The Securities Association of China and the China Insurance Institute have signed an agreement to set up a taskforce to study CAT insurance securitisation, and to conduct trials in this field.
CAT bonds will serve as the starting point in this endeavour, according to local media reports citing industry sources.
The objective is to establish a multi-channel CAT risk-sharing system and to open up linkages between the insurance market and the capital market.
As CAT bonds are new in China and the relevant regulatory system has not yet been established, regulators are considering selecting reinsurance companies to collaborate on pilot schemes and to issue CAT bonds in the international capital market. When sufficient experience has been gained, the authorities will consider issuing CAT bonds in the domestic capital market.
Insiders say that the traditional CAT reinsurance market is still the most important risk diversification market, which would be difficult to replace in the short term. CAT bonds and other capital market risk diversification vehicles would be an important complementary tool.
Global broker, Willis Group, said in a recent report that the CIRC had already announced its intentions to create a CAT bond fund, and discussions had begun on how to analytically define pools of risks in the property and liability portfolios of large insurers. The report said that offsetting CAT risk in such pools will inevitably require the issuance of multi-tranche CAT bonds for different layers of risk.