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

China’s insurance regulator has called on insurers in the country to look to sponsor catastrophe bonds in Hong Kong as a way to access diversified sources of reinsurance capacity and offload peak natural catastrophe risks.

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

As we’ve explained before, China’s government has been supportive of the development and introduction of catastrophe bond rules in Hong Kong and sees the special purpose reinsurance vehicles that can now be established there as a route for mainland Chinese insurers to access the capital markets for risk transfer and reinsurance purposes.

The CBIRC said it wants to support willing domestic P&C or life insurers that want to utilise the Hong Kong ILS regulatory regime to sponsor catastrophe bonds.

As a result, it has issued the notice to explain the process they must undertake and said that the subject of cat bonds is “of great significance for stabilising the cost of catastrophe risk diversification, forming a multi-level catastrophe risk sharing mechanism, and supporting the construction of Hong Kong’s financial center.”

It explains that catastrophe bonds can be used for transferring catastrophe risks 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) entity “has a sound protection mechanism for ceding insurance companies.”

Reporting requirements are also confirmed, as any Hong Kong cat bond sponsor from mainland China will need to report to the CBIRC, or its provincial-level agency, within 15 working days after a special purpose insurance company issues catastrophe bonds on its behalf.

Hong Kong based special purpose reinsurance issuers of cat bonds will also need to be registered in the China Reinsurance Registration System, in order to comply and be used by mainland Chinese carriers.

It’s another encouraging move from China, which clearly sees the opportunity for its insurance companies to become users of the Hong Kong cat bond platform and tap into global capital markets for their reinsurance.

China’s government has long talked about the need to diversify its peak catastrophe risks outside of the country and this provides the ideal mechanism to do that.

As we also previously explained, the first company destined to be an insurance-linked securities (ILS) special purpose vehicle was registered in Hong Kong a few months ago, with Greater Bay Re Limited established to issue catastrophe bonds on behalf of domestic reinsurer China Re.

As of this moment, no Greater Bay Re cat bond transaction has yet come to light, but it always takes time for a new domicile to effect the first issuances.

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

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

But it’s proximity and connection to mainland China does mean that it could become a successful cat bond issuance platform for Chinese domestic market insurers first, which would be a very interesting development for the insurance-linked securities (ILS) market.