Cat bonds, a way of putting disaster-response money in place

Mumbai, Jan 22: Catastrophe bonds, or cat bonds, are a way of putting disaster-response money in place before a flood, cyclone or earthquake actually happens.

Instead of depending entirely on insurance claims, reinsurance recoveries or government budgets after an event, cat bonds allow insurers or governments to raise money upfront from investors. This money is kept in a ring-fenced structure and is released quickly if a predefined disaster occurs. If no such event happens during the bond period, investors earn a relatively high coupon and receive their full principal back at maturity.

Talking to Bizz Buzz, Venkatakrishnan Srinivasan, managing partner of Rockfort Fincap says, “Globally, cat bonds had a strong run in 2025, with record issuances as climate-related risks increased and traditional insurance capacity became more expensive.”

The main investors in these bonds are large institutional players such as pension funds, sovereign wealth funds, insurance companies and specialised global funds. These investors participate because cat bond returns are largely uncorrelated with normal financial markets and offer higher yields, but they also fully understand that there is a real risk of losing principal if the specified catastrophe occurs, he said.

Most cat bonds are issued for three to five years and are rated very differently from normal bonds. Some cat bonds may carry investment-grade ratings, while many are rated below investment grade, not because the issuer is weak, but because the bond is designed to absorb losses if a disaster happens. Because of this risk, coupons are typically in the high-yield category, often meaningfully higher than regular corporate or government bonds. The premium paid by the sponsor — usually an insurer, reinsurer or sometimes a government agency — is what ultimately funds the investor’s return.

In India, cat bonds are still at an early stage, but the fact that the International Financial Services Centres Authority (IFSCA) is examining such structures shows that policymakers are exploring new ways to manage disaster risk and climate exposure. If and when this market develops, it is likely to start offshore or through IFSC structures rather than purely onshore. Indian retail investors may find the risk profile unsuitable, but large institutional investors with long-term horizons, strong balance sheets and risk-assessment capabilities may gradually explore this space. The broader benefit is that cat bonds can reduce post-disaster fiscal pressure and improve financial preparedness, rather than reacting after losses have already occurred.