Resilience Bonds

Review of RESILIENCE BONDS: A BUSINESS-MODEL FOR RESILIENT INFRASTRUCTURE by Shalini Vaijhala and James Rhodes, re:focus partners, 2018/
Source: https://www.institut.veolia.org/en/resilience-bonds-business-model-resilient-infrastructure

Reviewer: Jasper Cooke

This article outlines a financial strategy to help facilitate greater investment in mitigation, called a Resilience Bond. These bonds are designed to solve the challenge of investing in mitigation when the benefits are uncertain and would occur far into the future.

What are Resilience Bonds and how do they address this problem? Simply put, they are a form of insurance. They build on the idea of Catastrophe Bonds (Cat Bonds), which are much more like “insurance policies and not traditional municipal bonds.” They usually differ from traditional insurance in that once disaster losses reach a pre-set level, the Cat Bonds immediately pay out. Resilience Bonds include the addition that if a community implements a mitigation project that quantifiably reduces the risk to the insured property (and therefore the likelihood that the Cat Bond will ever have to pay out), then the ‘sponsor’ of the Resilience Bond (i.e. the person looking to reduce their own risk) will get a premium reduction.

To use an analogy from the authors, “If Catastrophe Bonds are similar to life insurance policies that only pay out when the worst disasters strike, then Resilience Bonds are more like progressive health insurance programs that provide incentives to make healthy choices—quitting smoking or exercising regularly—that reduce long-term risks and the cost of care.”

While the market for Cat Bonds is estimated at $30 billion annually and growing, the authors also lay out some challenges before issuance of the first Resilience Bond. For example, responsibility for public assets is often very broad and the process to implement a mitigation project suitable for a Resilience Bond could take years. Since the bond wouldn’t take effect until the project is complete, it can be hard to synchronize the timelines. The authors recommend collaborating both with design and engineering firms, as well as financial partners, so that the project can take advantage of all perspectives early on. Continuing the life insurance analogy, your life insurance company has to find out that you’ve quit smoking to reduce your rate, so these kinds of collaborative discussions are key for all partners to fully appreciate and realize the benefits.

Ultimately the authors hope that Resilience Bonds will help further increase the number of mitigation investments both by creating a direct financial incentive and by creating a broader quantified understanding of risk and risk reduction benefits. In my view, they are right. Resilience bonds make sense and, as long as catastrophe bonds continue to increase in popularity, resilience bonds will also continue to grow in potential utility. Better understanding of risk is key to any comprehensive national or local program to reduce it, along with clear responsibility for the range of risks a community faces, and resilience bonds can directly address these areas.

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