theIASHub | 10 Jul, 2025 | 18
Catastrophe Bonds : Recently, India has initiated steps to adopt catastrophe bonds as a novel financial strategy to strengthen its disaster risk management framework.
o This move comes in response to the growing frequency and intensity of natural disasters, highlighting the need for enhanced climate resilience.
o They offer an innovative alternative to traditional disaster insurance, by turning hazard exposure into a tradable security.
o Structure and Working: Sponsor (e.g., a government) pays premiums to set up the bond.
- Investors purchase the bonds, and their principal is held in a special account.
-If a predefined disaster (like a cyclone or earthquake) occurs, investors lose part or all of their principal, which is used for relief and reconstruction.
- If no disaster occurs, investors receive their full principal back, along with a high coupon (interest) rate.
o Disaster insurance coverage remains very low, leaving large sections of the population economically vulnerable.
o Public finances are strained due to heavy reconstruction costs after each disaster.
o Leverage India’s strong sovereign credit rating to secure favourable bond terms.
o Transfer risk to global capital markets, ensuring faster access to relief funds when disasters occur.
o India’s commitment to disaster preparedness, including an annual allocation of ₹15,000 crore ($1.8 bn) for mitigation can help lower the cost of cat bonds (i.e., bond premiums).
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