CATASTROPHIC BONDS-ISSUANCE, TYPES, BENEFITS AND RISKS INVOLVED

Catastrophic bonds, also known as catastrophe bonds, are a form of risk management instrument

- Piyush Kumar Jha

It is a high-yield debt instrument that is designed to raise money for companies in the insurance industry in the event of a natural disaster. They have short maturity dates of between three-to-five years. They are designed to transfer the financial risk of catastrophic events from insurers or reinsurers to investors in the capital markets. Catastrophic events, such as natural disasters or pandemics, can result in significant losses for insurers, which can impact their ability to pay claims. Catastrophic bonds provide insurers with a mechanism to transfer some of this risk to the capital markets, thereby reducing their exposure to losses.

The use of catastrophic bonds has grown in popularity in recent years as insurers seek to manage their risk exposure to catastrophic events. In recent years, catastrophic events such as hurricanes, earthquakes, and pandemics have caused significant losses to insurers and reinsurers. Catastrophic bonds provide a mechanism for transferring the financial risk of these events to the capital markets.

The use of catastrophic bonds has grown significantly in the past decade. According to the Insurance-Linked Securities (ILS) market report by Willis Towers Watson, the global market for ILS, which includes catastrophic bonds, grew to $93 billion in 2020, up from $91 billion in 2019. Catastrophic bonds accounted for a significant portion of this growth. The market in catastrophe bonds could grow to $50 billion by the end of 2025.

Process for Issuance of Catastrophic Bonds

Catastrophic bonds are typically issued as part of a securitization transaction.