China is anticipated to experience a significant expansion in the market for catastrophe bonds as authorities explore financial mechanisms to mitigate losses from natural disasters, with climate change escalating the frequency and severity of events like floods and typhoons.
Insurance experts suggest that cat bonds could play a pivotal role in forming a comprehensive risk-transfer system in China, incorporating both conventional insurance products and government subsidies, thereby enhancing the country's post-disaster financial resilience for relief and reconstruction efforts.
Tonat Belhassen, head of non-life at Munich Re’s Beijing branch, noted the growing interest in cat bonds within China in a report from the SCMP. While Hong Kong has been attracting many cat bond issuances, Chinese firms are showing an increased inclination towards this financial instrument.
In 2023, global cat bond issuances reached a record high of US$15 billion, marking an 8% increase from the previous year, according to data from Swiss Re. This surge indicates robust investor interest and an escalating demand for transferring risks associated with major natural catastrophes.
Hong Kong has rapidly emerged as a key centre for cat bonds in recent years. In a significant development, China Reinsurance Group issued a US$30 million cat bond in October 2021, representing the city's first insurance-linked security in the region, to provide coverage against typhoon-related risks in mainland China.
Furthermore, Hong Kong's stock exchange introduced its first locally listed cat bond valued at US$350 million in March, issued by the World Bank to cover earthquake-related losses in Chile over a three-year period.
The Chinese government is also focusing on promoting the Lingang free-trade zone in Shanghai as a national reinsurance hub. It inaugurated an international board for reinsurance trading in Lingang last June, with objectives such as enhancing capital replenishment mechanisms to disperse catastrophe and special risks.
Given China's high vulnerability to natural disasters, experts underscore the importance of integrating additional market tools to alleviate financial strains on insurers, reinsurers, and the government.
According to United Nations data, Asia-Pacific countries have experienced an average of six natural disasters annually over the past three decades, approximately double the frequency experienced by developing nations in Latin America and the Caribbean during the same period.
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