China regulator calls on insurers to sponsor cat bonds in Hong Kong

China’s insurance regulator has urged the country’s insurers to sponsor catastrophe bonds in Hong Kong in order to gain access to diversified sources of reinsurance capacity and offload peak natural catastrophe risks.

The China Banking and Insurance Regulatory Commission (CBIRC) said in a statement that Chinese domestic insurers sponsoring Hong Kong catastrophe bonds will support their “closer” economic partnership agreement between the country and the Special Administrative Region.

As already explained, the Chinese government supports the development and introduction of catastrophe bond rules in Hong Kong and sees the purpose-built reinsurance vehicles now being set up there as an access route for mainland Chinese insurers to access the capital markets for risk transfer and reinsurance purposes.

The CBIRC said it would support willing domestic property or life insurers who want to use Hong Kong’s ILS regulatory regime to sponsor catastrophe bonds.

As a result, it issued the notice to clarify the process to be followed, stating that the subject of cat bonds “is of great importance to stabilize the cost of disaster risk diversification, to create a multi-stage mechanism for disaster risk sharing and to support”. the construction of the Hong Kong financial center. “

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It explains that catastrophe bonds can be used to transfer disaster risk related to natural disasters such as earthquakes, typhoons, floods and public health emergencies.

The notice also states that the Hong Kong special purpose insurer (SPI) “has a solid protection mechanism for outgoing insurance companies”.

The reporting requirements are also confirmed as each Hong Kong cat bond sponsor from mainland China must report to the CBIRC or its provincial authority within 15 working days of the issuance of catastrophe bonds by a specialist insurance company.

Hong Kong-based special purpose reinsurance issuers of cat bonds must also be registered in the China Reinsurance Registration System in order to qualify and be used by mainland Chinese airlines.

This is another encouraging move from China, which clearly sees an opportunity for its insurance companies to become users of the Hong Kong Cat Bond platform and tap the global capital markets for their reinsurance.

China’s government has long spoken of the need to diversify its disaster risk outside of the country, and this provides the ideal mechanism to do so.

As mentioned earlier, the first company designated as a special purpose vehicle for Insurance-Linked Securities (ILS) was registered in Hong Kong a few months ago.

So far, no cat bond transaction by Greater Bay Re has become known, but it always takes some time before a new domicile causes the first issues.

Other Hong Kong cat bonds are also said to be in the works, with the potential for a number to hit the market in the next few months.

However, to be successful internationally, Hong Kong must be a competitive cat bond and ILS domicile option for sponsors.

But its proximity and connection to mainland China means it could initially become a successful cat bond issuing platform for Chinese domestic insurers, which would be a very interesting development for the insurance-linked securities (ILS) market.