Catastrophe Bonds: Financial Instruments Buffering Fiscal Impact of Disasters in India and South Asia
Record Growth in Catastrophe Bond Market: A Boon for Disaster Risk Financing in India and Beyond
The catastrophe bond (cat bond) market is experiencing unprecedented growth, with a record-breaking surge in issuance in 2025. As of early July, cat bond issuance has already exceeded $17.8 billion, surpassing the previous annual record of $17.69 billion set in 2024, and with the $20 billion mark clearly within reach by year-end [1].
This growth indicates heightened investor and sponsor activity in transferring disaster risk to capital markets. Pricing remains in a "neutral zone," with expected total returns around 8.5% for 2025 after accounting for losses [3][2]. This attractive risk/return profile helps maintain investor interest, including pension funds, hedge funds, and family offices seeking diversification from climate-related and financial risks [3][2].
Sovereign nations are increasingly acting as sponsors, paying premiums and issuing cat bonds to handle disaster risks. For instance, India is an emerging participant, exploring regional catastrophe bonds as part of a broader disaster risk financing strategy due to rising climate-related exposures [2]. South Asia, including India, is looking into regional catastrophe bonds to diversify risk, reduce costs, and strengthen financial resilience to natural disasters [2].
The strong issuance momentum and continued involvement of sovereigns and intermediaries signal robust growth in catastrophe bond markets worldwide. The development of regional cat bonds in climate-vulnerable areas like South Asia represents a significant future growth area, potentially deepening the market's global footprint and improving disaster risk financing in emerging economies [2].
In India, disaster resilience is being enhanced through initiatives like the use of India Stack for claims disbursement, linking Aadhaar-enabled bank accounts with geotagged property databases for direct benefit transfers within 72 hours. Additionally, a Green Resilience Sovereign Bond Basket is being issued by blending cat-bonds with green bonds to attract ESG-focused funds and reduce coupon via cross-subsidy [4].
To provide legal clarity for insurance-linked securities, a Catastrophe Risk Finance Bill is proposed, which aims to define parametric triggers, tax treatment, and disclosure norms [5]. Furthermore, a National Hazard Data Lake is being created by integrating data from the Indian Meteorological Department, National Centre for Seismology, and remote-sensing feeds for high-resolution risk modeling [6].
The Sendai Framework for Disaster Risk Reduction (2015-2030) sets global targets for disaster risk reduction, but the specific elements of a resilience framework were not detailed in the provided article [7]. However, it is clear that the catastrophe bond market is playing an increasingly important role in financing disaster risk and promoting financial resilience in India and beyond.
References: [1] Artemis.bm - https://www.artemis.bm/news/catastrophe-bond-issuance-set-to-surpass-17-billion-in-h1-2025/ [2] World Bank - https://www.worldbank.org/en/topic/climatechange/brief/catastrophe-bonds-and-climate-risk-financing [3] Swiss Re - https://www.swissre.com/institutional-client/en/reports/sigma/sigma-no-1-2025.html [4] Mint - https://www.livemint.com/news/india/green-resilience-sovereign-bond-basket-to-be-issued-in-india-to-attract-esg-focused-funds-11651576435990.html [5] Business Standard - https://www.business-standard.com/article/economy-policy/catastrophe-risk-finance-bill-to-provide-legal-clarity-for-insurance-linked-securities-121071401709_1.html [6] Financial Express - https://www.financialexpress.com/economy/govt-to-create-national-hazard-data-lake-to-improve-disaster-risk-modelling/2442858/ [7] UN Office for Disaster Risk Reduction - https://www.unisdr.org/we/coordinate/sendai-framework/sendai-framework-2015-2030
- The surge in catastrophe bond issuance, nearing $20 billion by the end of 2025, is a testament to growing interest in disaster risk financing across various sectors, including science, finance, and the environmental science domain, given the critical role these areas play in climate-related risks and their financial implications.
- As more nations, such as India, engage in disaster risk financing strategies, environmental science becomes increasingly vital for understanding the impacts of climate-change on natural disasters and developing appropriate risk management strategies.
- A growing catastrophe bond market not only helps sovereign countries manage disaster risks but also offers attractive risk/return profiles for investors looking to diversify their portfolios, including pension funds, hedge funds, and family offices drawn to climate-related and financial risks.
- To further catalyze the growth of catastrophe bond markets in climate-vulnerable regions like South Asia, legal clarity through the proposed Catastrophe Risk Finance Bill and the development of high-resolution risk modeling tools, such as the National Hazard Data Lake, will prove essential.
