General Insurance Corporation to offer catastrophe bonds

Indian bond investors will soon get a novel product — catastrophe bonds — from the state-run reinsurer, but it will be a highrisk and high-reward game which those with deep pockets alone may be able to take. The bonds will fund claims after a catastrophe like earthquake, or flood. These bonds help reinsurers transfer the financial risk of a catastrophe in a year to investors.

GIC Re, the sole Indian reinsurer, has sought government’s permission for one such bond, said a person aware of the development. “We have written to the ministry on issuing ‘cat’ bonds in India,” said an executive of General Insurance Corporation. “We will approach the Insurance Regulatory and Development Authority,” he said. GIC Re is attempting to establish itself as a bigger player in the international reinsurance business.

It has been underwriting many global events in the past. For the company, it is a natural progression to launch what is popularly known as ‘cat bonds’. The ‘cat bond’ market size is more than $20 billion. The bonds, popular in the US, are generally priced 200 basis points above the 10-year US treasury yield.

The price offered on ‘cat bonds’ is higher than corporate bonds as they carry junk status and investors run the risk of losing their entire sum. GIC will raise funds for a particular catastrophic risk like either earthquake or a tsunami or a cyclone with the condition that if the event happens, there will be no payout of interest or principal.

GIC will be the first company to issue ‘cat bonds’ in India and is likely to benchmark them against the 10-year government securities. According to the Swiss Re Cat Bond Price Return Index, ‘cat bonds’ have returned 9.09 per cent in the nine months till September last. Large global reinsurance companies like AXA, Swiss Re sell ‘cat bonds’ to reinsure against catastrophes. Also, companies package various catastrophic risks and some even design products based on specific perils like storm, earthquake and flood.

 Date: 2nd May 2014

Source: Economic Times

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