Alternative to Insurance Risk Transfer: Creating a catastrophe bond for Romanian earthquakes

Abstract

As the severity of natural catastrophes continues to intensify, in terms of the economic, environmental and human impacts, disaster risk management is becoming increasingly significant. The limitations of the insurance and reinsurance market capacity led to the development of alternative risk transfer products. These products are designed to alleviate the risk, in whole or partly, by putting into effect securitisation mechanisms that increase liquidity. Among them, catastrophe risk bonds are designed to transfer the financial consequences of natural catastrophic events (e.g. floods, hurricanes, earthquakes etc.) from the issuers to investors. Within this context, this paper investigates the effects of earthquakes in Romania and suggests a catastrophe bond issuance that offers coverage in case of large earthquakes. Through this mechanism, Romanian governmental authorities will attain sufficient and sustainable fund liquidity for covering the financial obligations following a catastrophic earthquake.