Reverse Catastrophe Bonds for Pandemic Preparedness

Traditional catastrophe bonds allow jurisdictions to insure against major disasters when a sponsor can afford regular coupon payments but cannot afford a large, unexpected disaster. Wealthy national governments can afford both routine payments to prepare for and prevent natural disasters and pandemics, and can afford much larger stimulus and relief payments when they occur, with the former being more cost effective, but the latter having much greater political support. Private preparation for major natural disasters is complicated by laws and social norms against price-gouging that discourage private stockpiling. We argue that governments could ensure efficient, market-driven preparations for many forms of disasters, including pandemics, by entering contingent purchasing contracts that follow the risk-transfer logic of ‘reverse catastrophe bonds.’ I In this model, private suppliers pay for the creation and maintenance of medical countermeasures and other disaster-ready supplies in exchange for the government sponsor agreeing to purchase such private stockpiles at a set premium when a disaster occurs. This would allow governments to avoid unpopular spending on disaster stockpiling, increase societal levels of stockpiling, incentivize private actors to predict and prepare for disasters, and allow the government to distribute emergency goods via social rather than market mechanisms during disasters or pandemics. This model is a form of contingent purchasing agreement related to, but distinct from, advance market commitments. Unlike AMCs, it does not rely on predefined target product profiles or ex ante quantity commitments. This paper also discusses how private philanthropy could play a catalytic role in developing and piloting versions of this proposal.