For low and middle income countries with an elevated exposure to natural disasters, catastrophe bonds can be a useful tool for financial planning, but the public sector side of the market needs to grow in order for governments to fully realise the potential benefits, according to analysts at DBRS Morningstar.
The potential fiscal cost of natural disasters can be meaningful in even the most insured parts of the world, such as parts of the U.S., but for those countries vulnerable to catastrophe events that also exhibit low levels of insurance penetration, it can be truly significant.
While governments often step in to aid in recovery and reconstruction, for low and middle income countries the fiscal headroom may not be sufficient to deal with a large natural catastrophe event, which makes post-event recovery even more of a challenge.
In response, some governments have looked to the insurance-linked securities (ILS) market, specifically the catastrophe bond product, to mitigate post-event stress on public finances.
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