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Parametric Catastrophe Bonds and Alternate Risk Transfer Mechanisms for China’s Market

Even as countries across the globe grapple with climate change, alternate risk transfer mechanisms like parametric solutions are emerging as the best option. A parametric transaction uses the physical characteristics of a catastrophe event as the trigger. A catastrophe bond (CAT) is a high-yield debt instrument that is designed to raise money for companies in the insurance industry in the event of a natural disaster. A CAT bond allows the issuer to receive funding from the bond only if specific conditions, such as an earthquake or tornado, occur.

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According to a PwC report, the insurance protection gap could reach $1.86tn by 2025 and Asia Pacific could account for nearly 50% of all uninsured risks.

Aon’s Weather, Climate and Catastrophe Insight has pegged economic losses in 2021 at $343bn, of which only $130bn were insured, leaving the global protection gap at 62%.

However, these figures do not tell the true story. The US contributed 71% of the total insured losses and it is an economic superpower that can support communities through government-backed disaster relief. Developing countries do not enjoy this luxury and the maximum impact of disasters is often borne by the most vulnerable communities themselves.

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