Chinese Regulators Consider Cat Bonds

Chinese regulators are working with insurance companies to establish a framework to sell catastrophe-linked bonds or ‘cat’ bonds, securities designed to help insurers pay for losses from natural disasters, such as the earthquake in Yunnan Province a month ago.

According to
International Financing Review Asia
, the China Insurance Regulatory Commission (CIRC) disclosed the initiative in a recent consultation paper on ways to improve the solvency ratios of insurance companies. The regulator urged market players to explore securitisation of insurance liabilities through vehicles like catastrophe bonds, in addition to selling preference shares.

“There are not many insurers in China that can do cat bonds at the moment, but it is a very important step to mitigate the risks related to the sector and to release the capacity for insurers to write more policies,” said a research analyst quoted by
IFR Asia
.

Potential issuers, such as PICC Property & Casualty and China Reinsurance Group Corp, began the groundwork to sell cat bonds years ago and are likely to be among the first to issue such paper, according to market participants.

“They [PICC and China Re] are expected to be in the pilot projects, while the framework is being built,” said a market source told
IFR Asia
.

“Like securitisation in China, an issuer/originator does not need to wait for the entire set of rules to emerge,” the source said. “It just needs to work with the regulators to find its way to reach the finish line.”

China’s National Development and Reform Commission (NDRC) highlighted the potential for cat bonds in a report on climate change last December.

Currently, there are no rules in China requiring insurers to buy extra protection for natural disaster payouts through reinsurance or cat bonds, but, as the wealth of China’s population grows, more people are buying insurance to protect assets.

Assets in China’s property and casualty insurance businesses reached 171bn renminbi (RMB) or US$27.8bn outstanding at the end of June 2014. Policies to protect agricultural property were the fastest growing in 2103, rising 27.43%, according to CIRC.

Cat bonds will be new to China, but it is an established, if specialised, market sector worldwide,
IFR Asia
noted. More than 29 deals priced last year globally, pushing outstanding volume to US$18.58bn, the largest year-end total on record, according to Guy Carpenter, the global risk and reinsurance specialist firm.

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