The Hong Kong Exchange (HKEx) officially welcomed its first ever catastrophe bond from the World Bank on Tuesday. This bond, sized at US$350 million, offers protection against losses related to earthquake risks in Chile over the next three years as the world at large faces a rising trend of catastrophic events caused by natural disasters and climate change.
A catastrophe bond is a type of insurance-linked security (ILS). This bond is supported by the Hong Kong Insurance Authority (IA) as part of its grant scheme for ILS, which was established in 2021.
Hong Kong Special Administrative Region financial secretary Paul Chan said in a news release that this catastrophe bond is proof of the government’s commitment to offering a greater variety of comprehensive products and solutions to assist both Chinese and global market players.
Chan said that this inaugural catastrophe bond is testament to Hong Kong’s position as an international financial centre and the development of its insurance industry. The financial secretary’s budget hearing for 2023-24 included a provision for the growth of ILS in Hong Kong as it extended the Pilot Insurance-linked Securities Grant Scheme for two years.
IA chairman Stephen Yiu said that the World Bank’s decision to partner with Hong Kong for this catastrophe bond marks “an important milestone” in Hong Kong’s journey to become an ILS hub. The catastrophe bond for Chile is the fourth ILS in Hong Kong, preceded by the PICC Property and Casualty Company-backed catastrophe bond in January.
The US$350 million bond is just a fraction of a larger US$630 million aggregate earthquake risk coverage transaction for Chile. The World Bank said that including the catastrophe swaps of US$280 million, this catastrophe bond is the largest ever single-country catastrophe risk transfer transaction.
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