Page 45 - Banking Finance May 2023

ARTICLE

CATASTROPHIC

BONDS -

ISSUANCE, TYPES,

BENEFITS AND

RISKS INVOLVED

atastrophic bonds, also known as catastrophe The use of catastrophic bonds has grown in popularity in
C bonds, are a form of risk management instrument. recent years as insurers seek to manage their risk exposure
It is a high-yield debt instrument that is designed
to catastrophic events.In recent years, catastrophic events
to raise money for companies in the insurance
industry in the event of a natural disaster. They have short such as hurricanes, earthquakes, and pandemics have
caused significant losses to insurers and reinsurers.
maturity dates of between three-to-five years. They are Catastrophic bonds provide a mechanism for transferring the
designed to transfer the financial risk of catastrophic events financial risk of these events to the capital markets.
from insurers or reinsurers to investors in the capital
markets. Catastrophic events, such as natural disasters or The use of catastrophic bonds has grown significantly in the
pandemics, can result in significant losses for insurers, which past decade. According to the Insurance-Linked Securities
can impact their ability to pay claims. Catastrophic bonds (ILS) market report by Willis Towers Watson, the global
provide insurers with a mechanism to transfer some of this market for ILS, which includes catastrophic bonds, grew to
risk to the capital markets, thereby reducing their exposure $93 billion in 2020, up from $91 billion in 2019. Catastrophic
to losses. bonds accounted for a significant portion of this growth.The
market in catastrophe bonds could grow to $50 billion by
the end of 2025.
About the author

Piyush Kumar Jha Process for Issuance of Catastrophic
Chief Manager (Faculty)
Bonds
ULA- Risk Excellence,
Union Bank of India Catastrophic bonds are typically issued as part of a
Mangaluru, securitization transaction.

42 | 2023 | MAY | BANKING FINANCE