Consider the following statements about Catastrophe Bonds (Cat Bonds) -
- They allow sovereign states to transfer disaster risks to investors, who lose their principal if a pre-defined natural disaster occurs.
- Investors receive a high coupon rate only if a disaster occurs during the bond's tenure.
- Catastrophe Bonds help reduce counterparty risk and ensure faster payouts for post-disaster relief.
- These bonds are exclusively available to traditional insurers and reinsurers, limiting access to capital.
Which of the statements given above are correct?
Explanation - Catastrophe bonds are hybrid financial instruments that combine features of insurance and debt. They allow at-risk entities, usually sovereign states, to transfer defined disaster risks to investors. In the event of a pre-defined natural disaster, investors lose a part or all of their principal, which is then used for post-disaster relief and reconstruction. If no disaster occurs during the bond's tenure, investors receive their principal back along with a relatively high coupon (interest) rate. These bonds effectively turn a country's hazard exposure into a tradable security, opening access to a wider pool of capital beyond traditional insurers and reinsurers. This reduces counterparty risk and enables faster payouts, essential in times of crisis.
Explanation - Catastrophe bonds are hybrid financial instruments that combine features of insurance and debt. They allow at-risk entities, usually sovereign states, to transfer defined disaster risks to investors. In the event of a pre-defined natural disaster, investors lose a part or all of their principal, which is then used for post-disaster relief and reconstruction. If no disaster occurs during the bond's tenure, investors receive their principal back along with a relatively high coupon (interest) rate. These bonds effectively turn a country's hazard exposure into a tradable security, opening access to a wider pool of capital beyond traditional insurers and reinsurers. This reduces counterparty risk and enables faster payouts, essential in times of crisis.