When NewRe pooled with other investors to finance the first “humanitarian impact bond” for the International Committee of the Red Cross (ICRC), it made media headlines. What was so noteworthy about it?
Rebecca Cichon: It was the ICRC’s first attempt at adapting a relatively new approach to financing humanitarian aid. At 26 million Swiss francs, it was also the most sizeable bond of its kind to date at the time. And NewRe was the first reinsurance counterparty to participate in such a mechanism.
On the face of it, “reinsurance” and “humanitarian aid” seem like odd bedfellows. How did NewRe get involved?
A colleague heard about it from the ICRC and asked me whether it was worth a look. My initial thought was that it wasn’t something we’d ever done. And I wasn’t sure it was something that we do. But I said, “Yes, let’s have a look!”
What exactly is the humanitarian impact bond?
In the end, it’s a mechanism for transferring risk. And that’s the way we at NewRe look at it. But what it is, is a loan. It’s a loan that we give to the ICRC.
What is the loan for?
The ICRC uses it to build physical rehabilitation centres in conflict-ridden areas, in this case Nigeria, Mali and the Democratic Republic of Congo. The ICRC runs these centres, which equip beneficiaries with mobility devices and perform physiotherapy. And after five years, if the centres are deemed to have created an impact – in other words, they can show concrete results – we get our money back from the ICRC and earn a return on top of it.
How did you approach something that was so new for you?
We tried to understand what it was all about. The first time we went to see the ICRC, I think we spent five hours in a closed room, without a break, trying to understand every detail of the transaction. What was it they were trying to do? How did they measure things? What experience did they have? It was a long meeting, but also the most productive one I have ever had.
How did you sell your colleagues at NewRe on the idea?
Once we had all the information, we started building a risk-analysis model for it along with a risk-transfer model. And once we had that, we went to management and told them, “Look, we can do this. We know we’ve never done it, but we have a way of applying our skills to do this. Can we proceed?” And they said, “Yes, sure, go ahead.” That’s how it happened.
What did you like personally about the project?
Within NewRe, I work for Capital Partners. We specialise in developing unconventional risk-transfer solutions for clients’ specific requirements. I have a focus on what we call public sector business development, which is really about addressing global challenges and thinking about what role we can play. I saw that, as a financing mechanism, the impact bond created value for us, but it also created value for the ICRC as a humanitarian organisation. It’s a whole new concept, but it makes sense.
Not only the concept was new. It also meant taking on a whole new array of risks.
Right. We had to understand the risks involved in impact creation, because that’s what defines our return. In other words, everything that can happen in the five years it takes to construct and operate the centres in conflict areas.
How do you evaluate those kinds of risks?
We evaluated the risks one by one, and we built the model in the same way. For some things, like natural catastrophes, floods, pandemics and political risks, we have internal expertise. For other risks we were able to obtain data from the ICRC. And that obviously helped us in completing the risk picture.
What was the reaction outside of NewRe to this aid-financing venture?
People realised that these are risks that are not easily taken by the private sector. And getting involved in this type of product does show our commitment to addressing global challenges. From that perspective, I think it was in general positively viewed. Obviously, because of the complexity, people wondered how we would go about it. But risk analysis is what we do. We just needed to take the tools that we have and apply them in a different way.
What other applications are you considering for this kind of impact bond mechanism?
It’s a very new market, but also one that has been growing a lot over the past few years. Many of the projects are small, which isn’t necessarily ideal for us since projects have to be a certain size to justify spending resources on them. That said, we are looking at concepts on poverty alleviation, education, infectious disease elimination, and on water and sanitation. We can’t be involved in each and every impact bond out there. But where we have data and where we feel comfortable with our risk analysis, we can and want to look into it.
What was it like to work with the ICRC?
In the beginning, we found we spoke different languages in terms of culture and sphere of activity. But an ICRC consultant had experience in both worlds and helped to bridge the differences. We now understand each other’s organisations a lot better. And then, as now, we worked very closely together, with almost daily contact – a constant back and forth.
Is it often the case that your work takes you into areas you haven’t been before?
All the time. Basically, everything I do is new. More or less at the same time that we closed the humanitarian impact bond, we accompanied the development of another transaction involving a pandemic emergency financing facility aimed at more quickly containing infectious disease outbreaks around the world.
That sounds pretty adventurous.
You could say that what we do is really about trying to push the frontiers of insurance.
How the humanitarian impact bond works
The “humanitarian impact bond” is a financing instrument created to encourage social investment from the private sector to support the ICRC’s rehabilitation programmes. ICRC funders – mainly governments – pledge to pay the ICRC for concrete results (“impact”) achieved over a period of five years. “Social investors” loan the ICRC the money to carry out the programme. At the end of the five years, the funders pay the ICRC based on the results: less if the results are bad, and more if they are good. The ICRC then repays the social investors. In a best case, they will get a return. In a worst case, they lose money.
The Humanitarian Impact Bond was uncharted territory for both NewRe and for the International Committee of the Red Cross (ICRC). Tobias Epprecht, who heads the project at the ICRC, reflects on the drivers and benefits of the unconventional partnership.
The Humanitarian Impact Bond provides predictable, multi-year funding. That’s a major advantage for us. We work in conflict situations in over 90 different countries. We’re financed by donations that we receive from governments. Generally, our donations are based on an annual cycle. For many of our activities, that works quite well. But certain projects go way beyond one or two years.
The ICRC is also looking to bring in new partners. Over the last 10 years, our budget has doubled. Traditional donors contribute what they can, but there is only so much they can do. The impact bond is a way of enlisting the private sector to ensure that we have sufficient resources to support our work. That’s where NewRe comes in.
We chose physical rehabilitation centres because of their suitability. Setting up new centres, renovating existing ones, and then supporting and maintaining them is exactly the type of project that benefits from the long window of predictability that multi-year funding offers.
The added value of the bond goes beyond the project itself. The emphasis on impact forced us to look at various indicators in a different way. In a world where data is everything, that meant questioning how we use existing data about our centres, how we organise it, how we interpret it, and what sorts of efficiencies and new tools we can develop based on it.
NewRe was interested from the very start. We initially contacted them purely as an insurer. But then they saw that it could be interesting for them to assume the risk as an investor on the project. Naturally, it was a big learning exercise for all of us. Our discussions with NewRe were good, frank and open. There was commitment on both sides to make it work.