China Property & Casualty Reinsurance Company (China Re P&C) sees the recently completed $50m Panda Re Ltd. (Series 2015-1) catastrophe bond as a “successful first-step” into alternative risk transfer and the capital markets for the re/insurer.
“Panda Re has been a very successful first-step into using alternative risk transfer mechanisms to strengthen and diversify our risk management strategy, and that of our risk-transfer partners,” commented Chen Sen, CFO and chief actuary at China Re P&C.
The use of the capital markets for reinsurance protection by China Re P&C is seen as the potential opening of a new frontier for the insurance-linked securities (ILS) market, with catastrophe bond diversification into Chinese risks a very attractive prospect for ILS investors and fund managers.
China Re said in a statement that the catastrophe bond issues could be looked on as a continuation of its internationalisation strategy and innovation development. The Panda Re cat bond is also a sign of the “important progress” made by China’s insurance industry, from research and the theoretical, on to the practical application of securitization of insurance risk, the sponsor explained.
The catastrophe bond is an “important breakthrough” for China’s insurance market and for the development of its financial markets, China Re continued.
“China made the first step toward linking domestic insurance risks to the international capital market,” Li Peiyu, chairman of China Re, told Xinhua news.
China Re P&C utilised the RMS® China Earthquake Model to get this ground breaking cat bond to market. Using the RMS model, China Re could analyse and define the risk metrics for the first-ever China catastrophe bond.
“RMS was an obvious partner for our first foray into the capital markets. Not only are they widely trusted by international investors to conduct catastrophe risk analysis for new regions and new risks, the RMS China Earthquake Model is central to our view of earthquake risk,” Chen Sen of China Re P&C continued.
The Panda Re 2015-1 cat bond is the first transaction to be sponsored by China Re P&C, as well as being the first ever cat bond to cover any Chinese catastrophe risks. In fact we’re told that outside of the odd collateralized reinsurance participation at renewals, the Panda Re cat bond is one of the first true ILS transactions in China.
The transaction transfers $50 million of catastrophic China earthquake risk to the capital markets, through a privately placed Rule 4(a)(2) cat bond securitisation structure. The cat bond features an indemnity trigger and provides reinsurance protection over a three-year period for the sponsor.
Being privately placed, the investors were asked to perform their own risk modelling for the deal to establish their own view of the risks. RMS, as well as having provided the risk model that the sponsor used, were also contracted to provide the reset modelling services at the end of each risk period.
“We collaborate with in-country institutions to ensure our models provide the best representation of the country’s catastrophe risk. Our local knowledge and experience of the risk is highly valued by international investors looking to diversify the regions they invest in,“ commented Wen Chen, director at RMS in China.
Investors are said to have received the Panda Re cat bond well, although some ILS managers Artemis has spoken to said that they did not invest. New perils are not for everyone and being an indemnity trigger there will have been some investors who question the claims process in China at this time.
However the Panda Re cat bond is seen as a success, both by the sponsor, the risk modeller and the investors who did allocate to the deal. Getting the first Chinese cat bond to market was never going to be easy and it’s encouraging to see the deal launch successfully.
Wen Chen of RMS explained; “The deal was well received by investors and priced very tightly, demonstrating the market’s strong appetite for diversifying risks. The success of the transaction is a strong endorsement of both China Re P&C’s catastrophe management and RMS’ modeling capabilities.”
Sponsor China Re also said that the cat bond is a step towards the Chinese State Council’s goal of establishing a catastrophe insurance system in the country, providing diversification of risk capital sources.
The successful issuance of this catastrophe bond paves the way for future use of securitization and the capital markets for China’s evolving catastrophe insurance and reinsurance requirements. Enabling the capital markets to assist in China’s risk capital needs will also support the ongoing development of its local insurance and reinsurance markets.