China now considering issuance of catastrophe bonds

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In recent weeks we’ve written about a number of countries who have been discussing the possibility of issuing catastrophe bonds and insurance-linked securities as ways to protect themselves against the costs of a major natural disaster. We’ve seen the issue come up for discussion in governments in Taiwan, Israel, Korea, the Philippines, Australia, the ASEAN group of nations and more countries all of whom see the benefit of securing a multi-year source of disaster reinsurance.

Much of the increased interest has been triggered by the events in Japan and the increased profile of catastrophe bonds in the mainstream financial press since the disaster. Nations have seen the devastation in Japan and other events such as the Queensland flooding in Australia, including the burden placed on the government for reconstruction, and see cat bonds as a possible source of disaster reconstruction funding.

The latest country to raise the cat bond issue is China. The Wall Street Journal carries a Chinese language article today (translated version here) discussing the call from a Ministry of Finance official in China for the government to investigate the issuance of catastrophe bonds to transfer catastrophe risk, ease the financial burden from disasters and promote the development of their re/insurance and capital markets. The Financial Secretary recommends using the state owned insurance agency as a sponsor of a catastrophe bond pilot scheme.

It’s encouraging to see the discussion of cat bonds spreading around the world. Even if these countries do not issue cat bonds themselves the fact that they are investigating alternative risk transfer mechanisms is positive for the market. They all seem to have some issues in common; a need for disaster risk and recovery re/insurance and a desire for that cover to be structured in such a way as it utilises the capital markets and pays out promptly as that is critical for disaster response in these nations.

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