The tragic events in Japan have led a number of countries to discuss the use of catastrophe bonds as a financial mechanism for transferring their natural disaster risks to the capital markets. In recent weeks we’ve written about the discussions happening in Israel and Taiwan, where cat bonds are being discussed in government circles, now South Korea is the latest to begin an assessment into the usefulness of cat bonds.
South Korea is another country which is exposed to natural disasters ranging from typhoon windstorms to flooding and earthquakes. They are also exposed to tsunamis after earthquakes due to their position. Korea, like Japan, has a similar topography and many of its largest cities are in lowland coastal areas which could be extremely exposed should disaster strike.
After the Japanese earthquake events, the research community and government in Korea began discussing how a similar event could impact them. According to our sources, those discussions have naturally turned to risk management and how best they can hedge the economic risks associated with large disasters. As a result catastrophe bonds have been discussed as a viable mechanism for both the government and Korean insurers to transfer a portion of their disaster risks to capital markets investors.
The South Korean Financial Supervisory Service has been investigating cat bonds as part of a feasibility study. Official have said that as part of a reinsurance and risk management plan, cat bonds offer a viable source of risk capital and risk transfer.
It’s encouraging to see talk of catastrophe bonds spreading beyond the usual countries where risks are covered. There is definitely an opportunity for many countries in disaster exposed areas to tap into the cat bond market as a source of reinsurance.
Some detail available in this translated article from the Korean Financial Daily.