13 Jul Financing Resilience Protection for the UK
Flood damage to homes, businesses and the economy has been significant over the past three years and costs are rising. Given the unpredictable and extreme weather patterns, it is likely citizens, businesses and the UK Government will face serious financial challenges in the years to come.
However, what these unpredictable challenges may provide, is a unique opportunity to think creatively about preparatory financing at a national level.
Extreme weather will continue to cause damage regardless of how we choose to protect ourselves, and this is what drives our collective preference for resilience thinking over preventative thinking.
And rightly so.
The problem however, is that paying for resilience can be front-loaded and therefore, at a national or local Government level, be seen as less attractive.
Although resilience is clearly the most cost effective long-term solution for government infrastructure and assets (and in terms of knock-on effects for private residences and commercial property and assets), it is still not the default approach following flood disaster.
I believe this is something that needs to change.
From our work in the energy sector we have clearly found that resilience pays and, in some cases, can even cost less up front.
As a result, the insurance world is increasingly focusing on resilient repair as a way of mitigating long term, repeated high payouts.
There’s room for change though, even at a national level.
In the USA there is already a mechanism in place that is designed to provide the front-loaded federal funding required at a regional level following disasters. It’s called a catastrophe bond, and it’s something we may be able to learn from in the UK.
From Catastrophe to Resilience
Introduced in the mid 1990s following Hurricane Andrew, Catastrophe bonds are US Government issued bonds designed to provide long-term finance for disaster recovery from private sector investment.
Building on this concept, two policy thinkers in the US, Shalini Vajjhala and James Rhodes, have re-thought the role of Catastrophe Bonds, developing a concept called Resilience bonds. These are federally tax-exempt disaster bonds that enable states to cope with the daunting costs of regionalised weather-based disasters without getting into paralysing long-term debt.
The idea is to leverage existing Catastrophe bonds and connect insurance coverage (that public sector entities can already purchase) with capital investments in resilient infrastructure systems such as flood barriers and green infrastructure, that reduce expected losses from disasters.
And this link between insurance and infrastructure is important because, just as life insurance doesn’t actually make you physically healthier, catastrophe bonds do not reduce physical risks. They only payout when disasters strike.
On the other hand, the idea of resilience bonds is to reduce risks, similar to how quitting smoking or exercising regularly lowers life insurance costs. In the case of resilient infrastructure, investing in watercourse management or flood barriers helps avoid physical and financial disaster. Resilience bonds combine these two different types of investment by modifying traditional catastrophe bonds to provide insurance savings that can be captured as rebates for investment in resilient infrastructure projects.
It’s simple, but innovative.
It also begs the question: could UK Resilience be financed through Government bonds (Gilts)?
After all, unpredictable problems call for creative thinking.
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