Castrophe bond
ARTICLES | Jul 19, 2024
Catastrophe Bonds are a specialized financial instrument for risk mitigation and stable returns. They transfer the financial burden of natural disasters to capital markets, diversifying risk. Investors act as creditors, providing capital. Issuers, often insurance companies or government entities, manage the allocated funds according to predefined contractual terms.
Throughout the contract duration, in the absence of a disaster, investors receive the agreed-upon interest payments and the return of principal upon maturity. In the event of a disaster, such as a flood, storm, or earthquake, with severity meeting predefined thresholds, the issuer will deploy the principal or interest to manage and remediate the damages. Investors may forfeit all or part of the principal and forgo the anticipated interest payments. Yet this mechanism establishes a financial reserve to alleviate the economic repercussions of the disaster.
Catastrophe Bonds are generally issued by special-purpose entities, investment banks, insurance-backed institutions, public funds, or financial organizations dedicated to mitigating the impact of public disasters preemptively. Notable examples include the International Football Federation, the Agricultural Insurance Cooperative in Japan, and the World Bank.
Institutional investors, including hedge funds and pension funds, dominate this market. Individual investors can participate through mutual funds or closed-end funds. The market in 2021 witnessed over 560 Catastrophe Bond issuances, cumulatively valued at about $13 billion. But issuance is limited in Southeast Asia, primarily due to management complexities and insufficient disaster risk assessment infrastructure.
Thailand’s government has yet to adopt Catastrophe Bonds for public financial management, relying instead on post-disaster compensation, aid, and financial adjustments. Private companies have initiated offerings in 2024 of mutual funds incorporating Catastrophe Bonds.
Implications for the future:
- The development of comprehensive database systems for disaster risk assessment, exemplified by the Urban Hazard Studio, is pivotal in advancing disaster prevention and mitigation policies in Thailand.
- Catastrophe Bonds are becoming increasingly popular as an alternative asset, particularly among investors facing significant disaster risks.
- Insurance companies and financial institutions play a crucial role in promoting financial mechanisms to manage risks and extreme climate events.
- Financial officers in business organizations, especially in industrial estates and commercial real estates, are becoming more aware and are exploring the feasibility of investing in Catastrophe Bonds, both domestically and internationally.
อ้างอิงจาก:
- https://www.oecd.org/en/publications/fostering-catastrophe-bond-markets-in-asia-and-the-pacific_ab1e49ef-en.html
- https://www.oecd.org/en/topics/sub-issues/asian-development-strategies.html
- https://www.thaibma.or.th/EN/Investors/Individual/Blog/2024/090424
- https://www.setinvestnow.com/th/bond
- https://www.senate.go.th/assets/portals/1/news/10233/1_10233.pdf
Free open data access Urban Hazard Studio for disaster prediction: UrbanHazardStudio.com
How to use Urban Hazard Studio: https://youtu.be/Fqy2LMcjLms
