Catastrophe bonds

Context
Recently, the Kerala government has asked the Union government to consider instituting ‘catastrophe bonds’ as protection against disaster-linked losses.
About Catastrophe bonds
Catastrophe bonds are insurance-linked securities that transfer disaster-related financial risk from governments to investors.
They are a hybrid product combining insurance protection with bond-like returns.
Governments issue these bonds by paying premiums, often through intermediaries like the World Bank or ADB.
Global investors earn high returns but may lose money if a specified disaster occurs.
Coupon rates depend on the type and probability of disasters covered.
Countries such as Mexico and the Philippines use CAT bonds; Kerala has proposed their use in India.
In essence, catastrophe bonds provide a modern, market-based solution for disaster risk financing, offering protection to governments and investment opportunities to global investors.