Third Hong Kong catastrophe bond “in the pipeline”

The third catastrophe bond transaction to be issued out of Hong Kong is now “in the pipeline” according to the Chairman of the Hong Kong Insurance Authority.

One of the key initiatives for the regulator in 2022 has been to improve the attractiveness of Hong Kong as a platform for the issuance of insurance-linked securities (ILS), something Stephen Yiu, Chairman of the Hong Kong Insurance Authority, feels steady progress has been made on this year.

The Insurance Authority (IA) has worked to promote Hong Kong’s ILS framework for a number of years now, the results of which are two catastrophe bonds having been issued there so far.

Hong Kong finalised its insurance-linked securities (ILS) regulatory regime in 2021, alongside the legislation necessary to establish special purpose insurance or reinsurance vehicles for securitisations and issuance of catastrophe bond notes.

Hong Kong also established a grant program for ILS issuance, enabling sponsors selecting Hong Kong as a domicile to save on their catastrophe bond issuance costs.

The culmination of this work was the successful issuance of the first catastrophe bond in Hong Kong, as a $30 million Greater Bay Re Ltd. (Series 2021-1) cat bond sponsored by mainland and state supported reinsurance giant, China Re Group, came to market.

That cat bond matured and hasn’t been renewed and our sources suggest it was a proof-of-concept and that China Re hasn’t made any noises about returning for further cat bond coverage at this time.

Then in 2022, Hong Kong based reinsurance company Peak Re sponsored its first catastrophe bond out of the domicile, becoming the first sponsor to make use of the ILS grant program in the process.

Since then it has been quiet, but now the Insurance Authority Chairman, Stephen Yiu, has said that a third cat bond is in the works.

Speaking at a recent event Yiu said; “The third catastrophe bond in the pipeline is reinforcing our claim to be a dynamic ILS hub.”

Our sources have been saying that a third Hong Kong cat bond was being discussed, with a mainland Chinese sponsor having been exploring the possibility for some months now. It’s possible these explorations are now moving towards a more formal process and possible cat bond issuance.

Yiu noted that, when it comes to its ILS ambitions, Hong Kong cannot be complacent.

Highlighting, “The need to muster the basic elements of an ecosystem so that Hong Kong can reap the benefits derived from a complete ILS value chain.”

Bringing ILS business to Hong Kong is seen as a key opportunity for it to further diversify its financial services base, strengthening its role as a global risk management centre and regional insurance and reinsurance hub.

A third cat bond would be welcomed, especially if it provides another diversification opportunity for investors.

At the same time, given the hardening of reinsurance and cat bond pricing, it will be interesting to see whether the ILS grant schemes offered by Hong Kong and Singapore gain more attention, as a way to save some money on issuance costs.