UK wants China to use its new ILS framework for catastrophe bonds

The United Kingdom government has been courting China and trying to encourage the country to look towards the UK and its recently enacted insurance-linked securities (ILS) regulatory and tax framework as a vehicle to help China and its entities gain access to greater disaster insurance or reinsurance protection.

In December 2017 the UK’s Chancellor of the Exchequer Philip Hammond met with Chinese Vice Premier Ma Kai and other officials to discuss economic and financial issues and potential areas of cooperation between the two countries.

One of the topics up for discussion and touched on during the sessions was disaster risk insurance and the fact both countries are committed to helping to enhance disaster insurance protection both at home and around the world.

Chinese officials welcomed the launch of the UK’s insurance-linked securities (ILS) legislation, consisting of regulatory and tax framework, at the meetings, while at the same time the UK government welcomed China’s moves to encourage greater uptake of disaster insurance in the country.

With China exposed to numerous natural perils, from severe weather through to typhoons and earthquakes, the increasing penetration of insurance coverage across the region means an increasing need for reinsurance capacity to back the growing exposure.

The capital markets, as a source of catastrophe reinsurance risk capital, have been discussed at length in Chinese government circles, including by the all-important State Council, over the years. We’ve covered the potential for China to use the ILS market many times, since as long ago as 2010.

As the country has made moves to put in place disaster insurance pilot schemes, while its domestic insurance market has expanded rapidly, the need for reinsurance and risk transfer to ensure the concentration of catastrophe and disaster risks isn’t just retained locally, will become increasingly more important.

As a result, it is clearly of interest to the UK government to promote its new ILS framework to the Chinese government, as a vehicle the country and Chinese entities could use for achieving risk transfer to the capital markets.

The governments of China and the UK jointly committed to exploring the joint development of disaster insurance products, as well as options for leveraging the UK ILS framework for Chinese entities seeking access to efficient disaster insurance or reinsurance capacity.

The pair said they would assess the feasibility of Chinese entities transferring disaster exposure through catastrophe bond issuances in London “when time is proper.”

A UK domiciled catastrophe bond benefiting Chinese sponsors, or even the Chinese government or a province itself, would be precisely the type of use-case for its ILS framework that the UK government is looking for, promoting UK insurance and reinsurance market infrastructure in a positive light globally.

The UK government sees the insurance-linked securities (ILS) market as central to keeping the UK’s insurance and reinsurance industry “at the cutting edge” in future, making promotion of the new ILS framework a key strategy right now.

Of course with other domiciles already established in ILS, like the established market leader Bermuda, others including Dublin, Guernsey, Gibraltar and the Cayman Islands, and newer entrants such as Singapore working hard to attract issuers, competition for ILS business is likely to heat up significantly over the years to come.

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Also read:

– Growth of China reinsurance industry an opportunity for ILS: Moody’s.

– China regulators agree to accelerate use of catastrophe bonds.

– The prospects for catastrophe bonds in China: Willis.

– Catastrophe bonds in China, some discussion on their feasibility.

– China now considering issuance of catastrophe bonds.