The Insurance Authority (IA) has announced Hong Kong’s strategic moves to position itself as a central player in facilitating global fundraising for natural disaster risk management, particularly through insurance-linked securities (ILS) such as catastrophe bonds.
The city is intensifying efforts to attract issuers, investors, and data resources, while also bolstering its modeling capabilities and nurturing talent, according to IA CEO Clement Cheung Wan-ching.
Hong Kong’s emergence as a potential hub for ILS gained traction when the World Bank listed its US$350 million catastrophe bonds in the city in March last year. Cheung emphasized the importance of building an ecosystem conducive to addressing the significant protection gap in natural catastrophe risks worldwide, particularly in the Asia-Pacific region and China.
Catastrophe bonds, also known as cat bonds, are a critical component of ILS, transferring risks associated with extreme weather events to capital markets. Despite a record issuance of cat bonds globally reaching US$15 billion in 2023, it falls significantly short of covering the immense scale of natural disaster-related losses, which totaled US$250 billion worldwide last year, as reported by German reinsurance firm Munich Re.
The Asia-Pacific region and Africa remain particularly vulnerable, with only a fraction of losses insured, highlighting the pressing need for innovative risk management solutions. Cheung highlighted Hong Kong’s robust capital market, government support, and financial infrastructure as key elements in further developing the ILS market to address this gap.
Acknowledging government initiatives to promote ILS development, including establishing a dedicated regulatory regime and launching a pilot grant scheme, Cheung stressed the importance of selective issuances aimed at fostering a sustainable solution leveraging Hong Kong’s strengths, particularly within the Greater Bay Area (GBA).
While acknowledging challenges such as limited data availability, Cheung expressed determination to enhance climate data collection within the GBA and Asia, collaborating with local universities to develop modeling capabilities crucial for packaging risks into ILS products.
Looking ahead, Cheung expressed confidence in regular issuances and emphasized the need for diversification among sponsors, issuers, and product types to sustain growth in the ILS market.
The IA’s efforts align with broader international trends, as seen in Singapore’s innovative cybersecurity cat bond offerings and the renewal of its ILS grant scheme to cover longevity and mortality risks.
Jorge Familiar, vice-president and treasurer of the World Bank, underscored the importance of ILS in disaster risk management, noting its potential for providing asset diversification to investors.
The World Bank’s partnership with Hong Kong on cat bonds last year, securing Chile against earthquake risks, exemplifies the collaborative approach toward addressing global challenges through ILS. Familiar expressed eagerness to continue this partnership and expand its impact through further transactions with the IA.
