Catastrophe Bonds Latest News
Recently, the Kerala government has asked the Union government to consider instituting ‘catastrophe bonds’ as protection against disaster-linked losses.
About Catastrophe Bonds
- These are insurance-linked securities that transfer the financial risks from natural disasters from the bond issuer to the capital market.
- These are a unique hybrid insurance-cum-debt financial product that transforms insurance cover into a tradable security.
- At present, the financial risk is fully borne by the State or Central governments.
Key Stakeholders and Mechanism of Catastrophe Bonds
- These bonds are sponsored by sovereign governments, who pay premiums.
- These are issued through intermediaries, such as the World Bank or Asian Development Bank, to reduce issuance risks.
- These are purchased by global investors, including pension funds, hedge funds, and family offices, who are attracted by high returns and the diversification benefits of non-market correlated risks.
- The risk level and frequency of disaster occurrence directly influence coupon rates.
- For instance, earthquake-related bonds often offer lower premiums (1-2%) compared to those covering cyclones or hurricanes.
- Global scene: Mexico and the Philippines have been using CAT bonds to protect themselves against disaster-linked losses.
Source: TH
Catastrophe Bonds FAQs
Q1: What are Catastrophe Bonds?
Ans: Insurance-linked securities that transfer risk to investors
Q2: What is the primary purpose of Cat Bonds?
Ans: To transfer risk from insurers to investors
