Sovereign catastrophe bond

A state hit by a major disaster must urgently fund relief, reconstruction and economic support, just as its revenues fall and its access to credit worsens. The sovereign cat bond lets it pre-finance that need: it pays investors a premium each year and receives all or part of their capital if a defined event occurs, without waiting for damage assessments. The trigger is usually parametric, the magnitude and depth of an earthquake in a defined area, the central pressure of a cyclone, which allows payment within weeks. The World Bank often acts as issuer, through bonds of its IBRD arm, which removes the credit risk of a special purpose vehicle and reassures investors. The sovereign cat bond fits into a layered strategy: budget reserves for small events, contingent credit lines for medium ones, market transfer for extremes.