What are Volcano Bonds?

The Danish Red Cross announced that it has launched first of its kind catastrophe bond for the volcano-related disasters in collaboration with the several financial firms.

Volcano Bonds

This bond which will enable the disaster relief agency to get the financial aid quickly to those who are suffering because of the eruption of 10 volcanoes namely Chile, Ecuador, Cameroon, Colombia, Mexico, Guatemala and Indonesia.  The project’s partners aim to raise $3 million with the launch of this bond. This money will be transferred to the Denmark’s branch of the Red Cross. The Initial investors in the bond are Plenum investments and Schroder Investment Management. The firm specializes in the insurance-linked securities.

How the funds will be raised?

The pay-out of the bond is based on the quantitative model which predict about where the funds will be needed on the basis of the height of the ash cloud after the volcanic eruption and prevailing winds.

Background

The project has been in the making since the year November 2018 when it was started around a table in Zurich.

Catastrophe Bonds

The catastrophe bonds insure against the damage from natural disasters such as earthquakes and storms. Some of the bonds also include the volcanic eruptions in baskets of the covered perils. These bonds offer a high yield to the investors who are going through the risk of losing some or all of their investment during the disaster.

Criticism

These pandemic bonds, which were sold in the year 2017, started being criticised when they failed to pay out during the Ebola outbreak in 2019 and in the initial phases of coronavirus pandemic in 2020. These bonds also went into losses amid the Covid-19 crisis.

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