China calls for catastrophe bonds in fight against climate change

Issuance of catastrophe bonds and the use of other weather-index based insurance and reinsurance solutions as tools to help China fight climate change is being called for  by its government.

China’s National Development and Reform Commission (NDRC) alongside several other government ministries has published the countries first national strategy to combat climate change. In a sign that the country is taking seriously the threat of extreme weather and a changing climate, the strategy outlines a legal system for adaptation to climate change, mechanisms for adaptation and a management plan to help the China adapt.

Financing climate risks is one area covered within the strategy and China’s NDRC is aware that without risk financing and risk transfer it will be difficult for a country growing and developing so quickly to combat climate and weather risks.

The NDRC estimates that extreme weather events cost China average annual losses of over 200 billion yuan (USD$32.9 billion) and result in over 2,000 lives lost every year since the 1990’s.

The NDRC is taking a strategic approach of climate adaptation rather than simply reducing carbon emissions, said the NDRC, focusing on the importance of a legal, supervisory and management mechanism to combat climate change and extreme weather. Part of the strategy says that the government should work on financial and taxation support to guarantee availability of financing, including for extreme weather.

The strategy promotes the use of weather-linked financial instruments, including the issuance of catastrophe bonds and other weather-index based insurance or reinsurance products, to provide financing post-disaster or extreme weather event. Products should be developed for agricultural and forestry risk transfer and financing and more foreign capital should be introduced to support risk financing and transfer needs, according to the NDRC.

The Chinese government has been talking about the development of a national catastrophe and disaster insurance scheme for a number of years, believing that in order for its insurers to take on more catastrophe risk a risk transfer or reinsurance facility would be required.

These discussions have often included talk of catastrophe bonds, insurance securitization, pooling of risks, market-based approaches and the use of derivatives, to transfer catastrophe risks to the capital markets, but without the legal and regulatory environment it has been difficult to envisage foreign capital wanting to become too involved.

Perhaps this national strategy, with its call for legal and supervisory regimes to be established to support the fight against climate change, including extreme weather risks, might be the push that is required to make the talk of catastrophe bonds for China a reality.