Enormous potential for cat bonds in Greater Bay Area: Hong Kong’s Carrie Lam

Carrie Lam, Chief Executive of the Government of Hong Kong, sees “enormous potential” for catastrophe bonds and insurance-linked securities (ILS) to provide important disaster risk capital to underpin risks in the Greater Bay Area.

The Greater Bay Area, also known as the Guangdong – Hong Kong – Macau Greater Bay Area, is a megalopolis made up of nine cities and two special administrative regions in South China and a significant area of economic growth, rapid infrastructure and development, and so is seeing rapidly increasing insured values.

It’s always been seen as a region that will require significant access to insurance and therefore reinsurance risk capital and since launching its insurance-linked securities (ILS) regulatory regime, Hong Kong expects to see issuance of catastrophe bonds supporting risks in the Greater Bay Area.

Hong Kong launched its insurance-linked securities (ILS) regulatory regime, alongside the legislation necessary to establish special purpose insurance or reinsurance vehicles for securitisations and issuance of catastrophe bond notes, earlier this year.

Hong Kong has also offered a grant program for ILS issuance, meaning sponsors can save on their catastrophe bond issuance costs by selecting Hong Kong as a domicile.

All of this work culminated in the successful issuance of the first catastrophe bond in Hong Kong, with the $30 million Greater Bay Re Ltd. (Series 2021-1) cat bond sponsored by mainland and state supported reinsurance giant, China Re Group.

That first Hong Kong issued catastrophe bond provides retro reinsurance protection against typhoon losses and covers the Greater Bay Area, providing a clear direction on where future cat bond issues could also focus.

At a conference held in recent days, Carrie Lam, Chief Executive of the Government of Hong Kong explained that there is “enormous potential” to secure more risk capital to underpin risks in the Greater Bay Area using cat bonds.

“The development of insurance-linked securities is another illustration of how the insurance industry can play a meaningful role in the fight against climate change by helping manage the risks involved,” Lam explained during her recent speech.

Adding that, “The escalating frequency of extreme weather events, the rapid pace of urbanisation and rising volatility of financial markets have pumped up the demand for insurance-linked securities as a means of managing natural disasters and their fallout.”

Explaining that the first catastrophe bond from Hong Kong transferred risks from the Greater Bay Area region to international cat bond investors, Lam highlighted the opportunity this demonstrated.

“Given that most instruments currently on offer are underpinned by catastrophic risks in North America and the Oceanic region, enormous potential exists within the Greater Bay Area,” Lam said.

Lam also wants the emerging ILS marketplace in Hong Kong to attract businesses and talent to the region as well.

“I trust that the inaugural catastrophe bond will mark the beginning of our journey to nurturing a vibrant insurance-linked securities ecosystem in Hong Kong, and will for sure attract top talents in this area to join us here,” she added.

“We look forward to continuing co-operation with the industry in enhancing the talent pool to fuel sustainable market growth.”

In order to capitalise on these opportunities, Hong Kong does need to give investors comfort that there is no additional political related risk attached to investing in structures domiciled there, than in other ILS and cat bond domiciles. This is going to become increasingly important for securing future growth for the special administrative region’s ILS marketplace.