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Life insurance is common in India, but disaster risk insurance is not. Low coverage leaves most assets and livelihoods uninsured and vulnerable to loss. Globally, after the late-1990s U.S. hurricanes impacted even re-insurers, catastrophe risk began shifting to financial markets via catastrophe bonds (cat bonds).

What are Catastrophe Bonds (Cat Bonds)?

Catastrophe bonds (cat bonds) are insurance-linked securities (ILS) that convert disaster risks into tradable debt instruments, allowing countries or insurers to transfer the financial burden of natural disasters to capital markets.

• They are high-yield bonds issued by governments or insurance entities (sponsors) via intermediaries like the World Bank or Asian Development Bank.
• In case of a pre-defined disaster event (e.g., a 7.0 magnitude earthquake or 250 km/h cyclone), investors lose part or all of the principal, which is used by the sponsor for relief and reconstruction.
• If no disaster occurs, investors receive attractive coupon payments and their principal is returned at maturity.
• A Special Purpose Vehicle (SPV) is created to manage funds, isolate risks, and ensure legal and financial transparency.

Why Cat Bonds Matter

India is one of the most disaster-prone countries in the world, experiencing regular cyclones, floods, landslides, earthquakes, and forest fires. Despite this:

• Insurance penetration remains low, leaving individual property and livelihoods largely uninsured.
• The fiscal burden of post-disaster recovery typically falls on government budgets, disrupting planned expenditure and long-term development projects.

As a solution, cat bonds offer pre-arranged, parametric-trigger-based disaster financing, enabling faster payouts and risk diversification.

Advantages of Cat Bonds

Cat bonds also appeal to institutional investors, especially pension funds and hedge funds, seeking returns that diversify portfolio risk away from traditional market-linked assets.

Limitations and Challenges

Transparent design, clear actuarial modelling, and historical comparisons with actual relief costs are critical for effective implementation.

India’s Readiness for Cat Bonds

• Annual Allocation: ?1.8 billion allocated since FY21–22 for disaster mitigation and capacity building shows India’s proactive approach to risk reduction.
• Sovereign Credibility: India’s stable credit rating and large economy make it a credible sponsor for such instruments.
• Hazard Exposure: Increasing frequency and severity of climate-induced disasters makes India a suitable case for cat bond-backed financial risk transfer.

Towards a South Asian Cat Bond

Given shared disaster vulnerabilities, India could spearhead a regional catastrophe bond to cover multiple countries facing similar risks:

Benefits:

• Regional risk pooling reduces premium costs.
• Enables a broader hazard matrix (e.g., cyclones in Bay of Bengal, earthquakes in Himalayan belt).
• Enhances regional financial resilience and climate cooperation.

Possibilities:

• An earthquake bond covering India, Nepal, Bhutan
• A cyclone bond for India, Bangladesh, Sri Lanka, Maldives, Myanmar

Such instruments would address unhedged regional risks and promote disaster preparedness in South Asia.

Global Context

• $180 billion: Approximate global issuance of cat bonds since inception.
• $50 billion: Currently outstanding in global cat bond markets.
• Post-1990s hurricanes in the US catalyzed growth in this market, especially as reinsurers struggled to bear repeated losses.