11 December 2013 Insurance

China endorses cat bonds in climate change paper

In what could represent a significant fillip for the already fast growing insurance-linked securities market, China’s government has said it plans to explore the use of such tools as part of its first nation-wide blueprint for adapting to climate change.

A report published this week by the National Development and Reform Commission (NDRC) in partnership with several other agencies including the ministries of finance, housing, transportation, water, agriculture and forestry, suggested that tools such as catastrophe bonds and weather-based indices could be used to help finance the consequences of natural catastrophes.

The report represents a sign that the country is taking seriously the threat of climate change and could potentially buy-in to some of the cutting edge financial mechanisms that have been developed by the insurance industry to help governments and companies cope with such disasters.

The NDRC estimates that extreme weather events have cost China some $33 billion annually since the 1990s. The body said it is taking a strategic approach to adapting to climate change rather than simply reducing carbon emissions.

Part of the strategy suggests the government should consider ways of guaranteeing the availability of financing, including for extreme weather. It is this part of the strategy that promotes the use of weather-linked instruments and catastrophe bonds. It also suggests that more foreign capital should be introduced to support risk financing and transfer needs.

This is not the first time the Chinese government has suggested such mechanisms could be used but it does seem to move the country’s commitment to such risk transfer programmes a step closer. Given the rapid growth of this industry in recent years and an apparent desire among investors to look at new perils, the timing could be ripe for such schemes to be developed now.

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