Hong Kong's development into an international risk management centre is picking up speed. In the final days of 2022, PICC Property and Casualty Company (PICC P&C) completed Hong Kong's third issuance of insurance-linked securities (ILS) – a USD 32.5 million (HKD 253.5 million) catastrophe bond (CAT bond) that provides earthquake reinsurance.

CAT bonds are a kind of ILS used by insurers and reinsurers to transfer risk to investors, typically providing protection against natural disasters. In 2021, new rules came into effect that provide a bespoke and streamlined authorisation and regulatory regime for Special Purpose Insurers (SPI) specifically for issuing ILS in Hong Kong.

Another landmark transaction

The PICC P&C transaction is the latest deal to be completed under the regulatory regime. PICC P&C established an SPI, Great Wall Re, to issue the bond in Hong Kong, and the bond is eligible for Hong Kong’s Pilot ILS Grant Scheme, which offers up to HKD 12 million for each application.  

“The arrival of a second ILS issued in Hong Kong by major Mainland insurance groups reinforces our crucial role as a risk management centre, serving unique needs of the country while offering full and open access by the rest of the world,” said Clement Cheung, CEO of the Insurance Authority¹.

As one of the world's largest property and casualty insurers, PICC P&C’s underwritten premiums have grown rapidly, increasing the demand to diversify the underwritten risk.

“With the issuance of the Great Wall Re catastrophe bond, PICC P&C builds a ‘dual-pillar’ risk diversification system consisting of both traditional reinsurance and insurance-linked securitisation, which will support PICC P&C to diversify the underwritten catastrophe risk, and increase catastrophe capacity in the future,” said Yu Ze, President of PICC P&C.

The deal took place in the final quarter of 2022, a challenging period for ILS issuance, as the bond competed for capital with other insurers and reinsurers. Despite the competitive backdrop, the deal was a success, with strong demand from international investors in Europe and the US. Investors were keen to get ILS exposure to China, while at the same time diversify risk away from ILS that typically covers natural disasters in Japan and US.

Another draw of CAT bonds is their low correlation with traditional financial instruments, while offering a yield that is comparable to financial assets with similar risk levels.

The successful transaction is also due to Hong Kong’s world-class capital markets ecosystem, which has quickly adapted to enable ILS issuance.

“During the issuance of Great Wall Re notes, both local and international service providers provided professional support covering the whole issuance process, which led to the full success of PICC P&C’s first catastrophe bond,” said Mr. Yu.

GBA opportunities

The road is clear for more Mainland Chinese insurers and reinsurers to issue more ILS in Hong Kong. In part, this is due to the demand for risk diversification, but also for regulatory support. In 2021, the China Banking and Insurance Regulatory Commission (CBIRC) expressed support for insurers in Mainland China to issue bonds in Hong Kong under the new ILS rules².

“We anticipate that Mainland Chinese demand for CAT bonds will continue to grow as a result of the development of the economy and China’s ever-expanding insurance penetration,” said Tony Gallagher, Asia Pacific CEO, Guy Carpenter. “While traditional reinsurance will still be a mainstay for companies, CAT bonds will be an important supplement in reinsurance capacity management.”

Hong Kong’s position in the Greater Bay Area could also support the future development of its CAT bond market. For example, one of the seven areas of development in the city cluster is infrastructure connectivity. The speed of development could be affected by catastrophic events, said Janet Li, Asia Wealth Business Leader, Mercer.

“The growth of the CAT bond market in Hong Kong, as the city continues to evolve into a leading hub for CAT bond issuance, can offer hedging protection to these projects,” she said.

She also highlighted how Wealth Management Connect, a cross-border programme for GBA residents launched in 2021, provides a channel through which investors may be able to access wealth management products issued by banks that employ CAT bonds for diversification.

“Overall, the growth of Hong Kong's CAT bond market could lead to synergies with other parts of the GBA and create more opportunities within the financial industry, as well as in risk management and return enhancement,” said Ms. Li.

[1] Insurance Authority

[2] Reuters