China Reinsurance (Group) issued a US$30 million catastrophe bond in Hong Kong on Friday to pay for future claims resulting from typhoon damage in the Greater Bay Area and other parts of the country, according to a company announcement.
The bond issued by the state-owned reinsurance giant’s subsidiary, China Property & Casualty Reinsurance, comes just a few days after Chinese financial regulators said they would allow mainland insurance companies to sell catastrophe bonds in Hong Kong.
It is the first such bond to be sold in Hong Kong, and could pave the way for the city to act as a fundraising hub for mainland Chinese and other international insurance companies to raise capital to meet their funding needs for natural disasters.
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“This decision of a leading state-owned reinsurer not only exemplifies the potential and attractiveness of Hong Kong as an emerging [catastrophe bond] hub, but also demonstrates our crucial role as a global risk management centre,” said Clement Cheung, chief executive of the Insurance Authority of Hong Kong.
China Reinsurance, or China Re, is the biggest reinsurance company in the country and the sixth largest globally.
Also known as an “Act of God” bond, the catastrophe bond is a special type of debt issued by insurance or reinsurance companies and normally bought by hedge funds and pension companies. The instruments are attractive because they usually pay a higher interest rate than other fixed income products.
The proceeds can only be used for paying insurance claims related to natural disasters such as earthquakes, flooding and typhoons.
The China Re bond issued via a Hong Kong special purpose company called Greater Bay Re will only be used to pay out insurance claims related to typhoons in the mainland.
“The Greater Bay Area is among the worst hit areas in the country, with many typhoons and heavy rains. It is of the utmost importance to have proper insurance arrangements to manage the risks in these natural catastrophes to safeguard the development of the bay area,” said Zhang Renjiang, general manager of China Property & Casualty Reinsurance in a statement on Friday.
“The first issuance of a catastrophe bond in Hong Kong is a major step forward to promote the Greater Bay Area development.”
In the last couple of years the government has introduced numerous measures to promote professional talent and capital flow within the bay area, Beijing’s ambitious plan to integrate nine cities in southern Guangdong province with Hong Kong and Macau in a bid to create a powerful and vibrant economic zone.
Beijing is encouraging mainland insurers to tap funds in Hong Kong after the country was hit hard by bad weather in recent months. July’s floods in Henan province are likely to generate total insurance claims of up to 11 billion yuan (US$1.7 billion), according to Goldman Sachs, in what could be the largest payout for a natural catastrophe in China’s history.
A large portion of the claims could come from Zhengzhou, where a lot of property and cars were damaged, Goldman Sachs said in a report in July.
Insurance payouts in the wake of natural catastrophes totalled US$89 billion globally in 2020, the fifth-highest on record, according to the world’s second-largest reinsurer, Swiss Re. That is up from US$63 billion in 2019 and above the previous 10-year average of US$79 billion, the Swiss Re report said.
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