leading
insurance industry organisations, ClimateWise helps
to align its members’ expertise to directly support
society as it responds to the risks and opportunities
of climate change. The Societal Resilience
Programme convenes impact–orientated,collaborative research to help insurers proactively
respond to the widening climate risk protection gap(ClimateWise, 2018).

−

A recent, innovative example is the Oasis Loss
Modelling Framework. This is an open–source, online
modelling platform for catastrophic risk provided bymore than 30 members of the insurance industry,
and underpinned by 80 models (Oasis Loss
Modelling Framework, 2017).
The platform is open source: it allows for catastrophe
modelling, including a results and exposure
database, and also facilitates the development of
new models. In so doing, it complements theexpertise and models developed over many years bycommercial institutions.

Innovative finance for resilient infrastructure

22

The design and pricing of insurance policies can help
encourage resilience (Arup and Lloyds, 2017). For
example, in the late 1990s, United Insurance actively
promoted resilient infrastructure by offering premium
discounts of up to 40% for businesses and 25% forhouseholds.
The benefits were clear following Hurricane Jose in
Antigua in 1999: average losses were around 10% of thetotal sum insured, but only 4.75% of the sum was insured
in the case of retrofitted projects. The discounts also
attracted new clients for the insurer (Benson and Clay,
2004). Other insurers have offered discounts for clients
who implement resilience measures such as hurricane
shutters, relocation away from coastlines and retrofits tomake structures more hazard–proof (Benson and Clay,
2004).
Similarly, four state governments in the US. Alabama,
Georgia, Missouri and North Carolina all have regulatory
frameworks stipulating that insurance discounts or credits
be given to consumers who undertake certified resiliencemeasures (Fortified Home, 2017).
In designing such schemes, a number of importantfactors need to be taken into account, such as thetreatment of assets that already benefit from more
resilient measures and the benchmark from which
improvements in resilience are recognised – in order tomake sure that the mechanism is robust and does notundermine insurance penetration (RMS, 2010).
However, pricing has its limits. Annual contracts can limit
the incentive for both insurer and insured to consider
resilience investments, but multi–year contracts will
typically make insurance more expensive. For example,
one study estimates that capital requirements are around
50% higher for a 10–year contract than an annual
contract and the annual premium around 5.5% higher,
reflecting both higher capital requirements and thegreater uncertainty involved in anticipating long–termrisk (Maynard and Ranger, 2013). Moreover, risk is only
one factor in determining insurance premiums.
There may be significant challenges for insurers inproviding risk–appropriate premium reductions forproperty when administrative costs are a large fraction of
the total premium (Maynard and Ranger, 2013). In
addition, smaller geographic regions and developing
countries tend to transfer large proportions of theirinsurance portfolios to reinsurers who commonly apply
blanket portfolio reinsurance premium rates, limiting theability to offer price discounts (while maintaining financial
robustness of insurance companies). For example, in the
Caribbean, 85% of gross property insurance premiums
are transferred to reinsurers.

The role of insurance in development

Making resilience a precondition for insurance contracts
can also be powerful. For example, the Government ofFiji made mortgages conditional on acquiring cyclone
insurance (Benson and Clay, 2004). In turn, insurance
could only be obtained when buyers provided a certificate
confirming compliance with the 1985 National Building
Code. This appears to have enhanced resilience at thenational level: Fiji self–reported a disaster risk
preparedness score of 4.95/5 in its 2014 National
progress report on the implementation of the Hyogo
Framework for Action m (Fijian Government, 2014). It has
also contributed to Fiji having a $95m insurance market,
the second largest among Pacific island countries (World
Bank, 2015a).

m

The Hyogo Framework for Action (2005-2015) was replaced by The
Sendai Framework for Disaster Risk Reduction 2015-2030 (Sendai
Framework) is the first major agreement of the post-2015 development
agenda. Both were endorsed by the UN General Assembly.

Innovative finance for resilient infrastructure23

Classification: Confidential

Innovative instruments for financing resilience24

4. Innovative instruments for financing
resilience

This section outlines four innovative finance instruments
to better promote resilience: insurance–linked loans,resilience impact bonds, resilience bonds and resilience
service companies n:−

Insurance–linked loan packages: this approach,requiring only small modifications from current
practice, explicitly integrates risk–transfer solutions
and resilience conditions into the loans provided byinternational financial institutions.
The product may be well–suited to large
infrastructure projects in high–risk regions, ideallyinvolving a portfolio of multiple assets. It can beeasily modified to facilitate the participation ofdonors keen to reduce interest costs on loans forcritical resilient infrastructure.

−

Resilience impact bonds: a payment for a
performance contract between an outcomes funder(donor) focused on resilience and social goals, anda group of investors. The donor makes payments tothe investors depending on the success of theinvestors in delivering physical, operational andfinancial resilience measures.
This product is particularly well–suited to cases
where the benefits of resilience are spread widely
across a community, such as for the services
provided by schools, social care bodies andhospitals.

−

Resilience bonds: an innovative risk–linked
financing mechanism that augments the existingcatastrophe bond model to take account of the
impact of resilience measures. Under this structure,when resilience measures are implemented,
coupon payments on the bond are reduced. This
reduction in coupon payments can be securitised toprovide a financing mechanism for the resilience
investments.

n

The insurance-linked loan and resilience impact bond are developed
out, backed up by risk and financial modelling, while the other two
products are set out at a higher level.

Innovative finance for resilient infrastructureThis product is well–suited to cases where several
different stakeholders have a common interest inenhancing the resilience of services provided by acritical asset, such as a coastal road or port.
−

Resilience–service companies (ReSCos): thisproduct/business model involves an agent who
pays upfront for an insured asset in return for ashare of future insurance premium savings. The
approach was inspired by the innovative financing
mechanisms employed by energy service
companies.
It may be best suited where there are many diffuse
but similar assets, such as residential orcommercial property assets, that are all subject tofrequent disaster events.

These solutions were created within the first Innovation
Lab of the Centre for Global Disaster Risk Protection.
The Lab brought together experts from the public andprivate sector, in an open discussion format, togenerate new solutions to meet identified problems.
Participants worked from real–world use cases
prepared in a pre–lab session to identify, develop andstress–test possible solutions.
The solutions each combine two features:
1. Incentives for the ex ante, resilient construction of
infrastructure, including its continued maintenance.
As section two shows, the additional costs needed
to increase the capacity of infrastructure to provide
services following disasters is easily offset by thelong–term economic benefits generated, typically bya benefit-cost ratio of around 4:1. However, suchinfrastructure faces several critical barriers thatneed to be overcome.
2. An insurance element such that, in the event ofdisasters, there are reliable resources made readily
available to ensure that communities, businesses
and countries can bounce back quickly.

Innovative instruments for financing resilience

Each solution seeks to provide incentives to create
resilient infrastructure by trying to capture and monetisesome of the resilience dividend. The resilience dividend
is the sum of the benefits of greater resilience, which
often exist as a societal-level benefit that is hard toformally quantify and attribute. In each of the financial
instruments, some of this dividend is quantified andmonetised to help finance the costs of more resilient
construction and to build back smarter.
This mechanism provides the strongest incentive formore resilient construction when the dividend can bemade available upfront to defray some of the additionalcosts of building resiliently. In most of the products, it is
only the reduction in physical damage that ismonetised, through reductions in insurance premiums;
with other aspects of the resilience dividend remaining
untapped, such as the impact on land values or social
benefits such as poverty reduction, reduce air pollution
and employment depending on the type of proejct.
This is different for resilience impact bonds where, in25

principle, the central role of the outcomes funder(donor) allows for all aspects of the resilience dividend
to be captured. Product designs rely on the use ofcatastrophe models to determine the base level of risk
and the risk reduction that can be achieved throughinvestments in resilience. Catastrophe models havebeen widely used within the insurance industry toquantify risk reductions from common retrofit measuresand resilience design features for standard residential,commercial and industrial structures. Certain structures
or bespoke design features may require additional
engineering assessment to quantify the resilience
benefit.
The ideas are assessed against eight criteria (seeFigure 5, below). The first four criteria (ex ante criteria)
relate to the design of the intrinsic features of the
instrument. The other four criteria (ex post criteria)
relate to various aspects of the benefits of implementing
the product. This scoring helps to identify key issues
that will need to be resolved in future productdevelopment.

Figure 5: The products are assessed against eight success criteria

Source: Vivid Economics

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience26

The solutions vary in the ease and speed of deployment. As Figure 6 (below) illustrates, the four ideas range from thosethat have already been developed but which can be re–purposed and brought to market quickly (insurance–linked loan
packages and resilience impact bonds), through to ideas that hold significant potential but will require greater time andeffort to implement (resilience service company):
Figure 6: Product concepts

Insurance-linked
loan package

Resilience impact
bond

Resiliencebond

Resilience service
company

Increasing degree of innovation required
Note: The products vary from those that require little innovation to those which that are substantially different to current
solutions.

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience27

4.1 Insurance–linked loan package

A. Introduction

The product would meet two fundamental criteria ofinterest:

This approach, requiring only minor modifications fromcurrent practice, explicitly integrates risk–transfer
solutions into the (concessional) loans provided byinternational financial institutions for financing new
infrastructure or infrastructure upgrade programs.

−

Resilience incentive: the total expected savings on
insurance premiums from additional resiliencemeasures are transferred to financing a portion of
the loan. This reduces financing needs relative to asituation in which insurance is taken out, but thepremiums are not reduced to reflect resiliencemeasures and may also result in a lower financial
burden than building in a non–resilient way andforgoing the insurance premium savings.

−

Insurance element: insurance is integral to the
product to generate the resilience dividend.
Dependent on scale, insurance cover could besought through multi–year contracts or capital
markets placements, with the ability to reset
contracts and re–assess the underlying risk andsubsequent premium at regular intervals.

Loans would be allocated by an international financeinstitution towards infrastructure programs where
resilience is explicitly built into the design. The loan
would cover both the costs of the resilient infrastructure
program and the costs of a parallel multi–year
insurance product. The infrastructure program costs,
including the additional costs of resilience, would be
disbursed using standard procedures. In addition, aseparate portion of the loan to cover insurance costs
would be disbursed to a separate resilience fund,potentially to be managed by a separate special
purpose vehicle (SPV) o. Under this structure, donor
funds could be used to make the terms of both portions
softer by blending donor funds.
The loan amount to cover insurance would be based on
the expected insurance premiums without the resiliencemeasures. By contrast, the actual cost of insurance
would take account of the resilience measures built into
the infrastructure design. The result would be a seriesof savings on the insurance premiums – the resilience
dividend – which could be transferred to the financing
portion of the loan. This could either be realised overtime or, potentially, made available upfront.

B. How would it work in detail?
B1. Key stakeholders and product components
The product would typically involve five key
stakeholders:−

A development bank that would provide a loansufficient to cover both an investment/retrofit withresilience measures, and the expected insurance
premiums associated with that asset if it were built
non–resiliently. The insurance–linked loan is an
attractive option to achieve development goals
whilst effectively managing the financial risks ofproviding loans.

−

A beneficiary, typically a national or local
government, which receives the loan proceeds anduses them to invest in infrastructure measures thathave additional resilience, as well as insurance
cover to secure socio–economic development.

−

The development bank and recipient may need tojointly facilitate the setting up a separate resilience
fund that would receive the loan proceeds
associated with the insurance premiums and makethese payments as demanded.

oThe separate treatment of the loan portion to cover the insurance
costs reflects the typical need of IFIs to disburse loan amounts over 35 years, while the insurance premia would need to be paid over alonger period. If donors are involved in the structure, then the amount
could alternatively be paid into a trust fund as a returnable grant.
While not discussed in this product description, either of these two
options – SPV or trust fund – could also provide a vehicle for covering
maintenance costs.

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience−

An insurer who provides a multi–year insurance
product (with regular opportunity for reset) for the
resilient infrastructure asset, and who is willing andable to assess the risk reduction resulting from theresilience measures and pass on the benefit in theform of reductions in premiums.

−(Potentially) a donor, who further supports theinvestment in resilience by offering concessional
resources to be blended with the developmentbank’s loan, to reduce the interest payments of therecipient.

B2. Flow of funds
Figure 7 (below) shows the generic flow of funds in the
structure, with the table providing more details on eachelement:
Figure 7: Cash flows between agents from the insurance–linked loan instrument

Innovative finance for resilient infrastructure28

Innovative instruments for financing resilience

29

Component

Funding Mechanism

Timing/Delivery

Infrastructure financing
Base cost of infrastructure

C

Loan – recipient country bears cost

Project outset, disbursed over 3–5 years
through procurement process

Base interest repayments

I

Paid by recipient country

Over 15–25 years

P

Financed by development bankthrough loan and ultimately borne byrecipient country

Net present value (NPV) of future
expected insurance premiums managed
in a Special Purpose Vehicle SPV ortrust fund for future disbursement andtransferred to insurer in a series ofmulti–year contracts.

Additional cost of resilient building

ΔC

Financed by development bankthrough loan and ultimately borne byrecipient country. Potential for donor
contribution.

Project outset, disbursement dependent
on funding mechanism

Additional interest repayments due
to additional cost of resilience

ΔIR

Financed by recipient country

Over 15–25 years

Rebate on insurance premiums

ΔP

Either reduced cost of insurance
upfront or used to part–fund interest
repayments

Reduced future insurance premiums or
reduced upfront cost of insurance

Optional concessionally spread to
reward resilience

ΔID

Financed by donor

NPV of concessionality spread fundedby donors at outset

Insurance
Annual insurance premiums

Resilience features

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience30

C. Worked example
The application of this product to the reconstruction of 10 schools in a hurricane–prone middle–income small island
developing states (SIDS) country can help illustrate more concretely how the product would work p.
The schools can either be reconstructed without resilience measures for $10m, or more resiliently – incorporating
features such as roof sheathing, roof covering, opening protection, roof anchor, roof geometry – at a cost of$10,695,000 (a 6.95% increase).
The exceedance probability (EP) curves in Figure 8 (below) demonstrate the reduction in risk that can be expected frombuilding resiliently when compared with a non-resilient (‘base’) construction. The EP curves show the probability ofexceeding (y-axis) a range of loss thresholds (x-axis) for the resilient and base examples.
Figure 8: Loss occurrence exceedance probability (EP) curves for base and resilient cases
3.0%

Occurence exceedance probabiltiy

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
0

1

Base

2

3

4
5
6
Event loss (Millions USD)

7

8

9

10

Resilient

Source: RMS, 2018. Produced using the RMS North Atlantic Hurricane Models.

p

The building and marginal cost assumptions for this case study have been derived from internal RMS expertise and research underlying thedevelopment of the RMS North Atlantic Hurricane Models. Costs are expected to vary by region, although relative costs and risk reductions will belargely conserved

Innovative finance for resilient infrastructure11

Innovative instruments for financing resilience

The resilience measures reduce the average financial
loss incurred from physical damage in an average year
(average annual loss) by almost 50%, from $36k to$19k. They also reduce the volatility of average annual
losses (AAL), as measured using the standard deviationof AAL, in any one year by around 40%. It is expectedthat this reduction in average annual loss reduces theannual insurance premium on the assets from $71.9k toclose to $38.0k. This assumes a premium loading factorof 2x modeled AAL.
The loan beneficiary is assumed to face a choice
between taking out a 25–year amortising loan with aninterest rate of 4.0%, covering either the cost of a non–resilient asset (base cost of construction, C) and thecost of insurance; or b) the resilient cost of construction(C+ ΔC) and the cost of insurance. In either case, theloan is disbursed over five years as the assets areconstructed. Reflecting the incentives of donors, theanalysis also assumes that if the beneficiary chooses toconstruct resiliently, a donor will reduce the overall
interest repayments by providing an upfront amountequivalent to the additional interest paid on the cost ofresilience measures.
With this set up, cash flow analysis shows that theinsurance savings plus donor contribution for resilience(d) are larger than the additional costs of resilience.

31

This provides a financial incentive to build resiliently.
The net benefit is $20,700 (using a discount rate of5%). However, in this set up, this net benefit does partly
rely on donor support: the net present value (NPV) of
insurance savings are estimated to be around 70% of
the additional costs of building resiliently, implying thatthese savings make an important contribution toresilience building but are insufficient by themselves.
Sensitivity analysis shows that in contexts where thecost of the resilience measure is lower, the absolute risk
reduction from the resilience measures is higher,
whether through achievement of higher percentage risk
reduction or through greater baseline risk, or the
discount rate is lower than the economic viability of the
product increases. In contexts where these factors
move in the opposite direction, the viability of the
product falls.
The economic viability of the product is also highly
sensitive to insurance pricing assumptions, where
proportional loading is assumed, higher loading factors
increase the net benefit as the insurance savings
increase. This holds true where the volatility (asmeasured by standard deviation) of average annual
losses is considered in the pricing formula as volatility
sees similar relative reductions to the reduction in
average annual loss.

D. Assessment against criteria
Evaluation
Encourages resilient infrastructure Has a viable path to implementation



Monetizes resilience dividend Offers flexibility



Makes resilience dividend available upfront

 Has a sound economic justification

Involves risk transfer

 Causes ‘no harm’Innovative finance for resilient infrastructure

Innovative instruments for financing resilience

32

Encourages resilient infrastructure

Has a sound economic justification−

Product only made available for infrastructure
where resilient options being considered.

−−

Depending on the specifics of the case, the rebate
resulting from reduced insurance premiums
significantly, or entirely, offsets the additional costof resilient infrastructure. Further incentives can beprovided by donor support.

The applied example above indicates there is apositive net resilience benefit to the proposed
structure compared to a situation where insurance
is taken out on equivalent terms on a non–resilient
asset, although in this specific case, the productrelies on a degree of donor funding to be viable.

−

The existence and extent of the benefit will dependon the marginal costs of resilience compared withthe risk reduction and associated premium
reduction.

−

Product can be structured to enable support for
ongoing maintenance of infrastructure.

Monetises resilience dividend

Causes ‘no harm’−−

The benefit of the product is illustrated withreference to a situation where insurance is takenout on a less resilient asset. Relative to a situation
where no insurance is taken out, the product will
require a higher loan amount and greater interest
payments.

−

However, as noted extensively earlier in the report,
there are also significant wider benefits fromresilience–building and insurance, which are notcaptured in the cash flow modelling. There is also
scope for donor involvement in offsetting theinterest costs on the additional loan amount.

The reduction in insurance premiums monetises thebenefits of resilience.

Makes resilience dividend available upfront−−

The product design allows for the reduction ininsurance premiums to be transferred from theinsurance portion of the loan, managed by the
resilience fund, to the financing portion of loan.
If all parties agree, and the recipients can commit tobuilding resiliently, this can be done prior to
infrastructure construction, reducing the overall sizeof the loan needed. However, the risk associatedwith non–delivery of the resilience benefits would
need to be allocated.

Involves risk transfer−

Risk–based insurance contracts are the vehicle
through which the resilience dividend is realised
and are essential to this product. This can support
the broader development of the insurance market.

Viable path to implementation−

International development bank loans are asignificant source of infrastructure financing and thisproduct represents incremental development topre–existing products.

−

The most significant challenges remain inaccessing risk–based insurance pricing, developing
the resilience fund and, as necessary, developing
appropriate multi–year policies which also meet theneeds of the insurance provider.

Offers flexibility−

The product has simple defining characteristics,
namely the set–up of the resilience fund to manage
the insurance funds provided by the loan, and themonetisation of risk reductions in the form of
reductions in premium payments.

−

The precise structuring and loan amounts can be
tailored to consider individual cases, insurance andmaintenance requirements.

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience33

A decision needs to be taken on how the risk that
resilience measures do not perform as expected isallocated, with the likelihood that if this risk is placedwith insurers, the premium adjustment for the
introduction of resilience measures will be notably
smaller, potentially undermining the viability of the
product.

E. Next steps
This product could come to market quickly, taking into
account three factors:
1. The key role that international financial institutions
already play in financing infrastructure indeveloping countries, which has been rising rapidly
in recent years to account for almost half of all
development assistance for infrastructure
2. That insurance is often procured during theconstruction phase and the first years after
completion
3. The increased focus by international financial
institutions, and donors, on resilience and the rolefor insurance within thisThe key challenges, and hence areas for ongoing work
to realise this product, include the following:−

Designing the insurance product. There is a need tofurther develop the insurance product to integrate it
within the loan package. A multi–year insurance
product will give other parties the greatest
confidence as to the enduring nature of theresilience dividend on which the product relies.
However, Lab participants indicated the maximum
insurance contract length would be three years withbuilt in resets/renewals at the end of each three–year period.
This suggests a pool of participating insurers would
be needed, and that future pricing would need tobe, as far as possible, adjusted in a pre–determinedway, while not exposing insurers to too muchreinsurance pricing risk. Key to product viability isrecognition of the risk–reduction rather than thestatic baseline insurance pricing. Coverage could
be reduced to accommodate future increases inpremium resulting from a changing risk environment
or funds could be topped up to maintain initialcoverage levels.

−

Uncertainty surrounding the implementation ofbuilding standards and resilience measures, as wellas efficacy of resilience measures. This uncertainty
will make it more difficult to convert the modelled
reduction in average annual losses into a monetised
resilience dividend, and then more difficult again to
make this resilience dividend available upfront prior
to the investment being undertaken. This may be
mitigated by regular inspections during and on
completion of construction. Solutions at a sovereignlevel might include introduction of building
certification policies.

Innovative finance for resilient infrastructure−

Robust quantification of risk reduction associatedwith some resilience measures and infrastructure
types. The product relies on stakeholders having
confidence in the modelled estimates of the
reduction in risk from resilience measures. This
makes it most likely that this product can be
developed for resilient building design features forresidential, commercial and industrial structures for
key natural perils such as wind and earthquake risk.
Implementation is also likely to be most feasible for
portfolios of assets where uncertainty in engineering
performance and modelling is reduced. More work
may be required before this product can be applied
to risk reductions related to green infrastructure(e.g. mangroves, storm water storage systems) andsome types of heavy infrastructure (e.g. roads andenergy).

Innovative instruments for financing resilience34

4.2 Resilience impact bond

A. Introduction

The product meets the two fundamental design
features:

The resilience impact bond is a pay–for–performance
contract between a donor (outcomes funder) and an
investor, where the return for the investor depends on
how well they ensure the implementation of resiliencemeasures associated with one asset or a series ofassets.

−Resilience incentive: investor returns would behighest in cases where various metrics of resilience
were successfully achieved. The donor, who seeks
to achieve resilience outcomes, uses the pay–for–performance contract to align investor interests withthis public policy goal.

Development impact bonds are increasingly being usedin the development community to transfer the risk ofdelivering specific outputs or outcomes to investors.
They can be an attractive instrument, where the deliveryof outputs or outcomes is uncertain and investors havea good ability to influence the output/outcome delivery.
A small selection of use cases include:−

Insurance element: the requirement to take out
insurance to cover losses associated with disasters
would be specified as one of the measures ofresilience against which the donor would make apayment.

−

Reducing the rates of sleeping sickness in Uganda−

Improving child and maternal health in Rajasthan,
India

−

Malaria prevention in Maputo Province,
Mozambique−

HIV prevention and treatment in Gauteng Province,
South Africa−

Reducing unemployment in youth migrants inBrussels

The discussion in Section 3 identified a range ofbarriers to delivering resilience which are difficult forgovernments and/or donors to control. A resilience
impact bond pilot would test whether private investors
are well–placed to overcome these barriers. It would
define a series of physical, operational, and financial
resilience indicators associated with infrastructure
assets, including adequate insurance of the assets.
Meeting these criteria would require a capital outlay by
a set of investors. If all the indicators were successfully
met the investors would receive an attractive return paidby a donor; progressively missing more targets would
result in lower returns. Specific rules would also apply incases where the assets were affected by a disaster.

Innovative finance for resilient infrastructure

In addition, the impact investor may also choose to
take out insurance to ensure it has sufficient
resources to implement disaster response andcontingency plans needed to meet the criteria for
payment. The investor may also seek insurance toprotect against the risk of receiving a smaller pay–out from the donor, on account of not meeting all of
the resilience metrics.

Innovative instruments for financing resilience35

B. How would it work in detail?
B1. Key stakeholders and product components
The product requires four main actors:
1. Outcomes funder (e.g. donor): designs the structure of, and then implements, the impact bond, determining how
payment depends on the 1) the initial loan amount and 2) performance metrics which measure success in deliveringvarious dimensions of resilience. These performance criteria would include measures of physical resilience e.g.
designing and constructing (or retro–fitting) disaster resistant structures and evidence of ongoing maintenanceactivity; operational resilience such as the existence of robust disaster contingency planning and continued deliveryof services reliant on infrastructure during all ‘normal’ periods; and financial resilience such as evidence that
insurance is in place to cover physical losses from events and evidence that appropriate financing mechanisms arein place to support immediate disaster response needs and contingency plans.
2. Impact investor: provides project capital and appoints an implementation agent to manage the delivery of the
project. Receives a return on invested capital, which is calculated based on how well the project performs against
pre–defined performance indices. The performance indices are designed to reflect the outcome funders desired
project objectives.
3. Implementation agent: acts on behalf of the impact investor to implement project locally. Responsible for ensuringthat the project delivers expected outputs and outcomes.
4. Insurance provider: structures and supports insurance products that provide coverage for, at least, the physicalassets, and possibly also the operational costs of disaster, and investor cash flows as required.

B2. Flow of funds
Figure 9 (below) shows the generic flow of funds in the structure, with the table below providing more details on eachelement.
Figure 9: The flow of funds from the resilience impact bondInnovative finance for resilient infrastructure

Innovative instruments for financing resilience

36

C. Worked example
To further illustrate how the product might work, theanalysis below discusses a use case in Dominica wherea resilience impact bond is used to increase theresilience of 10 schools against hurricane risk andmaintain the provision of education services.
Investors are expected to design, finance and deliver a
programme that covers three dimensions of resilience:
1. Physical resilience through a wind retrofit program
to upgrade the structural resistance to wind damage
2. Operational resilience through the establishment ofdisaster response and contingency plans to ensure
continuity of service following disaster. Prior to theprogramme starting, these plans do not exist
3. Financial resilience through a requirement topurchase asset insurance (in relation to damages
from wind speeds more than 100mph) and toestablish suitable funding mechanisms to support
disaster response and recovery costs
The return to the investors is through payments madeby the outcomes funder according to the success of theinvestor in meeting these three criteria. The term of thebond is five years – resilience measures are expected

to be implemented across the portfolio of schools
throughout this period, and success against indicators
capturing the three dimensions of resilience would beassessed annually.
The physical resilience measures of the retrofit program
are a crucial component of the product. The analysis isbased on this consisting of upgrades to the roof
sheathing and covering (FEMA, 2013a), and additional
opening protection (FEMA, 2013b). It is assumed thatthese cost $590,000 in total per school ($400,000 for
opening protection, $150,000 for roof covering and$40,000 for roof sheathing). This raises the insurable
value of each school from £10m to $10.59m. The
building and retrofit cost assumptions have been
derived from internal RMS expertise and additional
research.
Figure 10 (below) quantifies the expected reduction indamage and loss from these measures for the 10
schools across a range of wind speeds. Average annual
losses are expected to reduce by 46% as a result ofretrofitting, falling from $43.6k to $23.5k. The volatility of
average annual losses is expected to fall by the same
proportion. Assuming a 2x technical loading factor, thiswould reduce the annual premiums of insurance
covering all events from $87.3k per annum to $47.0k.

Figure 10: Significant damage reduction potential is shown from building resiliently
100%
90%

Mean Damage Ratio

80%
70%
60%
50%
40%
30%
20%
10%
0%
50

Base

60

70

Retrofit

80

90

100 110 120 130 140 150 160
Wind Speed (60-second Sustained, mph)

Damage Reduction (percentage)

170

180

190

Damage Reduction (absolute)

Source: RMS, 2018. Vulnerability curves for the hypothetical school portfolio are created using the RMS North Atlantic Hurricane Models.

Innovative finance for resilient infrastructure200

Innovative instruments for financing resilience

Building these resilience measures into a series of cash
flows associated with the RIB requires assumptions on
how the RIB might be structured to incentivise thedifferent aspects of resilience. Based on the structures
for similar products, our analysis assumes that:−

A low rate of return (1.5%) is applied to the funds
needed for physical reflecting, reflecting that this isan output almost exclusively dependent on theinvestor’s ability to design, implement and maintainpre–agreed measures to the required resiliencelevel (0% if measures are not delivered).

−

Because the delivery of operational resilience
outcomes, especially continued service availability,
is riskier for the investor and less in their control,
this is remunerated at a 15% return. The return is
0% if the operational measures are not delivered.

−

The asset insurance is remunerated through both areturn rate (15% to reflect the potential difficulty ofprocuring insurance where risk transfer markers areunderdeveloped) and the reduction in premiums, as
the return is based on the cost of insurance for a
non–resilient asset. It is also an obligatorycomponent of the product q. Investments required toensure that there are sufficient funds to cover theoperational costs of implementing disaster plans, isremunerated at a high rate of return (15%) so longas asset insurance is in place, but at 0% if this is
not in place.

A further complicating aspect of this product is what
happens when there is a disaster event. For any wind
event above 175mph, the bond is reimbursed
immediately – it “converts”. Given the extent ofdamages and the investor’s capital at risk (value ofretrofit), it is unrealistic to expect investors to continue
services or deploy a sufficient disaster relief plan forevents of such magnitude.
From this perspective, the structure is a mix between an
impact bond and a resilience bond with tail risk events
borne by the outcome funder. For any wind event above
100mph, the investor is expected to implement theoperational resilience measures for one year, before it
then converts.
The nature of the product is such that a wide variety ofdifferent cash flows can be realised depending on the
combination of performance criteria that are met, andthe realisation of an event in any one year. The chart
below (Figure 11, overleaf) shows a range of potential
combinations of performance and events, and showsq

It is obligatory because the capital outlay of the investor on the
retrofit measures is only a very small proportion of the total asset
value. Without obligatory insurance, in the event of a disaster, theinvestor would rather exit the structure rather than bear the costs of
rebuilding the whole asset. On the calibration involved in thisexample, the obligation would likely apply for damages caused bywind speeds in excess of 100 mph.

Innovative finance for resilient infrastructure37

how the return on investment and the payments by theoutcomes funder vary.
The chart illustrates clearly the fundamental feature ofthis product: the investor return on investment is higher(and the outcome payments made by the donor are
higher) when the investor is successful in meeting theperformance metrics associated with the dimensions ofresilience. Across the scenarios considered, investor
return on investment varies from +18.3% to –43.9%
depending on the extent to which the resilience metrics
are met.
The analysis also illustrates how the requirement totake out insurance for the assets transfers risk awayfrom the outcomes funder. For example, in scenario 2 –where a 140mph wind event strikes in year three, where
40% of schools have been made resilient, the investor
receives a total of $378,322 from the outcomes funderfor having taken out insurance.
By contrast, the event causes damages to the resilient
schools of $582,400 while the non–resilient schools
suffer damages of $1,865,400. This is the cost thatwould need to be made by the outcomes funder to theinvestor to ensure the investor would not exit thestructure.

Innovative instruments for financing resilience38

Figure 11: The return on investment will depend on how well the investor meets the criteria and whether an event occurs

Innovative finance for resilient infrastructure

Innovative instruments for financing resilience39

D. Assessment against criteria
Evaluation

Encourages resilient infrastructure Has a viable path to implementation



Monetises resilience dividend Offers flexibility



Makes resilience dividend available upfront~ Has a sound economic justification~

Involves risk transfer

 Causes ‘no harm’

Encourages resilient infrastructure

Involves risk transfer

The pay–for–performance design of the structure
explicitly aligns the incentives of investors with theoutcomes funder to promote physical, operational andfinancial dimensions of resilience.

There are multiple roles for insurance within theresilience impact bond, including:

Monetises resilience dividend
The resilience dividend is monetised in two ways:−−

The investor’s return on investment is linked to theresilience benefit that the retrofit generates. For
example, the investor makes a return on investmentof 18.3% in cases where the resilience measures
are fully implemented, and no event occurs but
makes negative returns in the cases where some or
all the resilience measures are not met.
The resilience dividend is captured again throughreduced asset insurance costs – depending on whopurchases the insurance, the savings can passthrough to any of the impact investor, outcomesfunder, or service provider.

Makes resilience dividend available upfront
The structure relies on the credible commitment by theoutcomes funder to the investor being sufficient toincentivise the investor to undertake the upfront andother measures that promote resilience. In other words,
rather than the resilience dividend being provided
upfront, it is transferred to an investor who, because ofcontractual commitments with the outcomes funder, ispatient enough to receive the monetised resilience
dividend over time.

1. Asset insurance for the underlying infrastructure
2. Parametrically triggered funds to cover theoperational costs of disaster, and3. Insurance intended to provide coverage for the
impact investor, so they can protect future cash
flows and expenditures against the risk of disasters
impacting the project.
Viable path to implementation
There are many examples of impact bonds, and pay–for–performance contracts more broadly, being
implemented. This paves the way for a resilience impact
bond focused on resilience. However, the complexity ofthe product, and the need to tailor this complexity toeach application, may limit its scalability (see below).
Offers flexibility
The performance criteria can be tailored to reflect
different desired project outcomes. The structure alsooffers flexibility to set different rates of return fordifferent performance criteria, allowing different
outcomes to be more or less heavily incentivised
according to donor preferences.
Sound economic justification
Further work needs to be undertaken to assess thevalue for money of this instrument compared toalternative structures. This research would need toassess the probability of the different aspects ofresilience being undertaken with and without the pay–for–performance contract.
The mandating of insurance assumed in the structure isneeded given the difference between the amountinvested in the retrofit and the underlying value of theasset. This mandate would need to be assessed in

Innovative finance for resilient infrastructure

Innovative instruments for financing resilienceterms of the wider economic benefits it could bring, as
discussed earlier in the report.
Causes ‘no harm’There are built–in performance criteria which aim tominimise disruption to services.

E. Next steps
The product offers an innovative and exciting way to
overcome many of the challenges that impede
resilience–building by transferring the risk of non–provision of resilience to a single accountable set ofinvestors, who suffer financial losses if it is notdelivered.
However, several aspects need to be addressed, either
before or during a pilot, to further test the robustness ofthe product and its widespread suitability.
−

Complexity: the impact bond for resilience has asignificant number of complex and interconnected
elements. The performance indices require a rangeof bespoke qualitative and quantitative methods forboth their design and measurement, which may
need to be adjusted for each application.
While this offers flexibility, it may also introduce
significant transaction costs that are difficult tojustify for smaller interventions. Moreover, due tothe uncertain nature of quantifying resilience
benefits, some of the performance criteria arenecessarily subjective, which introduces the risk ofdisputes over performance assessment.

−

Efficiency: more work is required to understand theefficiency of this structure in terms of value formoney for the outcomes funder. This requires anassessment of how much more likely it is that theresilience measures will be delivered through thisproduct compared with through a moreconventional donor–funded program.

In addition, the product relies entirely on resources fromthe outcomes–funder, which may limit the sustainablescalability of the product.

Innovative finance for resilient infrastructure40

Innovative instruments for financing resilinece

41

4.3 Resilience bond

A. Introduction

B. How would it work in detail?

A resilience bond is an innovative, risk–linked financing
mechanism that takes the existing model of acatastrophe bond (cat bond), in common usage within theinsurance linked securities market, and also accounts forthe impact of resilience measures. The framework anddesign for this instrument was developed by re:focus as away to both transfer catastrophe risk and help to fundprojects to boost resilience pre-disaster.

B1. Key stakeholders and product components

Like cat bonds, sponsors pay premiums on an insurance
contract and these premiums are used to make interest
payments to bond investors. In the event of an eligible
disaster, investors lose all or a portion of their investment
and the bond principal is transferred to the bondsponsors as an insurance pay–out.
Unlike cat bonds, resilience bonds explicitly account for
the impact of resilience measures by reducing bondinterest payments as the measures are implemented andthus reducing the financial risk born by bond investors.
The difference in interest payments is credited to theresilience measures and can be securitised to provide
upfront project capital through project revenue bonds orvarious types of project loans. re:focus have alreadyundertaken research into the theory and application ofthis product, including a report with illustrative case study
examples of developing coastal protection systems in
Hoboken, seawall upgrades in Miami Beach and funding
flood barriers in Norfolk (re:focus, 2017).
In a development application, resilience bonds could besponsored by a consortium of stakeholders that have aninterest in implementing the resilience measures or inminimising future disaster recovery costs. Consortia
members might include local asset owners andhomeowners, local business and industry interests,
regional economic development authorities, international
development banks, aid agencies and national
governments.

Innovative finance for resilient infrastructure

The key stakeholders in this structure would be:−Sponsoring stakeholder consortia: those with acommon collective strong interest in ensuring theresilience of a set of assets, including asset owners,
those who rely on the services provided by theassets, economic development authorities andinternational financial institutions.

−

The consortia would need to establish a resiliencebond facility which would issue a resilience bond.
The sponsoring stakeholder consortia would pay
fixed premiums into the resilience bond facility tocover the interest costs of the resilience bond.

− A blended capital facility would provide capital toinvest in resilience measures identified by thesponsoring stakeholder consortia. This capital raisingwould be supported by securitising the difference
between the premiums paid by the sponsoring
stakeholder consortia and the resilience bond interest
payments after the resilience measures have been
introduced.

Innovative instruments for financing resilinece

42

B2. Flow of funds
Figure 12: Cash flows underpinning the resilience bond−

A: Consortium premiums paid on an insurance contract to the resilience bond facility.

−

B: Insurance pay–outs issued by the resilience bond facility in the event of a qualifying natural disaster.

−

C: “Rebates” paid by the resilience bond facility to the source of project capital, which mirrors the reduction ininterest payments made to investors as the resilience measures reduce the risk to investor principle.

−

D: Upfront capital provided to the resilience project based on projected “rebates” attributable to the project.

Innovative finance for resilient infrastructure

Innovative instruments for financing resilinece

43

C. Assessment against criteria
Evaluation
Encourages resilient infrastructure Has a viable path to implementation?

Monetizes resilience dividend Offers flexibility



Makes resilience dividend available upfront

 Has a sound economic justification?

Involves risk transfer

 Causes ‘no harm’

Encourages resilient infrastructureSound economic justification

The product is only relevant when there is a consortiumof stakeholders who recognise a shared interest inenhanced resilience.

Previous analyses of resilience bonds have shown theireconomic viability, although more work needs to be doneto assess this in a development context.

Monetises resilience dividend

Causes ‘no harm’

The resilience dividend is monetised by the reduction inbond interest payments upon the successful delivery of
the resilience measures.

So long as the governance arrangements of thesponsoring stakeholder consortium are robust, theproduct should satisfy this criterion.

Makes resilience dividend available upfront

D. Next steps

The resilience dividend is only made available as theresilience measures are introduced and the differences
between the bond interest payments and the premiums
payments crystallises. However, the predictability of thisdifference allows for the rebate to be securitized whichallows the blended capital facility to provide upfront
capital.
Involves risk transfer
The essence of the product is a cat–bond, a familiar risk
transfer instrument.
Viable path to implementation
Despite its potential, more work is needed to assess theease of bringing this product to market. This mechanism
involves multiple stakeholders with complicatedincentives structures and requires integrating theresilience bond with a blended capital facility. There arelikely to be significant political and administrative
challenges associated with aligning and managing large
consortia of resilience bond beneficiaries andstakeholders.
Offers flexibility
The project concept can be tailored to suit a range ofcontexts, although the economic viability of applying the
instrument would need to be considered afresh in eachcontext.

Innovative finance for resilient infrastructure

Further risk and cash flow modelling is required to assess
the product viability in one or a series of use cases.

Innovative instruments for financing resilinece

44

4.4 Resilience company

A. Introduction

B. How would it work in detail?

The idea of the ReSCo was inspired by the innovative
financing mechanisms employed by energy service
companies (ESCOs). ESCOs develop, build, and fundprojects that create energy savings. They pay for the
project upfront and rely on receiving some proportion of
the savings that are realised due to the reduced energy
usage to make a return on their initial investment.

The three core actors needed for the product are:

A similar innovative mechanism could be used inconjunction with insurance policies to generate resiliencesavings for particular assets. Retrofitting a building, forexample, reduces risks and results in lower insurance
premium (assuming these are risk–based). The ReSCo
would offer to undertake the retrofitting of the building at
its own risk, and realise a return by receiving some
proportion of the savings that are realised due to reduced
insurance costs.
The R structure could be suited to disaggregated retrofit
solutions with small scale yet 'easy win' resilience
options, ideally where insurance is already in place.
These would likely need to be resilience options whichwere effective at reducing losses from short return period
events e.g. roof anchors and roof opening protection toincrease resilience to hurricane wind damage.

Innovative finance for resilient infrastructure−

The ReSCo: this type of company would need to beestablished. It would offer contracts to asset owners
to undertake retrofit measures and commit theassociated capital.

−

Asset owner (house owner): the asset owner would
be the counterparty to the ReSCo and agree to haveretrofit measures undertaken on its property. The
product also requires that the asset owner has
insurance on the asset.

−

Insurance provider: the insurer would offer aninsurance contract to the asset owner. Contractual
agreements between the insurer, asset owner and
ReSCo would be needed to ensure that the impact ofresilience measures is recognised in insurance
premiums, and that this financial benefit flows fromthe insurer to the ReSCo, via the asset owner.
There could also be a role for a donor both in helping
to instigate the creation of a ReSCo – the novelty of
the idea implies that a public private partnership isneeded – and potentially in subsidising the cash
flows received by the ReSCo, in cases where
insurance premiums were insufficiently risk–based tomake the product viable.

Innovative instruments for financing resilinece

45

Figure 13: a schematic of the ReSCo cash flows

−
−
−

−
−

(A) – $𝒀𝒀: The cost of the resilience measure, funded by the ReSCo.

𝑨𝑨𝑨𝑨𝑨𝑨𝒏𝒏𝒏𝒏𝒏𝒏 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 , 𝑨𝑨𝑨𝑨𝑨𝑨𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 : The annual average loss for non–resilient and resilient assets.

∆𝑨𝑨𝑨𝑨𝑨𝑨 = 𝑨𝑨𝑨𝑨𝑨𝑨𝒏𝒏𝒏𝒏𝒏𝒏 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 − 𝑨𝑨𝑨𝑨𝑨𝑨𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 : The insurer reduces the premium that the house owner pays, toaccount for the reduction in risk: the resilience dividend is equal to the reduction in average annual loss. The houseowner now pays a fraction, 𝝆𝝆, of the resilience dividend to the ReSCo each year, to payback the initial cost of theresilience $𝑌𝑌.
𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊 : The payment by the insurers if a catastrophe occurs.

𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊 : The cost of insurance taken out by the ReSCo to cover their cash flow to cover a situation
whereby the ReSCo does not receive the agreed payment from the asset owner.

Innovative finance for resilient infrastructure

Innovative instruments for financing resilinece

46

C. Assessment against criteria
Evaluation
Encourages resilient infrastructure Has a viable path to implementation?

Monetises resilience dividend Offers flexibility



Makes resilience dividend available upfront

 Has a sound economic justification?

Involves risk transfer

 Causes ‘no harm’

Encourages resilient infrastructureThis product creates a business model around theconcept of providing ‘resilience solutions’. The ReSCo
would be incentivised to identify and market how resilient
infrastructure solutions would offer benefits to a wide
range of stakeholders.
Monetises resilience dividend
The resilience dividend is monetised by the reduction ininsurance premiums that provides an income generating
potential for the ReSCo.
Makes resilience dividend available upfront
The resilience dividend is only made available as theresilience measures are introduced and the reduction ininsurance premiums crystallises. The product, in effect,transfers the resilience dividend to a set of investors whoare sufficiently patient to receive that dividend over time.
Involves risk transfer
Insurance contracts are fundamental to the realisation of
the resilience dividend.
Viable path to implementation
Despite its potential, more work is needed to assess theease of bringing this product to market. Most importantly,
there are currently no ReSCos in existence. A lot of
incubation work may be needed to translate the concept
into companies that are equipped to offer resiliencesolutions and take the associated risk on theirperformance. Pilots may be needed involving public(donor) support.
Offers flexibility
The product concept can be tailored to suit a range ofcontexts, although the economic viability of applying the
product would need to be considered afresh in eachcontext.

Innovative finance for resilient infrastructureSound economic justification
This needs to be tested to better understand whether andin which circumstances the reduction in average annual
losses will be sufficient to offer an attractive return to the
ReSCo investors. As noted above, the ReSCo structure
could be suited to disaggregated retrofit solutions withsmall scale yet 'easy win' resilience options, such as roofanchors and opening protection to increase resilience tohurricane wind damage.
Causes ‘no harm’There would likely need to be light regulation of any
ReSCo to ensure sufficient consumer protection to any
asset owner entering into a contractual relationship with a
ReSCo.

D. Next steps
Further risk and cash–flow modelling is required toassess the product viability in one or a series of use
cases.

Classification: Confidential

Conclusions

47

5. Conclusions

Disasters are currently characterised by growing costs,
significant underinsurance, poor infrastructure andgreater losses due to delayed recovery.
Resilient infrastructure is one way to help reduce thegrowing costs of disasters and speed recovery.
Resilience has a significant potential dividend, with thetotal benefits usually outweighing the costs by four toone. This dividend is rarely recognised, and resilient
infrastructure is underinvested in.
Even more resilient infrastructure will sometimes be
subject to disasters that affect its performance andundermine the critical services that infrastructure
provides. In these cases, insurance can help
communities respond more effectively to disaster, accesspost recovery finance more quickly and hence bounceback faster. Insurance is also often the vehicle throughwhich the resilience dividend can be monetised, helping
to provide a financial incentive for resilient infrastructure
construction.
This paper outlines four innovative insurance instrumentsthat combine insurance capital provision to provide amonetary incentive for resilient infrastructure. These
instruments include: insurance–linked loan packages,
resilience impact bonds, resilience bonds and resilience
service companies.
−

Insurance–linked loan packages: explicitly integraterisk transfer solutions into the (concessional) loans
provided by international financial institutions for thefinancing of new infrastructure or infrastructure
upgrade programmes.

−

Resilience impact bonds: a pay–for–performance
contract in which private investors cover the costs ofproviding various aspects of resilience and are repaid
by a donor based on the benefits of the project.
Resilience Bonds are insurance products that requiresponsors who will pay insurance premiums in orderto access the rebate. This may be a challenge inmarkets with low insurance penetration.

Innovative finance for resilient infrastructure−

Resilience bonds: cat bonds that offer reduced
interest in return for resilience measures. These
reduced interest payments can be securitised as
project revenue bonds or project loans to help cover
the upfront costs of resilient infrastructure.

−

Resilience–service companies (ReSCo): an
independent agent who pays for and implements
resilience measures in exchange for returns fromfuture insurance premium discounts. ReSCos havean analogous example in the energy sector but are
untrialled in insurance.

Each of these instruments offer potential solutions to thechallenges of financing and promoting resilience but will
require further development to apply them in practice.
This study has further developed the insurance–linked
package and resilience impact bond, illustrating with risk
and cash flow modelling how they might work. For these,
the next stage is to convene a group of interested
stakeholders to pilot the products in a specific context: inboth cases, there is significant practical experience thatcan be drawn on. In the case of resilience bonds and
ReSCos, more research is needed to demonstrate proof
of concept, following similar analysis to that deployed inthis report.
Policymakers have a critical role to play in driving forward
the development of these and similar products, tailoring
their design and sponsoring pilots. The significant publicbenefits from resilience investments justify the publicfunding these products will often likely require to be
successful. This should be part of a broader effort bypolicymakers to invest in risk data gathering andmonitoring, prepare and plan in key sectors, andimplement systems and tools to facilitate resilience.
The insurance industry needs to engage with
policymakers by providing advice on risk modelling andassessment, guidance on risk financing tools and support
to push resilience up the political agenda. Insurers canhelp to drive resilience themselves by better pricing risk
and resilience into insurance premiums.

References

48

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