Hong Kong could emerge as a trading hub in “catastrophe bonds” that help insurance companies in the Greater Bay Area offset risk related to property damage arising from flooding and other natural disasters, according to SCMP.
Hong Kong is uniquely placed with a developed capital market, legal system, and intermediaries to help insurers and reinsurers in China pass their risks to investors through insurance linked securities.
Investors are essentially betting against the occurrence of a natural peril by putting their principal on the line. The insurance company pays a coupon to investors that is generally higher than other fixed income securities, however in the event of a predefined specific events, the insurance company would use the principal to pay claim-holders.
The need to develop the insurance linked securities market was highlighted in the Hong Kong 2019-2020 budget.
China’s reinsurance market was valued at HK$273 billion (US$34.8 million) in 2013 and is expected to grow to HK$1.54 trillion by 2020, according to a report by the Financial Services Development Council.