Two regulatory organisations in China have 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.
Conversations surrounding the use of catastrophe bonds in China have been ongoing for a number of years, with insurance, reinsurance and financial market organisations in the country all expressing a desire to create a catastrophe bond and insurance-linked securities (ILS) market in the country.
A number of catastrophe insurance pilot schemes have been in development and operation around the country and there is an expectation that these schemes could provider the risk for any initial foray into the cat bond market.
Now, the Securities Association of China (SAC) and the Insurance Institute of China (IIC) have signed an agreement and will establish a team to work on bringing the securitisation of insurance and reinsurance risks to China, with catastrophe bonds the first focus.
These two groups will seek to promote experimentation and research into catastrophe bonds and risk securitisation. The regulators will at first look at catastrophe bonds as a provider of reinsurance capacity, before broadening the initiative to look at how securitisation of risks could be used more widely.
Insurance and reinsurance companies will be called on to assist with the initiative, work on test cases and with the first goal being to issue catastrophe bonds into the international capital markets.
Alongside these efforts, work will be ongoing to establish the necessary financial and capital market structures and processes within China to enable issuance of catastrophe bonds and the use of insurance securitisation within the local capital market.
The continued development and maturation of the international market in catastrophe risk securitisation has been studied in China for some time and now the market is pulling together relevant groups to focus on bringing catastrophe bonds to the country.
China has been working to develop catastrophe insurance and risk transfer for disaster relief and, recognising the potential scale of these exposures, its goal now is to diversify those risks into the capital markets, using risk securitisation techniques such as cat bonds.
The development of an internal risk securitisation market within China could be a huge development for the country, helping it to access the huge capital base of its own investment markets. At the same time any securitisations could also be marketed to international investors as well, helping to diversify risk globally.
Pei Guang, Secretary at the Shanghai Insurance Regulatory Commission, said recently at a forum on catastrophe risk management and financial innovation that the capital markets and securitisation will help China to spread its catastrophe risks outside of the re/insurance sector, as well as into international markets.
Guang explained that the full range of catastrophe risk financing should be explored and adopted by China, including catastrophe bonds, the use of futures and other contracts that can help to spread the risk.
Shanghai itself is looking into such initiatives as an insurance and reinsurance exchange, which would encourage pricing transparency and centralised transactions, which could tap into capital markets capacity via securitisation in the future.
China is putting a significant effort into understanding where catastrophe risk securitisation could be put to use and the development of a catastrophe bond market. These efforts are being backed from the highest levels, with State Council members understood to be keen to see these initiatives progress.
With regulators now tasked with bringing China’s catastrophe bond ambitions to life, it could start to move much more quickly. That could ultimately lead to new classes of perils ceded to the catastrophe bond market and insurance-linked securities (ILS) investors, which would be welcomed by both sides.