Scope for introduction of catastrophe bonds

By IANS,

New Delhi : There is scope for introduction of catastrophe bonds in the Indian capital market and it is an area that needs focus in the future, according to the Economic Survey laid in parliament Thursday.

"Capital market solutions for catastrophe risk insurance are another area that needs focus," the survey noted.

In other words, transfer of insurance risk of natural calamities like earthquakes, hurricanes and floods to the capital market through the catastrophe bonds is what is being looked at now.

Such issuance of catastrophe bonds is in vogue in advanced countries and "there is scope for introducing it in countries like India to provide insurance against contingencies," the survey noted.

Also known as cat bonds, catastrophe bonds are a sort of reinsurance for the insurers.

Non-life insurers, reinsurers will issue the cat bonds - like any other financial instruments that would pay an interest to the investors.

If a catastrophic loss occurs, say due to floods, earthquake or other natural calamities, the bond holders will have to forfeit their principal which the insurer will use for settling claims.