National re-insurer General Insurance Corporation (GIC Re) is exploring the possibility of issuing catastrophe bonds (Cat bonds) in the US market. It expects to trim risks from large catastrophic losses in India and raise funds at a lower rate, said a top company official.
The company is in the process of hiring a consultant to take the project forward.
Cat bonds are risk-linked securities that transfer a specified set of risks from the insurer to investors.
The yields offered on Cat bonds are higher as they carry junk status. But investors run the risk of losing the entire principal amount if the catastrophe actually occurs.
The state-owned reinsurer will be the first Indian company to float catastrophe bonds in the international market. Typically, such bonds are issued for a period of three years.
According to Ashok Kumar Roy, Chairman and Managing Director of General Insurance Corporation, “In India, there are many large risks and the top-end exposures are also very high, particularly for earthquakes. CAT bond is an alternative method to buy protection for big exposures.”
“Right now we are studying the economics of whether it makes sense to go for our traditional reinsurance cover or to go for CAT bonds depending on which one is more financially beneficial to us,” Roy said.
According to global risk advisor Willis Capital Markets & Advisory, internationally the third quarter of 2013 saw $1.4 billion of non-life catastrophe bond capacity issued through seven bonds, in comparison with $0.5 billion issued through three bonds in the third quarter of 2012.
Also, to hedge itself against any currency fluctuations, GIC Re is planning to structure the bond issue partly in the Indian rupee and in US dollars.