Catastrophe bonds, or cat bonds, are a type of ILS that transfer the risks associated with extreme weather events to the capital markets, giving the insurance industry greater capacity to take on more risks. Cat bond issuance is set to rise 8 percent to a record $15 billion globally in 2023, according to reinsurance company Swiss Re.
While the record figure signals investor interest and growing demand for catastrophe risk management, it still falls far short of the scale of losses associated with natural disasters. According to German reinsurance company Munich Re, natural disasters cost the world US$250 billion last year.
“Hong Kong can do a lot to fill this gap,” Cheung said. He pointed to the city’s strong capital market, government support and financial infrastructure, all of which could further develop the ILS market.
03:33 a.m
Strongest earthquake to hit Taiwan in 25 years leaves at least 7 dead, hundreds injured
Strongest earthquake to hit Taiwan in 25 years leaves at least 7 dead, hundreds injured
However, the last such issuance was more than a year ago by the World Bank, raising questions about the city’s efforts.
IA’s Cheung said the government agency had been picking the emissions to achieve a long-term solution that could use Hong Kong’s strength to serve the Greater Bay Area (GBA) first and, if possible, most of China and the region.
“We’re not just looking to increase emissions — we’re talking about whether we can build a system,” Cheung said.
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Dozens buried under rubble as landslide in China prompts evacuation of 500 in Yunnan province
Dozens buried under rubble as landslide in China prompts evacuation of 500 in Yunnan province
IA is in talks with various potential issuers, including international reinsurers, direct insurers and Chinese municipalities, according to Cheung. It also networks and educates investors through conferences.
Cheung said one of the reasons for low insurance coverage for natural catastrophe risks is a lack of data. IA is determined to discover more climate data within the GBA and Asia, while developing modeling capabilities with universities in Hong Kong.
“The question is whether we detect the risks and whether we are sure that the risks can be accumulated, packaged and put into the ILS,” Cheung said. “That’s where the ecosystem will work.”
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Japanese cherry trees facing threat from climate change may disappear by 2100, study says
Japanese cherry trees facing threat from climate change may disappear by 2100, study says
“I believe we will have shows every year from now on. We define our KPIs [key performance indicators] so we should have regular feeds, but we need to work on more sponsors, different issuers and types of products.”
Jorge Familiar, vice president and treasurer of the World Bank, said ILS is essential for disaster risk management and provides investors with asset diversification.
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Relative humidity reaches 100% in southern China
Relative humidity reaches 100% in southern China
“The return on assets that insurance-linked securities provide investors is not correlated with either interest rates or the behavior of capital markets,” he said. “It’s an interesting tool to provide diversification to a diversified portfolio of assets.”
The World Bank’s Hong Kong cat bonds last year insured Chile against financial risks caused by earthquakes. The bonds will mature in three years at a floating rate — Bloomberg calculated a coupon rate of 9.56 percent.
“We would certainly like to continue this partnership [with the IA]to see our efforts materialize in more transactions,” said Familiar.
