Hong Kong government pushes for more ILS and cat bond activity

At a recent event held in the city, speakers representing the government of the Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China were keen to promote the development of its insurance-linked securities (ILS) market offering and to attract more catastrophe bond business.

With its ILS regulatory regime and ILS grant scheme now up and running for a few years, Hong Kong has hosted as domicile, or listed on its stock exchange, US $562.5 million of catastrophe bonds so far.

Having extended its ILS Grant Scheme by two years this year, Hong Kong’s lawmakers are keen to see more ILS market activity brought to its shores.

As part of the continued development of its financial market, insurance and reinsurance industry and capital market, Hong Kong continues to see ILS and catastrophe bonds as an important sector to be involved in.

Speaking at the Asian Insurance Forum 2023 last week, Hong Kong’s Chief Executive, Mr John Lee, explained that an opportunity exists given the focus on climate risk around the world.

“We’re working to expand our insurance-linked securities, given climate change and other global challenges, and the growing demand for alternative risk transfer tools,” Lee explained.

Adding that, “Climate risk creates opportunities for the insurance industry. And Hong Kong is in a strong position to realise those opportunities.”

On Hong Kong’s ILS progress, Lee said that it remains on the Hong Kong government roadmap.

“The development of insurance-linked securities is also a Roadmap goal and I’m pleased to note that, since 2021, we have welcomed four issuances of catastrophe bonds, totalling 560 million US Dollars.

“One of them became the first insurance-linked security to be listed on the Hong Kong Stock Exchange,” Lee said.

Lee summed up his speech by saying, “In a world beset with uncertainty and instability, insurance has grown ever more important, providing much-needed security and peace of mind for us all.

“I am confident that the insurance industry will continue to create opportunity for our financial services sector, for the Hong Kong economy and for the community at large.”

Paul Chan, the government of Hong Kong’s Financial Secretary, also spoke at the event last week.

Chan said that “it is through consistently developing and enhancing our financial markets that we can strengthen our resilience,” adding that, “we know that in the highly competitive world of finance, we must not stop improving ourselves so that we will be able to stay ahead of our competition.”

Chan noted that Hong Kong’s insurance industry has experienced a strong rebound this year, with premiums rising and demand increasing, while at the same time he recognised the significant opportunity for Hong Kong’s insurance industry on the Mainland in China, in particular the Greater Bay Area (GBA).

Chan then said, “Intensified natural disasters have increased insurance and reinsurance costs, creating significant rise in the demand for alternative risk transfer to supplement the traditional reinsurance market.

“That is why we are keen on developing the insurance-linked securities, or ILS market, which can play an effective role in offloading underwritten risks to the capital market. While the global ILS market has been growing steadily over the past decade, the proportion of natural catastrophe risks covered by ILS remains small, and this market in Asia, including the Mainland, is very much underdeveloped.

“I think you know this well: with the concerted efforts of the Government, the Insurance Authority, industry stakeholders and our Mainland and overseas partners, we have so far issued four catastrophe bonds totalling US$560 million. That includes our recent issuance of catastrophe bonds for Chile in collaboration with the World Bank. It was also the first ILS product listed on the Hong Kong Stock Exchange.”

During a panel discussion at the same event, Michael Bennett, Head of Derivatives and Structured Finance at the World Bank Treasury said, “It is amazing to have the catastrophe bond listing in Hong Kong, which was just the beginning. Hong Kong has the capital to be a provider of both insurance and capital-market sides, so we are excited to see that development.”

The event also heard from speakers who explained the global growth in demand for natural catastrophe insurance and reinsurance, which is seen as an opportunity for Hong Kong.

But, in order to catalyse the local investor community around insurance-linked securities (ILS), it was said that greater education is required to explain the ILS asset class and cat bonds to institutions in Hong Kong and China.

It’s clear Hong Kong is continuing to push for growth of its ILS market activities and with the grant scheme still in place, it will be interesting to see if the country can pick up further cat bond issuances in 2024.

As a reminder, the first Hong Kong domiciled cat bond issuance was a $30 million Greater Bay Re Ltd. (Series 2021-1) deal sponsored by mainland and state supported reinsurance giant China Re Group in September 2021, but that transaction did not utilise the country’s ILS grant scheme.

Hong Kong then saw its ILS Grant Scheme used for the first time by Hong Kong based reinsurance company Peak Re, with its sponsorship of the $150 million Black Kite Re Limited (Series 2022-1) catastrophe bond deal in June 2022.

Chinese domestic insurer PICC Property and Casualty Company Limited was next, sponsoring a $32.5 million Great Wall Re Limited deal, to provide it with earthquake reinsurance in China, also taking advantage of the ILS Grant Scheme in Hong Kong.

Most recently, the World Bank issued $350 million catastrophe bond for Chile, the IBRD – Chile 2023 cat bond notes, were admitted for listing on the Hong Kong Exchanges and Clearing Limited (HKEX).