Epidemic Financing Facilities: Pandemic Bonds and Endemic Swaps

Abstract

The COVID-19 pandemic has had a with severe human toll and catastrophic economic losses and has also heightened the need for more effective solutions for managing epidemic-related risks. This article proposes two capital market–based epidemic financing facilities to address two extremes of epidemic risks. The proposed pandemic bond is meant to hedge the severe pandemic outbreak, and the proposed endemic swap can be used to hedge a recurrent endemic. Using coronavirus as an example of a pandemic and dengue fever as an example of an endemic, we discuss the modeling and pricing of the proposed epidemic securities. We price the proposed securities based on epidemiological models and actuarial models. We show that the proposed hedging securities can provide additional capital relief for pandemic recovery plans, effectively stabilize hedgers’ cash flows, and create attractive returns for different investors.