In the realm of disaster risk management, Hong Kong is asserting itself as a pivotal center for insurance-linked securities (ILS), particularly through the issuance of catastrophe bonds. Led by Clement Cheung, CEO of Hong Kong's Insurance Authority (IA), the city is embarking on a journey to cultivate the ideal ecosystem for this transformative initiative.

Amidst burgeoning engagement with issuers and investors, especially in China's dynamic Greater Bay Area, Hong Kong is bolstering its expertise by enhancing talent and risk modeling capabilities within local universities. However, a notable challenge in this domain remains the scarcity of data, which inhibits precise risk assessment and underwriting.

Hong Kong, renowned as a global financial powerhouse, possesses the allure to attract transnational entities and international insurers to participate in issuing ILS instruments. Notably, the World Bank's endorsement of $350 million in catastrophe bonds in Hong Kong during 2023, safeguarding Chile against earthquake-related financial risks, underscores the city's growing significance in this domain.

Catastrophe bonds serve as a conduit, transferring extreme weather risk to capital markets and enabling insurers to expand their capacity to underwrite higher-risk policies. Advocates extol ILS as a valuable tool for disaster risk management, providing investors with asset diversification independent of interest rates and capital market fluctuations.

Despite earnest endeavors to cultivate this niche market, Hong Kong has encountered limited success, primarily issuing bonds related to Chinese perils. In stark contrast, Singapore has emerged as a formidable competitor, attracting high-quality issuers like Japanese carriers Tokio Marine and MS&AD, as highlighted by Mithun Varkey, editor-in-chief of Insurance Asia News.

The Asia-Pacific and Africa regions, characterized by their vulnerability to natural disasters, still suffer from minimal insurance coverage. While Hong Kong’s government has demonstrated support for ILS development through regulatory measures and grant schemes, challenges persist, notably in investor awareness and market depth.

Hong Kong’s IA is actively engaging with potential issuers, including insurers, reinsurers, and Chinese municipalities, in a bid to expand the market. Nevertheless, perceived higher costs compared to traditional fundraising methods have made Chinese insurers hesitant, according to Varkey.

In contrast, Singapore continues to forge ahead in the ILS space, offering innovative cybersecurity cat bonds and renewing grant schemes for longevity and mortality coverage. The competition between Hong Kong and Singapore underscores the imperative of fostering a conducive environment and addressing market challenges to fully realize the potential of ILS in the region.