Disaster Prevention Bonds would be a new financial instrument, designed to channel the market’s efficiencies and incentives into avoiding humanitarian disasters in the next 50 years. (They are not the same as catastrophe bonds (see box), which are not designed to reduce the humanitarian impact of the specified catastrophe.)
Disaster Prevention Bonds could be backed by some or all of the world’s governments and issued by an international body like the United Nations or World Bank. These bonds need not bear interest, and would redeemable for a fixed sum once a sustained period of absence of a humanitarian disaster had passed. The type of disaster need not be specified. The bonds would be floated on the open market and be tradable at any time thereafter. The redemption terms would stipulate that they would become worthless the moment an unspecified calamity killed, say, 100 000 of the world’s citizens by a single catastrophic event in any 48-
Holders of Disaster Prevention Bonds would then be in a similar position to holders of catastrophe bonds: they win if there is no catastrophe. But the bonds’ redemption terms would target impacts, rather than events. So it would not be the occurrence of a catastrophe that triggers the loss to bondholders; but the numbers of people killed (or made homeless) by such an event.
When floated the bonds would fetch a price lower than their redemption value. It could be much lower if investors think the likelihood the required disaster-
How would Disaster Prevention Bonds work?
Even a large number of small bondholders couldn’t do much to prevent a disaster. So the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective disaster-
So bondholders would either trade bonds, or make incentive payments to ensure that any proceeds from higher bond prices, or from redemption, would be channelled in ways most likely to stimulate speedy, least-
What could bondholders do? They might decide that the best use of their funds is to highlight the dangers of nuclear war to a complacent public, to lobby for the application and enforcement of stringent building codes in earthquake-
Insurance against knowns and unknowns
Centrally allocated resource allocation can succeed when it's well meaning, has sufficient resources and is dealing with problems whose solutions are easily identifiable and do not conflict too much with powerful interests. Unfortunately, many of the new problems arising from denser, more linked, populations and higher technology are difficult even for a well-
Democratic governments are actually quite good at identifying broad social and environmental goals and raising the revenue for their achievement, and under a Disaster Prevention Bond regime they would continue to do so. But where governments are less effective is in actually achieving our goals. Disaster Prevention Bonds would let markets do what they do best: allocating scarce resources to achieve broad social and environmental goals at least cost.
As well as their efficiency, Disaster Prevention Bonds mean that there is no need for a handful of experts to try to anticipate the causes of future disasters and to allocate funds according to their views with only today's knowledge at their disposal. Investors in Disaster Prevention Bonds would do this work themselves, without bias, and would be motivated to adapt to new information continuously, during the entire lifetime of their bonds. And in another striking improvement over government-
To sum up: the advantages of a globally-
Efficiency, arising from the incentive bondholders to support only efficient projects and to terminate failures – something that governments are often loth to do. There will also be efficiency gains arising from the continuous, publicly available pricing information generated by the market value of the bonds, which would be of immense value in helping decision-
Stability of the goal: long-
Impartiality, transparency, and buy-
Disaster Prevention Bonds would go some way toward offsetting existing incentives, many of which make disasters more likely. Government policies have subsidised fossil fuel extraction and use, probably helping to destabilise the world’s climate. As well, the short-
A Disaster Prevention Bond regime could level the incentives playing field. Those who want to avoid a global catastrophe of any kind are, it’s safe to say, in a massive numerical majority, but have few means of channeling our wishes into effective action. We don’t know what to do, and our tendency is to assume that governments will sort it out with the support of hard-
In stark contrast to today’s disaster prevention or mitigation measures, Disaster Prevention Bonds would inextricably link rewards to achievement of a targeted outcome. With their efficiency and clear, comprehensible and meaningful goals, Disaster Prevention Bonds could not only minimize the occurrence and impact of future disasters, but help close the gap between governments and the people they are supposed to represent.
[*] Our Final Century?: Will the Human Race Survive the Twenty-
Catastrophe bonds are typically issued by insurers, who stand to lose if a defined catastrophe, like a hurricane, occurs. Investors buy catastrophe bonds for a principal and then receive a high rate of interest. They will also see their principal returned, provided a defined catastrophe does not occur, enjoying a healthy net return. But if the catastrophe does occur then the insurance company retains the principal and uses it pay claimants. Catastrophe bonds were first issued in 1997 and their use has risen spectacularly. They are not designed to reduce the probability of a catastrophe occurring, or its humanitarian impact.