Hong Kong is positioning itself as a hub for insurance-linked securities (ILS), especially catastrophe bonds, as it seeks to help global fundraising for disaster damage management.
Clement Cheung, CEO of the Insurance Authority of Hong Kong (IA), emphasized the need to create a suitable ecosystem for this endeavor. The city has seen increased engagement with issuers and investors, particularly in China’s Greater Bay Area, along with efforts to expand talent and risk modeling capabilities at local universities.
A key problem with disaster insurance is the lack of data, which makes risk assessment and underwriting difficult. Hong Kong, considered a global financial center, has the potential to attract multinational companies and international insurers to issue ILS instruments. Notably, the World Bank issued $350 million in catastrophe bonds in Hong Kong in 2023, protecting Chile from earthquake-related financial risks.
Catastrophe bonds transfer the risk of extreme weather into capital markets, increasing the ability of insurers to underwrite higher risk. With global cat bond issuance expected to reach a record $15 billion in 2023, ILS proponents are touting it as a valuable disaster risk management tool that offers investors asset diversification independent of interest rates and capital market fluctuations.
Despite efforts to expand the market, Hong Kong has had limited success, with only a few bond issues issued, mainly to protect against Chinese risks. In contrast, Singapore has attracted high-quality issuers such as Japanese carriers Tokio Marine and MS&AD, according to Mithun Varkey, editor-in-chief of the magazine Asia Insurance News— highlighting the competition between the two financial centers.
Asia-Pacific and Africa remain highly vulnerable regions with minimal insurance coverage against damage from natural disasters. Although the Hong Kong government has demonstrated support for ILS development through regulatory measures and grant schemes, challenges remain, including investor awareness and market depth.
Hong Kong IA is engaging with potential issuers including insurers, reinsurers and Chinese municipalities to expand the market. However, Varkey says Chinese insurers remain hesitant due to perceived higher costs compared to traditional fundraising methods. In contrast, Singapore has made progress in ILS, offering cybersecurity cat bonds and reintroducing grant schemes to cover longevity and mortality. Competition between Hong Kong and Singapore highlights the importance of creating an enabling environment and addressing market challenges to realize the potential of ILS in the region.