Catastrophe Bonds

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.

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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