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What are catastrophe bonds?

India is proving to natural disasters – floods, earthquakes, cyclones, heat waves, forest fires, droughts, etc. The recent Cyclone Fani causes destruction in coastal parts of Odisha,

In this context, catastrophe bonds have come to the fore. These are insurance bonds which cover large scale disasters for a period of 3-5 years. Ex. GIC India LTD issued such bonds in Uttarkhand and it was used after the 2013 floods.

see all WHY DO OUR CITIES GETTING FLOODED SO MUCH?

The impact of any disasters includes –

  • Displacement of people
  • Loss of lives
  • Infrastructure damage
  • Risk of spreading disaster

All their impacts require quick resolution which only the state finds difficult to do

Hence, the insurance mechanism proves to be useful in post disasters period.

However, there are limitations of such bonds –

  • They require high provision can be out of poor families reach.
  • The issuing companies need to ensure effective fund generating the capacity to deliver in large disasters ex. Fani
  • The time period of such bonds maturity is low [3 years generally]
  • The bonds are junk bonds hence are highly prone to risk.

Despite this, the advantages cannot be ruled out –

  • Aiding states in relief work
  • If issued on a pan-India level than the cost of financing disasters relief can be managed.

As in a year, only some parts are affected by any disasters.

  • Increasing the maturity and coverage period can ensure more premiumfor bond issuing companies.

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Conclusion –

The government should consult with national and private insurance players like IRDA and GIC LTD. To find the suitability of such bonds.

Best global practices like of USA should be a part of such bond policy.

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