India - Raining Cats & Bonds

Does a nation have to be paranoid to start saving for the rainy day? Or should there be repeated catastrophes for it to devise ways to reduce its losses?
India is far from being the former and has been very much in the thick of catastrophes in the past few years. An earthquake in Bhuj, tsunami, a major cyclone in Orissa, quakes in Kashmir, floods in Mumbai, and now the catastrophe-by-invitation that is visiting Bihar.
For the last four years, Indian officials have been window-shopping for means to insure the country against catastrophes, without quite making up their mind.
Next month, Swiss Re, one of the world’s leading reinsurance companies known for its cat bonds, or catastrophe bonds, will make a presentation. It would be telling officials and legislators what it took Mexico to cushion itself against earthquakes. Mexico, in fact, has set a precedent for the developing countries by getting a risk cover through capital market-linked cat bonds. It started with FONDEN, a fund for disaster relief for the local governments. Mexico issued cat bonds using this fund.
When Hurricane Andrew hit Florida in 1992, the payouts ruined many insurance companies. Hence cat bonds were born. They are risk-linked securities issued by a sponsor (eg an insurance company or a government) and include a specified trigger (eg an earthquake hitting 8.0 on the Richter scale). Investors buy the bond and are paid a high interest rate. But once disaster strikes, the bonds lose all money, which is then used by the sponsor to cover its losses.
In Turkey, after the 1999 earthquake, a catastrophe insurance pool was created with funds from homeowners. Swiss Re is among the reinsurers of this pool. This links it to international capital markets. It is not known if Swiss Re will propose and if India will accept the cat bond formula.
A similar transfer of risk is being achieved in Ethiopia, where the World Food Programme is aggregating all the risks to the farmers into a policy which is tradable in international capital markets.
These have the advantage of gaining access to a large number of investors. This can lead to lower premiums even when the risk is high. But bankers say it can be expensive and is beyond the reach of the poor.
But these may end up being the few available ones, given the increasing risk of disasters if one is to go by the warnings of the Intergovernmental Panel on Climate Change.
Many countries have gone for pooling of risks, which can help them when destruction is widespread. So the Caribbean Catastrophe Risk Insurance Facility in Columbia allows 18 participating countries to pool their risks and save on premium payments. Some South Asian countries have also gone for this kind of pooling of risks.
While there is suspense about the cat bonds coming to India, several microinsurance schemes like Afat Vimo are inching into the heartland in a country which is estimated to lose $1 billion annually to catastrophic events. With 4,000 clients in Gujarat, Tamil Nadu, and Jammu & Kashmir, Afat Vimo, started by All India Disaster Mitigation Institute a decade ago, is going strong and sending out a message that micro-finance institutions, NGOs and insurance companies can together bring the small relief that will mean everything when all is lost for the vast majority