The Business of Betting on Catastrophe

Summary

The Business of Betting on CatastropheWorld Bank pandemic bonds paid out only after death tolls passed a threshold. They’re part of a booming market where investors turn calamity into capital.Adobe Stock/MITP ReaderBeeLine Reader uses subtle color gradients to help you read more efficiently.The pandemic bonds — a financial device made up by one of the world’s most powerful institutions, the World Bank — can seem like a great idea for raising money to fight pandemics. Money is pooled ahead of time, rather than waiting for governments to pony up monies to stop a deadly infectious disease after it spreads. Private investors speculate on the risk of pandemic, putting their money into a special World Bank account, earning interest on the money they invest, what’s called their principal. If a pandemic happens, investors lose their principal to organizations that fight disease, thwarting contagion before it escalates. If there’s no pandemic, investors get their prin­cipal money back, in addition to interest. In a world where the risk of pan­demic outbreak is ever-present, making risk the thing that investors buy is, at the very least, interesting.This article is adapted from Susan Erikson’s book “Investable!“Soon after the idea for the pandemic bonds was first floated by the World Bank in 2014, I applied for a grant to study these kinds of investments and got it. As the puzzle pieces of my research began falling into place, the role of insurance-linked securities (ILS) emerged as an element I could not ignore. (I tried.) The problem was that I had no idea what ILS was. Hadn’t known the industry existed. Knew no one in the industry. Zilch. How would I even study it?Googling around in the summer of 2017, I learned of an international reinsurer’s conference in Baden-Baden, Germany. By that point, I had learned enough to know that ILS grew out of the reinsurance industry in the mid-1990s, as insurers tried to deepen and diversify their portfolios so they wouldn’t run out of mo...