Hong Kong to become a hub for catastrophe bonds as Greater Bay Area takes shape
- Cross-border reinsurance business seen as growth market for Hong Kong
- Increased urbanisation in storm prone areas in China highlights the need for catastrophe bonds
Hong Kong could emerge as a trading hub in products that help insurance companies in the “Greater Bay Area” offset risk related to property damage arising from flooding and other natural disasters, according to experts.
Catastrophe bonds are structured credit instruments often used by US and Japanese insurers, as well as reinsurers, to raise capital by offloading the insured risks from natural disasters, be it wildfires in California or earthquakes in Nagano.
Tow Lu Lim, a partner at law firm Mayer Brown, said Hong Kong’s reinsurance market could see rapid growth in coming years thanks to China’s rapid urban building that has seen dense residential communities arise along coastal areas prone to storms.
“In China, the major natural catastrophe risks are flooding and typhoons. At the same time you have increased urbanisation, meaning that large populations are living along coastal cities. You would have municipalities and insurers that could be interested in issuing catastrophe bonds through the capital markets in Hong Kong,” said Lim.
The city’s insurance sector, and in particular its reinsurance market, is one of the biggest potential winners under the plan for the new economic hub linking nine mainland cities along with Macau and Hong Kong, Lim said. The central government has called upon Hong Kong to leverage the advantages of its insurance industry to foster innovation and support Greater Bay Area development.
