1 November 2012 Alternative Risk Transfer

Cat bonds in China a certainty

Robust economic growth and new region-specific modelling software will lead to more global firms investing in catastrophe risk and insurance-linked securities (ILS) in China, according to Dr Milan Simic, senior vice president and managing director at modelling agency AIR Worldwide.

AIR has developed catastrophe models for China that support a range of trigger-types for ILS including indemnity, modelled loss, industry loss, parametric and hybrids, allowing companies to evaluate the potential risks posed by typhoons and earthquakes.

“When making the decision to securitise catastrophe risk and enter the ILS space, it’s essential that the risk is well understood,” says Simic.

He adds that the development of more detailed models and the ability of investors to better understand risk in China and neighbouring countries such as Japan, coupled with the growth of the Chinese insurance market, will lead to increased interest in ILS in the region and eventually, China-specific catastrophe bonds.

“The Chinese insurance market has seen a great degree of growth and continues to mature. Reinsurance is becoming a key component in protecting both domestic Chinese insurers and large multinational firms assuming catastrophe risk in China. ILS function as a potential alternative to traditional reinsurance in that they allow companies to pass some of the risk to the capital markets,” says Simic.

“Once catastrophe bonds and industry loss warrantees that include risk in China become more common, and investors view them as an attractive option that produces high returns relative to the risk, we will see more and more companies adopt probabilistic models for China,” he says.

“Historically, there have been very few public catastrophe bonds that include risk in China, but as the market continues to mature, and multinational firms continue to assume more risk, we expect the first China-specific cat bond will go to market.”

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