Cat to the rescue: Govts, insurers must issue catastrophe bonds for citizens’ financial protection from weather events

Synopsis: With India prone to disaster activities, there is a need to launch the cat bonds or catastrophe bonds.

Introduction

Climate change has an adverse impact on the nature and environment. It led to a lot of devastating activities like floods, fire etc. India is also facing the brunt of these activities.

National Disaster Management Authority (NDMA) estimates that 27 states and Union territories are disaster-prone. Under this aspect, there is a need that India should encourage the use of cat bonds.

What are catastrophe bonds or cat bonds? 

Catastrophe bonds or cat bonds provide options for insurers, reinsurers, global corporations and even governments as a way to protect themselves against natural disasters.

What are the benefits of cat bonds?

Under these bonds, the investors are compensated by a rate of return that is higher than that of normal government or corporate bonds. This helps them get extra returns on investment, which in turn helps them to meet liabilities.

It is beneficial for both insurers and the government. It offers assurance to the insurer of cash payout to lower premiums and simultaneously offers coverage of extreme events. Governments can get extra cash to spend on relief and rehabilitation purposes.

What should India do?

Owing to the benefits provided by these bonds, the World Bank provides a cat bond market access facility for member countries. Jamaica, in the past, also issued cat bonds to provide financial protection of up to $185 million against losses from tropical cyclones.

India, which is a disaster-prone country, should also actively encourage the use of cat bonds.

Source: This post is based on the article “Cat to the rescue: Govts, insurers must issue catastrophe bonds for citizens’ financial protection from weather events” published in Times of India on 21st October 2021.