Cat Bonds, Paper Dreams: Disaster Finance Must Beat Fantasy
Indian Army carries rescue operations in Dharali village in Uttarakhand! (Image Indian Army, X)
If India were to issue sovereign cat bonds offshore, investors would demand high premiums to compensate for untested models.
By P SESH KUMAR
New Delhi, November 25, 2025 — The Mint article’s (Bajpai and Tiwari) proposal that India should adopt catastrophe bonds (cat bonds) to fund disaster relief is bold, timely, and intellectually seductive. But as with many elegant financial ideas, the devil dances in the details.
But international evidence, the structural, political, and market-development realities could make cat bonds far more complex. While the authors correctly diagnose India’s fiscal vulnerability to climate-stoked disasters, their prescription overlooks the deep prerequisites—risk-modelling capacity, robust regulatory frameworks, investor appetite, transparent parametric triggers, and an independent validation ecosystem—those countries like the US, Mexico, Japan, and New Zealand painstakingly built before issuing successful cat bonds.
For the theory to shift to a grounded roadmap: localized catastrophe modelling, data governance reforms, pooled sovereign-state issuance, integration with insurance-linked securities (ILS) hubs, and pilot issuances backed by multilaterals will be incumbent. Without such scaffolding, catastrophe bonds risk becoming another “announce-today, abandon-tomorrow” financial experiment. Or, perhaps the authors would like the heavy lifting to be left to the policy makers!
The irresistible headline promise is evident: India needs catastrophe bonds to pay for the increasingly punishing climate disasters battering the subcontinent. Floods, cyclones, landslides, and erratic rainfall have indeed thickened the government’s relief burdens, and the authors are correct that traditional budgetary provisioning is now little more than a Band-Aid on a hemorrhage. Their thesis—that India should follow global pioneers and offshore portions of its disaster-relief costs to capital markets-is provocative, progressive, and aligned with contemporary climate-finance thinking. Yet the elegance of the proposal stands on stilts that wobble under scrutiny.
India spends billions annually on relief and reconstruction, with hardly any pre-funded buffers. Annual budgets are disrupted, state finances collapse under the weight of unplanned payouts, and Parliament debates disaster allocations only after tragedy strikes. In such a scenario, cat bonds seem a technical bridge between vulnerability and preparedness. The authors highlight that global issuances have grown steadily and that returns on such securities attract investors hungry for uncorrelated risk. So far, so compelling.
But the article may be glossing over a truth that every country issuing cat bonds has learnt the hard way—cat bonds are not plug-and-play instruments; they are intricate architectures built on risk science, legal engineering, sovereign credibility, and a highly mature insurance-linked securities (ILS) ecosystem.
When Mexico launched its famous FONDEN cat bonds, it did so on the back of decades of parametric modelling supported by the World Bank’s expertise. Japan and New Zealand had exhaustive seismic and meteorological datasets, robust reinsurance partnerships, and deeply institutionalized disaster-risk governance before their first issuances.
Even the United States-home to the most sophisticated ILS market-relies on actuarial depth, long historical hazard data, strong rating methodologies, and investor familiarity built since the 1990s.
India, by contrast, still struggles with basic disaster-loss databases that differ across the NDMA, IMD, state disaster management authorities, insurance companies, and revenue departments. How, then, will one model trigger thresholds with the precision that the market demands?
The article also underestimates the political economy of cat bonds. These instruments succeed when trigger parameters are beyond dispute, payouts are apolitical, and governance is independent of short-term pressures. India’s recent experience with relief distribution-where damage assessments, compensation slabs, and even the declaration of a “disaster” often become bargaining chips between Centre and States-hardly inspires confidence in running a parametric, rules-bound, litigation-proof system.
Without pristine and trusted data, a failed trigger-where a catastrophe occurs but thresholds are not met-could trigger public backlash, accusations of “market-rigged disasters,” and political delegitimization.
Moreover, the article champions investor appetite but overlooks the Indian reality of narrow capital markets. Cat bonds are notoriously illiquid, sought mainly by global pension funds, reinsurers, and specialized ILS funds.
India lacks a domestic ILS market, and SEBI does not have a tested regulatory framework for such securities. Even if India were to issue sovereign cat bonds offshore, investors would demand high premiums to compensate for untested models, emerging-market risk, currency risk, and governance opacity. The result is that India might end up paying more to insure itself through capital markets than through traditional reinsurance arrangements. The authors hint at this trade-off but do not engage with its magnitude.
Where the article truly misses a chance is in failing to acknowledge that catastrophe bonds work best as part of a layered disaster-risk financing strategy-not a standalone magic wand.
Countries that deploy them effectively integrate them with sovereign risk pools, budgetary buffers, contingency funds, insurance markets, and climate-resilience investments that reduce exposure. India is still building these layers. Without them, cat bonds risk becoming yet another sophisticated product thrown into a system unprepared to absorb it.
Yet the idea is not unworkable. It is simply unfinished.
This is where a hypothetical “Part 2” of the article could shine. Rather than reiterating theoretical benefits, it could outline a pragmatic roadmap: begin with a national disaster-risk analytics platform; harmonize data reporting across IMD, NDMA, ISRO, and state authorities; create an independent Catastrophe Risk Assessment Authority with transparent methodologies; invite the World Bank Treasury and global reinsurers to co-design pilot issuances; build a regulatory ILS sandbox under SEBI; and start with small, parametric state-specific bonds for cyclones or floods in high-exposure regions like Odisha, Assam, or Uttarakhand. Combined with pooled sovereign–state issuances and tied to climate-resilience spending commitments, India’s cat bond ecosystem could mature without risking fiscal shock or political backlash.
The original article lifts the curtain on an idea India must eventually embrace. But the performance will require rehearsal, scaffolding, and a stronger script. Without these, catastrophe bonds could remain an elegant suggestion floating far above the muddy reality of India’s disaster economy.
(This is an opinion piece, and views expressed are those of the author only)
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