Chinese financial markets regulator the National Financial Regulatory Administration (NFRA) has issued guidance for domestic China market insurance and reinsurance companies to sponsor collateralised sidecar structures out of Hong Kong.Continuing to recognise the potential benefits to the domestic China insurance market of accessing third-party investor sources of international capital to fund growing reinsurance needs, Chinese regulators and lawmakers seem to be accelerating their push to connect Chinese re/insurers with the capital markets via Hong Kong.We first wrote about high-level Chinese government officials exploring the potential for insurance risks to be securitized and transferred to international investors back in 2011, since when the topic has repeatedly come up in government discussions on the need for more capacity to support growing natural catastrophe exposures in the country.But it has taken the development of Hong Kong’s insurance-linked securities (ILS) regulations to drive a deeper desire for engagement with the global ILS community in China and now the regulator there is actively working to support and promote the use by China’s re/insurers of ILS structures to access diversifying sources of reinsurance risk capital.

As is typically the case, catastrophe bonds are always the first instrument to be explored and now for a number of years the Chinese financial regulator has encouraged domestic re/insurers to use those structures and Hong Kong’s regulatory infrastructure.So far that has resulted in a handful of transactions that have come out of Hong Kong for China mainland insurers or cedents owned by them.Most recently, Taiping Reinsurance Company sponsored the $35 million cat bond out of Hong Kong in December 2024, prior to which PICC Property and Casualty Company Limited sponsored the $32.5 million Great Wall Re Limited in 2022, and China Re sponsored the $30 million in 2021.

There was, of course, also the $50 million cat bond in 2015 for reinsurance firm China Re as well, but that was issued out of Bermuda prior to Hong Kong having its own ILS regulatory regime.Now, the focus turns to identifying other insurance-linked securities structures that may be feasible under Hong Kong’s regulations and that could benefit players in the Chinese insurance and reinsurance market.The sidecar is typically a next step on the ILS journey after cat bonds, often the second type of collateralised reinsurance arrangement seen in a still emerging ILS domicile, given the proportional, quota share reinsurance and retrocession they provide is often more familiar to and deemed more accessible for potential sponsors.

China’s National Financial Regulatory Administration (NFRA) said that its goal is to “enrich” the channels of risk diversification available for disaster insurance, improve the risk management of domestic market insurance companies, and enhance the status of Hong Kong as an international financial centre, it has issued a notice specific to reinsurance sidecars, as an insurance-linked security it encourages re/insurers to utilise.The NFRA explains that sidecars can help re/insurers proportionally share their natural disaster and public health emergency risks using special purpose insurance companies.The special purpose insurer can then issue equity or debt-type securities that can be sold to investors and the proceeds used to fund the reinsurance obligations under a quota share type aggreement.

The NFRA clarifies that the management requirements are covered under its catastrophe bond related ILS notice, while solvency rules for reinsurance sidecars would align with the typical rules for reinsurance counterparty risk.The regulator said that it will implement its rules around sidecars and support willing insurance or reinsurance companies that want to issue sidecar securities out of Hong Kong, thereby enhancing the risk management tools available to its domestic market and improving the level of disaster risk management in China.It’s interesting to note that, as has been seen over the last more than a decade, China’s State Council itself is continuing to push for greater use of ILS instruments and continues to see a need for the Chinese insurance market to further diversify risk outside its borders.

The introduction of this reinsurance sidecar option is seen as conducive to improving China’s disaster insurance guarantee system, enabling insurers to connect more directly with the capital market in a format that may be more easily adopted than excess-of-loss catastrophe bonds, we understand.It’s also seen as a way to further enhance the financial strength of China’s domestic insurance companies, while offering a new investment product for Hong Kong’s financial market at the same time.It’s encouraging to see plans continuing to develop for Hong Kong’s ILS market and that it is China driving the move into sidecars as well, which could result in more issuance coming out of the domicile and offer a valuable alternative risk transfer structure to insurer’s in the region.

Sidecars have seen significant growth in the reinsurance market over the last year, as well as expansion of this class of ILS structure to cover a growing range of risks.In fact, Aon Securities had said that .In terms of reinsurance sidecar activity most relevant to the Asia Pacific region, notably MS Amlin Asia Pacific has been using its Phoenix Re sidecars for a number of years now, while Hong Kong based reinsurance firm Peak Re has also sponsored sidecars in the past.

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