Quantitative and Financial Aspects of Resilience Bonds in the Context of Recursive Insurance Contracts. A Cost Benefit Analysis

Abstract

It is now well known that the world community must share the risks and hazards deriving from climate change and, more generally, from the environment. At the end of summer 2019, the European Bank for Reconstruction and Development (EBRD) issued the World’s first dedicated climate resilience bond and this confirms the thesis according to which financial, social and economic instruments are always most necessary for the development of society and to avoid that natural hazards can, as occurred in the past, cause extremely heavy damage with negative repercussions on every single area of a community. Starting from the characteristics of resilience bonds and reinsurance, the paper seeks to highlight the potential advantages that would derive from a systematic application of recursive contractual instruments (smart contracts). The authors focused on the study of the projection of financial and quantitative data of resilience and catastrophe bonds on the basis of a determined timeline, a fixed insurance premium, mitigation works related and connected to the main contract (insurance). In particular, the study concerns the correlation of the urban implementation of risk mitigation works with the specific catastrophic flood risk. The paper implements a purely economic and social cost-benefit analysis (ACB) in the sense that includes, among others, a public approach and the goal of maximizing social welfare, according to efficiency economic criteria. In a nutshell, the authors highlight as the main result not only the possibility, but also the convenience of the joint and multidisciplinary application of the quantitative method (resilience bonds) to infrastructure resilience.

Definition of Indicators for Multi-Criteria Decision Analysis of COVID-19 Emergency Response and Health System Resilience in Italy

“…In disaster risk environment it is possible to refer to the United Nations Office for Disaster Risk Reduction (UNISDR) definition of resilience: 'the ability of a system, community or society exposed to hazards to resist, absorb, accommodate, adapt to, transform and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions through risk management' [24]. Simplifying, resilience commonly means 'the capacity to recover quickly from a shock' [20], [26]- [29]. Referring to a pandemic, the health system resilience has been chosen, intending the 'preparedness and the ability to respond to a severe and acute shock' [25], [26], [30], [31].…”

The Mitigation of Socio-natural Hazards through Smart Insurance Contracts

“…The loss ratio, often calculated as paid losses to premiums received in the underwriting year, provides a quick result but may not account for segment losses, hindering a comprehensive tariff policy review [12]. Some companies use cash settlement loss for rapid portfolio assessment, correlating paid losses over a period with premiums received in the same period.…”