Reinsurance – protecting against catastrophe
Media
Reinsurance – protecting against catastrophe

Throughout 2022, the entire Asia region experienced a seemingly endless series of extreme weather events. These include catastrophic floods in Pakistan, a severe drought in western China, and deadly typhoons in the Philippines. Climate-related disasters cause immense human suffering and huge economic losses. The fear is that as climate change accelerates, Asia will be hit by even more disastrous weather.

“Extreme events are expected to keep increasing in severity and frequency, particularly heavy precipitation-driven flooding,” said Jeremy Waite, Head of APAC Catastrophe Centre of Excellence, Guy Carpenter.

Protection from disaster

The insurance industry has an important role to play in providing solutions that help protect against mounting climate-related risks. With significant assets at risk and rising demand for catastrophe insurance, insurers and reinsurers are increasingly accessing financial markets for additional capital to complement their underwriting capacity.

Catastrophe bonds, also known as CAT bonds, are debt instruments issued mainly by insurance and reinsurance entities that transfer insurance risk to institutional investors. CAT bonds are one of the insurance-linked securities (ILS) that offer investors opportunities to diversify into insurance risks. The principal of a CAT bond is at risk if a defined event occurs – such as a flood or typhoon.

ILS now represent a significant portion of global reinsurance capacity, with close to USD100 billion of so-called alternative capital that complements traditional reinsurance capital and underwrites risks across the world.1 This, however, is a tiny fraction of the global fixed income market, which has bonds outstanding worth USD127 trillion in 20212, suggesting that the transfer of insurance risk to the capital markets is still at an early stage and there is plenty of room to grow.

CAT bonds are bought by a diverse group of institutional investors – from hedge funds to pension schemes. In addition to attractive yields, these bonds are favoured due to the low levels of correlation to other asset classes. This is because the returns of a CAT bond are determined by risks related to the insured event, usually a natural disaster, and are therefore can be expected to be independent of capital market activity and the broader market environment.

“Investors like the fact that events in the capital market, such as a stock market crash, do not cause a hurricane or earthquake to occur,” said Janet Li, Partner and Wealth Business Leader, Asia, Mercer. “We now have nearly three decades of data demonstrating the low correlation of ILS performance to traditional financial instruments and showing that ILS have delivered good diversification under most market conditions.”

Understanding Catastrophe Bonds

A landmark in reinsurance

The ILS market is still nascent in Hong Kong. A landmark CAT bond deal in the summer of 2022 not only highlights the city’s ability to raise capital across a broader range of financial instruments, but also its growing role as a centre for risk management.

In June, Peak Reinsurance Company (Peak Re) issued a USD150 million CAT bond via its newly created special purpose insurer Black Kite Re. This is to date the largest CAT bond issued in Hong Kong and the city’s first 144A CAT bond issuance.

“We believe there is strong interest among Asian investors for CAT bonds. This was validated by our ability to double the size of the issuance from the initial announced guidance,” said Franz-Josef Hahn, Chief Executive Office of Peak Re – a Hong Kong-based reinsurance company that has established a global footprint in the decade since it was established.

Dedicated ILS funds, traditional asset managers, pension funds, as well as insurers and reinsurers all participated in the deal.

In addition to investor demand, Hong Kong’s conducive regulatory environment was a key factor in persuading Peak Re to pick Hong Kong as the venue for its first CAT bond issuance. In March 2021, new rules came into effect that govern the trading of ILS in the city. There is also a pilot scheme that offers up to HKD12 million of subsidies to help cover the costs of ILS issuance.

“We found the Hong Kong special purpose insurer application transparent and straightforward, and that the Hong Kong Insurance Authority team was highly professional and pragmatic in their approach,” said Mr. Hahn.

A future in risk management

The development of a local CAT bond market will strengthen Hong Kong’s status as Asia’s leading risk management hub, highlighting the city’s capabilities in pricing, transferring and financing risk. Other factors that prime the city for success include: a large number of insurers and reinsurers that have global or regional headquarters in Hong Kong, a vibrant InsurTech sector, the presence of different intermediaries - such as insurance brokers, and a forward-looking regulator.

A CAT bond market, as well as the broader development of the local insurance and reinsurance sector, will also assist Hong Kong in realising its goal to lead the world in sustainable finance. The increasing frequency and severity of natural catastrophes is putting increasing pressure on individuals, societies, and governments. While insurance on its own cannot solve the issue of climate change, it does provide important tools to promote resilience, by helping people quickly recover from disasters.

“CAT bonds can provide institutional investors with the opportunity for an attractive, uncorrelated return while at the same time giving insurers a tool to deal with natural disasters including climate change,” said Mercer’s Ms. Li.

1Gallagher Re, Reinsurance market report.

2SIFMA, Capital Markets Fact Book

Cookie Settings

Cookies are small computer files sent from this site and stored on your browsing device to remember information about you, such as your preferences or online interaction with this site.   You do not need to allow cookies to visit and navigate this site and may choose not to accept cookies in your browser settings, but you may not be able to access to all its features as a result.  

This website uses Google Analytics, Google Tag Manager and Google Ads, which in turn use cookies.  Information collected by these cookies will be transmitted to and stored on Google’s servers, and used by Google to provide evaluative and analytical services on website activity and internet usage to us. 

We use the following types of cookies on this site (overview): 

Name 

Provider 

Purpose 

Expiry 

Category 

How to opt out 

UMB-UCONTEXT-C, 

Umbraco 

Used to maintain session of logged in user 

6 months 

Strictly necessary 

 

UMB_XSRF-V 

Umbraco 

Used to maintain session of logged in user 

6 months 

Strictly necessary 

 

UMB-SXRF-TOKEN 

Umbraco 

Used to maintain session of logged in user 

6 months 

Strictly necessary 

 

_gid 

Google 

Registers a unique ID for generating statistic data on how the visitor uses the website 

2 years 

Performance 

Opt-out link 

_ga 

Google 

Registers a unique ID for generating statistic data on how the visitor uses the website 

2 years 

Performance 

Opt-out link 

_gat 

Google 

Used by Google Analytics to throttle request rate 

2 years 

Performance 

Opt-out link 

_gtag_UA_170395871_1 

Google 

Used by Google Tag Manager to register a unique ID for visitor and used to calculate visitor, session and campaign data for the sites analytics reports 

2 years 

Performance 

Opt-out link 

__atuvc 

AddThis 

Associated with the AddThis social sharing widget and stores an updated page share count 

6 months 

Functionality 

Opt-out link 

Last updated: [02.06.2021] 

For more information about these cookies and the way your personal data is processed by them, see the embedded links to their providers in the table above. 

You have the right to decide whether or not to accept or reject non-essential cookies by ticking the boxes below.  Alternatively, you can exercise your cookie preferences by clicking on the relevant opt-out links provided in the table above.  You can also set up and change your cookie settings in your web browser preferences to accept or reject cookies (see https://www.allaboutcookies.org/manage-cookies/).  

Cookies aresmall computer files sent from this site and stored on your browsing device to remember information about you, such as your preferences or online interaction with this site. You do not need to allow cookies to visit and navigate this site and may choose not to accept cookies in your browser settings, but you may not be able to access to all its features as a result. 

This website uses Google Analytics, Google Tag Managerand Google Ads, which in turn use cookies. Information collected by these cookieswillbe transmitted to and stored on Google’s servers, and used by Google to provide evaluative and analytical services on website activity and internet usage to us.

We use the following types of cookies on this site(overview):

Name UMB-UCONTEXT-C,

Provider

Umbraco
Purpose Used to maintain session of logged in user

Expiry

6 months
Category Strictly necessary
How to opt out  

 

Name UMB_XSRF-V

Provider

Umbraco

Purpose Used to maintain session of logged in user

Expiry

6 months
Category Strictly necessary
How to opt out  

 

Name UMB-SXRF-TOKEN

Provider

Umbraco

Purpose Used to maintain session of logged in user

Expiry

6 months
Category Strictly necessary
How to opt out  

 

Name _gid

Provider

Google
Purpose

Registers a unique ID for generating statistic data on how the visitor uses the website

Expiry

2 years
Category Performance
How to opt out Opt-out link

 

Name _ga

Provider

Google
Purpose Registers a unique ID for generating statistic data on how the visitor uses the website

Expiry

2 years
Category Performance
How to opt out Opt-out link

 

Name _gat

Provider

Google
Purpose Used by Google Analytics to throttle request rate

Expiry

2 years

Category Performance
How to opt out Opt-out link

 

Name _gtag_UA_170395871_1

Provider

Google
Purpose Used by Google Tag Manager toregister a unique ID for visitor and used to calculate visitor, session and campaign data for thesitesanalytics reports

Expiry

2 years
Category Performance
How to opt out Opt-out link

 

Name __atuvc

Provider

AddThis
Purpose Associated with theAddThissocial sharing widgetand stores an updated page share count

Expiry

6months
Category Functionality
How to opt out Opt-out link

Last updated:[02.06.2021]

For more information about these cookiesand the way your personal data is processed by them, see theembeddedlinksto their providers in the table above.

You have the right to decide whether or nottoaccept or reject non-essential cookies by ticking the boxes below. Alternatively, you can exercise your cookie preferences by clicking on the relevant opt-out links provided in the table above. You can also set up and change your cookie settings in your web browser preferences to accept or reject cookies(see https://www.allaboutcookies.org/manage-cookies/).

Strictly Necessary Cookies

We use these cookies to assist you to navigate this site, register in our events and provide feedback to us.  These cookies are essential in order to enable you to move around the website and use its features or they are cookies that are required by law. You may set your browser to refuse or alert you of these cookies before accepting them by using this website, but without these cookies, services you have asked for (such as navigating between pages, setting your privacy preferences or filling in forms) cannot be provided. These cookies do not store any personally identifiable information and will expire after 6 months.

Performance Cookies

We make use of analytic cookies to analyse the number of visitors to our website and how our visitors use our website, services or applications, to track traffic sources, and to monitor website performance. This allows us to provide a high-quality experience by customising our offering and quickly identifying and fixing any issues that arise.

These cookies collect anonymised, aggregate information. If you do not allow these cookies, we will not know about your visit and usage of our website and will not be able to monitor its performance. These cookies will expire after 2 years.

Website Functionality Cookies

We make use of cookies to provide you with certain functionality and personalised experience. For example, to remember choices you make (such as e-newsletter subscription and report download, your language preference and location), to recognise the platform from which you access the site, and to provide enhanced and more personal features. These cookies are not used to track your browsing on other sites.   These cookies will expire after 6 months.

Targeting Cookies

These cookies collect information about the browsing habits associated with your device which is used to make advertising more relevant to you and your interests.  These cookies will expire after 6 months.   These cookies do not store any personally identifiable information.  We may however combine and use information collected with these cookies with other information about you to track or profile your interests.  We will use such information to provide you with targeted advertising and social media re-targeting and may engage third party providers to process such information on our behalf.  If you do not allow these cookies, you may not be able to receive targeted advertising.

These cookies are also placed by third parties, such as Google Analytics and similar service providers, when you visit and use functions or services provided by them on this website, such as the ‘Like’ or ‘Share’ buttons, and when you navigate away from this website to use their services.  These third party providers provide such services in return for recognising that you have (or more accurately your device has) visited certain websites.   The information stored by these cookies will be collected and used by the third party providers together with other information to build a profile of your interests, show you targeted advertisements on other websites and social media.  Such third party providers may also transfer the information to other third parties as required by law or to process the information on their behalf.  

 

Last updated: [02.06.2021]

 

This site uses cookies to optimise site functionality and give you the best possible user experience provided that you expressly consent thereto.

Learn more about cookies and manage your cookies settings here.