Page 18 - Insurance Times July 2022

Cover Story

COMBATING

CLIMATE

CHANGE WITH

CAT BONDS

Introduction Hence financial initiatives are also called for side-by-side with
corrective measures to provide immediate financial relief for
From melting glaciers in the polar regions to increased bush-
losses caused by natural disasters.
fires in Australia, we are witnessing more and more severe
climate phenomena which are wreaking havoc everywhere.
How CAT Bonds originated
Climate change is a global reality now and it is adding to both
the frequency and severity of natural catastrophes and CAT Bonds developed to help mitigate the heavy costs of
weather- related disasters. severe natural disasters.They were developed and first used
in the mid-1990s in the aftermath of Hurricane Andrew and
Though estimates vary, global economic losses from natural the Northridge Earthquake in the USA.
catastrophe events in 2020 were estimated at approximately
Hurricane Andrew struck Florida and the Gulf Coast in the
USD 190 billion.
year 1992. It led to USD 27 billion in damages, of which USD
15.5 billion was covered by insurance. As Hurricane Andrew
Even as awareness about climate change is growing and
was the costliest hurricane to ever make landfall in the United
global initiatives are being made to slow down the pace and
States at that time,it led to one of the most difficult periods
initiate corrective measures towards reducing the emission
for the property and casualty (P&C) insurers. The financial
of harmful gases severe weather events are exacting a heavy
upheaval it caused in the insurance sector can be gauged
toll on human lives and property.
from the fact that it led to the failure of eight insurance
companies and pushed many others to the brink of insolvency.
About the author
The insurance industry then created a new financial
Nandita Banerjee
instrument called a Catastrophe Bond or Event Linked Security
Retired Manager
to increase capital. A CAT Bond is a security that pays the
National Insurance Co. Ltd.
issuer when a predefined disaster risk is realized.
18 The Insurance Times, July 2022