China’s Belt and Road Initiative could kick-start ILS in Asia

The countries of China’s Belt and Road Initiative (BRI) are largely unsupported by insurance and would benefit from the introduction of insurance-linked securities (ILS) into the region, according to Kirill Savrassov, chief executive of Phoenix CRetro.

Speaking in an Intelligent Insurer Re/insurance Lounge webinar titled “New domiciles, new risks, new structures: another evolution for ILS”, which took place ahead of SIRC 2020 Re-Mind, Savrassov highlighted how a cat event in one of those countries could cause wider repercussions for the delivery of the BRI.

“Those countries are receiving billions and billions of investment into their transport and critical infrastructure but remain uninsured and uncovered for large natural disasters,” he said.

“It is very much in the interest not only of those countries but also of China as a local regional investor to keep this critical infrastructure protected. Even a mild earthquake in Kazakhstan or Uzbekistan could cause the transport corridor to be blocked.”

He added that the introduction of ILS does not have to be complicated: any country which has already borrowed money through Eurobonds is infrastructurally ready to issue cat bonds.

“It’s not rocket science,” he said. “From a technical point of view, issuance of cat bonds and issuance of borrowing bonds are absolutely the same—so, already being on the international capital market for borrowing money through bond issuance means they can easily issue catastrophe bonds from a legal and infrastructure perspective.”

Savrassov added that a key factor will be a proper regulatory regime in the jurisdiction where these bonds are to be issued. While Bermuda is blacklisted in some of these regions as an offshore destination, local players such as Singapore or Hong Kong—which has declared it wants to be an ILS player—could come to the fore.

“Either those regional centres need to become automatically acceptable by issuing countries or it’s a big task for Bermuda to get deeper into Europe and Eurasia and to change the status of the island from being on the blacklist for all those countries,” he said.

Good models
An additional issue will be ensuring the cat models and data available for those geographies are of a good enough quality for investors to be comfortable with the risks. Savrassov noted that while there is a significant amount of excellent quality data, much of it is government-owned and classified.

“It’s a very big task for our modelling colleagues to work out a model that will be known and accepted by the investors,” he said.

“However, I hope that with input of the data which is available, a good working model can be achieved quite speedily.”

He added that the timeline for bringing ILS to these new geographies has shortened as a result of the impact of COVID-19.

“I believe that in three to five years’ time there will be an issuance of a cat bond by one of those countries and then it will have a domino effect—from the moment the first former Soviet Union country issues a cat bond, there will be a queue of its neighbours wanting to do the same.

“There is a very good route for growing up ILS activity and business because you are not reinventing the wheel,” he added.

“All you need is to follow the brilliant example of the ILS community which has been performing well for the last 15 or 20 years.”

To watch the full video interview on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge.