Catastrophe Bonds:
Facing recurrent climate-induced disasters, Kerala has urged the Union government to introduce catastrophe (CAT) bonds as a financial safety net against disaster-related losses during pre-Budget consultations for Union Budget 2026–27.
- Kerala’s repeated disasters strain public finances, highlighting the need for climate-resilient financing tools like CAT bonds, recognised in its Risk-Informed Master Plan (2022), alongside demands for a Coastal Resilience Fund to address severe erosion along its 590-km coastline.
- These are insurance-linked securities that transfer the financial risk of major disasters, like hurricanes or earthquakes, from insurers or governments (sponsors) to investors.
- Under CAT bonds, Governments act as sponsors and pay premiums, while the investors’ principal serves as the insured sum; if a disaster occurs, this principal is transferred for recovery purposes, whereas if no catastrophe occurs, investors earn high interest.
- CAT bonds offer investors high yields and portfolio diversification since their returns are not directly linked to financial markets, while for governments and insurers they ensure quicker payouts, reduce reliance on budgetary allocations, and shift disaster risk to global capital markets.
- Currently, in India states and the centre bear the full fiscal burden of disaster relief.
- Countries like Mexico and the Philippines use CAT bonds to hedge against natural disasters.
- CAT bonds can provide a fiscally sustainable, predictable, and rapid financing tool for disaster-prone States. It reduces pressure on public budgets and emergency borrowing.
