Specialty Insurance

Rewarding Resilience

A new bond framework can provide dividends for completing infrastructure projects that boost resilience.
By: | May 2, 2017 • 5 min read

Healthy cities, like healthy people, are less risky to insure. So if insurers offer people tools and incentives to meet their health goals, why not do the same for cities and regions?

That’s a simple but clear way of explaining the purpose of resilience bonds, a unique variation of catastrophe bonds being developed through the Re:Bound initiative, the brainchild of Re:Focus Partners, a design and finance firm focused on developing and brokering public-private partnerships for sustainable infrastructure around the world.

Shalini Vajjhala, founder and CEO, Re:Focus Partners

Resilience advocacy is still a relatively nascent trend. In fact, the formal role of chief resilience officer didn’t even exist before 2014. But resilience projects like seawalls and other coastal protections are now finding their way onto the agendas of cities and regions with catastrophe exposures.

In the process of designing some of those projects, the team at Re:Focus Partners noticed a marked disconnect. Founder and CEO Shalini Vajjhala said: “We were creating insurance benefits that weren’t really capturable at the retail level. If you rebuild 63 miles of seawall along Miami Beach you should be reducing risk — that’s the point of the whole project. But it occurred to us that no one was really thinking about this problem this way.”

Vajjhala and her team launched Re:Bound to establish a direct method for tying infrastructure investment to risk transfer vehicles, using catastrophe bonds as a jump-off point.

“Our goal with the program was to test and validate whether we could rework a CAT bond into a new structure so that we could capture the benefits of resilient infrastructure projects in an insurance linked finance mechanism,” Vajjhala said.

Re:Focus teamed up with RMS, Swiss Re, The Rockefeller Foundation and Goldman Sachs to study, develop and validate the framework for the bonds.

Alex Kaplan, senior vice president at Swiss Re, took part in the initiative. “The challenges our cities and communities face globally are changing,” said Kaplan. “This means the solutions our industry can provide must also evolve.”


Resilience bonds, like CAT bonds, serve an insurance purpose, providing a payout if a catastrophic event occurs and meets the bond’s predetermined triggering criteria, whether that be a certain threshold of losses, a specific storm surge height or a certain wind speed, for example. That financial assurance enables entities or communities to reduce their dependence on federal relief and disaster aid.

But unlike CAT bonds, resilience bonds also benefit their holders when disaster doesn’t strike. Reduced premiums based on lowered risk are tied to the completion of the resilience project during the bond term, creating “resilience rebates” that can applied in a variety of ways depending upon the needs and goals of the entity.

“If you rebuild 63 miles of seawall along Miami Beach you should be reducing risk — that’s the point of the whole project. But it occurred to us that no one was really thinking about this problem this way.” —Shalini Vajjhala, founder and CEO, Re:Focus Partners

At the completion of a resilience project, the bond holder has achieved reduced physical disaster risk while maintaining the financial protection of the bond and earning a return on its premiums, which would continue through subsequent bond issuances — creating a long-term resource for funding continued resilience efforts.

“Resilience bonds could not only support a faster recovery,” said Kaplan, “but would also help to improve national and city preparedness in a very substantial way, and fast-track resilience from idea to reality.”

Modeling for Impact

The framework for resilience bonds, like CAT bonds, relies on sophisticated models, which are broadly understood and deliver a high level of confidence for investors. The difference for resilience bonds is the use of project-based measurements to frame the risk.

Alex Kaplan, senior vice president, Swiss Re

For a flood barrier project, for instance, the same CAT events are modeled both with and without the barrier in place, illustrating how the project will reduce the cost of the risk.

“The key to the resilience bond concept is the ability to … determine in a robust, probabilistic manner, the reduction in risk that results from actions taken to improve resilience,” said Ben Brookes, VP, capital markets, RMS.

Brookes noted that modeling for resilience brought a new dimension to exposure data.

Resilience, he said, “might mean reducing loss of life in the wake of disaster. It might mean protecting complex interconnected lifelines such as health care services, transportation, energy and water supplies. It might mean improving the ability to recover quickly. It might mean reducing the economic impact in terms of city revenues or private business.

“Or it might mean all of these things and more.

“The interplays between these elements can also be critical,” Brookes said.

Shared Exposures

The catastrophe exposures being addressed by any given public sector resilience project typically impact numerous public and private stakeholders in a region, such as utilities, hospitals, universities and mass transportation systems as well as private corporations.


As such, resilience bonds present partnership opportunities to share the cost of infrastructure improvements as well as the benefits of resilience rebates, while improving the risk profile for all.

Shared risk in the Embarcadero Historic District in San Francisco is a notable example.

“There is $75 billion in assets behind the seawall and all of the major utility lines actually run physically through the concrete wall,” said Vajjhala.

“The wall is not seismically sound anymore.”

A retrofit would generate insurance benefits for the Port, which is the seawall’s managing entity, as well as all of the private properties that could be impacted if that seawall fails, she said.

“Almost every major port city has some variation on that problem.”

The Re:Bound project is exploring infrastructure interventions that work across different perils, including wildfires.

“It’s all about what’s modellable, what creates a meaningful risk reduction, and then how do you translate those risk reductions into a resilience bond structure so that they can be redirected to support the project,” said Vajjhala.

Jamie Rhodes, program co-lead, Re:Bound

She and Re:Bound program co-lead Jamie Rhodes are working with potential sponsors and co-sponsors from around the country to explain the new bond framework and help them determine whether a resilience bond might be an effective complement to a resilience project under consideration.

Vajjhala and Rhodes expect that the first issuance of this type of resilience bond will happen within the next year and a half. They’re excited to be able to bring the concept to reality.

“A large part of what makes our little firm tick is solving problems that are at the intersection of public and private interest — those things that have a lot of people’s attention but there’s no single individual or organization that has the get-up-and-go to tackle on its own,” said Vajjhala.

“We take a great deal of satisfaction in being able to solve these kinds of problems and incubate lines of business that create public value.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.