The government has suggested development of a market for catastrophe bonds in order to

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transfer risks of losses from natural disasters to debt investors from insurance companies.

These bonds, popular in western world, have been successful in transferring huge risks from insurance companies’ books to investors in catastrophe bonds, which normally offer high returns relative to normal debt. In the economic survey tabled in Parliament on Thursday, the government said, “Capital market solutions for catastrophe risk insurance is another area that needs focus.”

Catastrophe bonds essentially transfer insurance risk of natural calamities such as earthquakes, hurricanes and floods to the capital markets through issue of catastrophe bonds, the survey said.

Catastrophe bonds (also called cat bonds) are a form of insurance securities. They are an alternative to insurance that transfers risk to investors rather than insurers. The terms of the bond contain a provision for delaying or skipping payment of interest and or principal in the event of loss due to a natural catastrophe. Catastrophe bonds may be issued by an insurer or any company to transfer risk, in order to protect their own balance sheets in the event of large-scale payouts such as those caused by natural disasters. These bonds are typically for a three-five-year tenure.

M Ramadoss, chairman and managing director of New India Assurance said, “An India-centric pool will have to be formed for natural calamities and the intermediary can then issue bonds.” He said GIC Re, a reinsurance company, has been appointed to manage a natural catastrophic fund (NatCat pool) for Afro-Asian countries.