The devastation caused by the relentless rains in Kerala and Uttarakhand has strongly underscored the increased risks from climate change. One symptom of climate change is extreme weather, events that are 90-95% different from weather events. India is vulnerable because the NDMA estimates that 27 states and Union territories are prone to disasters.
Disasters weigh heavily on individuals and large communities. The financial fallout is usually managed by insurance and government support through mechanisms such as disaster response funds. Protection is suboptimal as the options available in India are not good enough to deal with increased natural hazards. We need to tap into a much larger global basket of insurance-related securities (ILS), especially catastrophe bonds, also known as cat bonds. Extreme event insurance works best if insurers are able to spread the risk among a large pool of investors. This way, insurers will not be financially overwhelmed by a disaster either, nor will they have to increase premiums disproportionately to cover the increased risk of certain events like flooding.
Catastrophe bonds have emerged for over 25 years as a popular option for insurers, reinsurers, global corporations and even governments as a way to protect against natural disasters. The way it works is for issuers, insurance or reinsurance companies, or governments, to issue short-term bonds that are bought by investors, usually private equity firms or hedge funds. These bonds offer good fixed returns to investors. Investors lose the capital they invested in a disaster and the bond issuer gets the money. That’s why, in July, the Jamaican government issued catastrophic bonds that will provide it with up to $ 185 million in financial protection against losses caused by named storms during three Atlantic tropical cyclone seasons. In India, it is possible to develop a policy where the state could supplement its disaster response fund with a financial cushion provided by cat bonds.
What this means for Indians, rich or middle class or poor, is that with catastrophic bonds, insurers and governments will have more financial clout to insure the wealthiest citizens or help the most affluent citizens. poor. Insurers have the assurance of a cash payment to reduce premiums and provide coverage for extreme events. Governments can obtain additional funds to spend on relief and rehabilitation. It is precisely because catastrophic bonds are so useful that the World Bank has a mechanism to access the catastrophic bonds market for member countries. India is no slouch when it comes to financial innovation. And it is rocked by many weather events. Catastrophic bonds should be actively encouraged.
This article appeared as an editorial notice in the print edition of The Times of India.
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