Shanghai, China looks to trial catastrophe bonds: Regulator

The city of Shanghai in China is once again targeting catastrophe bonds as a new offering for its local insurance and reinsurance market, as insurance-linked securities (ILS) remain a risk transfer tool target for the regulator in the area.

China has discussed the use of catastrophe bonds numerous times in recent years and the main insurance and reinsurance regulator has made some progress in developing a regulatory environment to support catastrophe bond and ILS issuance.

This ongoing discussion has even seen feedback sought from Chinese insurance and reinsurance market participants, as well as global players, on proposed legislation for catastrophe bonds and so-called insurance liability securitisation structures back in 2016.

Prior to that, in 2015, two regulatory organisations in China signed an agreement to establish a group to work on bringing the securitisation of catastrophe insurance risks to the country and to accelerate the adoption of catastrophe bonds for risk transfer needs.

But these discussions began as long ago as 2011, when a Ministry of Finance official in China called 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.

In 2011 we also reported that Shanghai’s plans for an insurance exchange could include risk securitisation or catastrophe bonds.

More than seven years later we’ve only seen one Chinese catastrophe bond so far, the $50 million Panda Re Ltd. (Series 2015-1) transaction that saw China Re transfer some of its Chinese earthquake risk to the capital markets. This deal matures in July and so far no replacement has been seen in the market.

There have been private ILS deals, as some ILS fund managers and collateralized vehicles participate in underwriting Chinese reinsurance on a fully collateralized basis.

Traction has been slow so far and discussions to expand the use of ILS and cat bonds in China continue to this day, including our recent report that China Re executives had visited Singapore to discuss potential cooperation on catastrophe bonds.

At a media briefing held in Shanghai last week to discuss the Free Trade Zone projects the subject of catastrophe bonds was raised again.

The chief of the Shanghai Insurance Regulatory Commission, Pei Guang, stated that his unit plans to launch the trial of catastrophe bonds and to also enhance the offshore insurance and reinsurance service offering of the city.

Having a local regulatory framework and structure to allow for catastrophe bond issuance would certainly benefit Shanghai, as it would then become the defacto hub for Chinese ILS issuance.

However, it may serve the regulator well to look at creating a segregated cell structure that can be used for bilateral deals, sidecars, private ILS, collateralized reinsurance and smaller transactions first, but that could also be used for large cat bonds and more broadly distributed securitised re/insurance arrangements.

By having a single structure that can support a range of ILS transactions, Shanghai could position itself as a market to foster the development of ILS in China, which would certainly benefit the local insurers and reinsurers, by enabling them to bring private capital from overseas into their reinsurance and retrocession arrangements.

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