Cat bonds yield higher returns
Monday, 19 April 2010
MUMBAI, Apr 18 (Economic Times): Catastrophe bonds (commonly known as cat bonds) are widely used in advanced countries. These are intended to transfer insurance risk arising out of natural calamities such as earthquakes, hurricanes and floods, to the capital markets. Cat bonds are risk-related securities that transfer a specified set of risks from a sponsor to the investors.
The Economic Survey 2009-10 has suggested the introduction of cat bonds here. The survey has indicated that there is scope for introducing these in countries such as India to provide insurance against contingencies. It observed that capital market solution for catastrophe risk insurance is an area that needs focus.
The survey said since the opening up of the insurance sector, the number of participants has gone up from six in 2000 to 44 at present, operating across life and non-life categories.
Insurance was opened up for the private sector in 2000 with the enactment of the Insurance Regulatory and Development Authority Act 1999. The post-liberalisation period has witnessed tremendous growth in the insurance industry, particularly in the life segment.
Cat bonds are popular in some of the markets abroad, especially in the United States, Japan and Europe. Insurers can use these as an alternative to reinsurance. Insurance or reinsurance companies can issue these bonds and place them with various investors.
This helps them transfer a part of the risks to the investors. The insurance company can further invest the money generated from selling the bonds. Cat bonds can be issued by the government or financial institutions.
Investors can get a slightly higher return when compared to other securities and it also offers them an opportunity to diversify their investments. In case the catastrophe is of huge proportions , investors can lose the capital. The insurance company then uses the amount raised against cat bonds to pay policyholders' claims.
Non-life insurers and reinsures issue cat bonds like any other financial instrument , and also pay interest to investors. In case a catastrophe loss occurs, the bond holder will have to forfeit the principal which the insurer will use to settle claims. Cat bonds are very risky instruments.
These are high-yield debt instruments that are usually insurance-linked and meant to raise money in case of a catastrophe such as an earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, the issuer's obligation to pay interest or repay the principal is either deferred or completely waived.
Cat bonds are not closely linked with the stock markets or economic conditions, and offer significant returns to investors.
The Economic Survey 2009-10 has suggested the introduction of cat bonds here. The survey has indicated that there is scope for introducing these in countries such as India to provide insurance against contingencies. It observed that capital market solution for catastrophe risk insurance is an area that needs focus.
The survey said since the opening up of the insurance sector, the number of participants has gone up from six in 2000 to 44 at present, operating across life and non-life categories.
Insurance was opened up for the private sector in 2000 with the enactment of the Insurance Regulatory and Development Authority Act 1999. The post-liberalisation period has witnessed tremendous growth in the insurance industry, particularly in the life segment.
Cat bonds are popular in some of the markets abroad, especially in the United States, Japan and Europe. Insurers can use these as an alternative to reinsurance. Insurance or reinsurance companies can issue these bonds and place them with various investors.
This helps them transfer a part of the risks to the investors. The insurance company can further invest the money generated from selling the bonds. Cat bonds can be issued by the government or financial institutions.
Investors can get a slightly higher return when compared to other securities and it also offers them an opportunity to diversify their investments. In case the catastrophe is of huge proportions , investors can lose the capital. The insurance company then uses the amount raised against cat bonds to pay policyholders' claims.
Non-life insurers and reinsures issue cat bonds like any other financial instrument , and also pay interest to investors. In case a catastrophe loss occurs, the bond holder will have to forfeit the principal which the insurer will use to settle claims. Cat bonds are very risky instruments.
These are high-yield debt instruments that are usually insurance-linked and meant to raise money in case of a catastrophe such as an earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, the issuer's obligation to pay interest or repay the principal is either deferred or completely waived.
Cat bonds are not closely linked with the stock markets or economic conditions, and offer significant returns to investors.