Source: Beijing Business Today
Domestic insurers are launching their first "sidecar" insurance-linked securities. On 10 month 14, China Business Journal learned that PICC Property and Casualty successfully issued a sidecar ILS in Hong Kong, with a total amount of 1200 million USD (approximately 9400 million HKD), providing reinsurance coverage for its offshore wind power insurance business.
This marks the first issuance of a "sidecar" structured insurance-linked security (ILS) in the Hong Kong market, and the first such issuance by a mainland Chinese insurer. What is a "sidecar" structured ILS? What functions does it serve? And how does it promote the diversification of catastrophe risk?
First Order Conversion
Catastrophe bonds are insurance-linked securities where insurers cede risk to a Special Purpose Insurer (SPI) via proportional reinsurance. The SPI raises indemnity funds by issuing equity or debt securities, deposits them into a trust account, and invests in low-risk, highly liquid assets to ensure timely claim payments.
The core mechanism involves insurers transferring specified catastrophe risks to a dedicated SPI via proportional reinsurance. The SPI then raises capital from the capital markets by issuing equity or debt securities, thereby linking risk with capital. This design enables Sidecar Insurance-Linked Securities (ILS) to access additional underwriting capacity without substantially altering the existing insurance business framework.
The trial of "sidecar" insurance-linked securities (ILS) by domestic insurance institutions marks the transition of this innovative instrument from policy preparation to market practice. In 2025 year, 10 month, the National Financial Regulatory Administration issued the "Notice on Matters Concerning Domestic Insurance Companies Issuing Certain ILS in the Hong Kong Market," supporting eligible domestic insurers to issue sidecar ILS in the Hong Kong market.
In this issuance, PICC Property and Casualty Company Limited, as the sponsor, issued side-car notes through Great Wall Re Limited, a special purpose insurer in Hong Kong, to provide risk coverage for its offshore wind insurance business.
As a key component of green energy, offshore wind power has seen rapid growth in China recently. However, its insurance exposure is characterized by large single-value policies, concentrated risks, and high sensitivity to natural disasters, creating significant demand for both primary and reinsurance coverage. PICC Property and Casualty Company stated that this issuance introduces Chinese offshore wind insurance risk into international capital markets, enhances global investors' understanding of China's green energy insurance business, and expands risk diversification channels for insurance services supporting green energy development.
This issuance marks the first "sidecar" structured insurance-linked security (ILS) in Hong Kong. Raymond Cheung, Chief Executive of the Insurance Authority, stated: "With policy support from the National Financial Regulatory Administration, this ILS issuance demonstrates our commitment and determination to advance Hong Kong's development as a global risk management hub. The Insurance Authority will continue to promote the adoption of protected cell companies as an ILS issuance structure and review the existing definition of eligible ILS investors to foster a more vibrant market."
Xie Yuantao, Dean of the School of Insurance at UIBE, noted that the first issuance of "sidecar" insurance-linked securities by domestic insurers marks an expansion of China's insurance risk securitization toward more flexible structures, establishing a channel from "mainland risk" to "Hong Kong SPV (Special Purpose Vehicle)" and then to "international capital."
From Catastrophe Bonds to Sidecar Insurance-Linked Securities
In the past, domestic insurers relied primarily on reinsurance to spread catastrophe risk. However, reinsurance capacity is limited, concentration is restricted, and it struggles to diversify single-asset and cumulative risks. Pricing cycles lag, and customization costs are high. For large-scale, concentrated, or tail events like typhoons, earthquakes, and floods, reinsurance alone cannot fully meet demand.
In the past two years, channels for spreading catastrophe risk have continued to expand. Previously, regulators issued "Notice on Matters Concerning Mainland Insurers Issuing Catastrophe Bonds in the Hong Kong Market." To transfer catastrophic losses from natural disasters such as earthquakes, typhoons, and floods, or public health emergencies, insurers may issue catastrophe bonds via special purpose insurers in the Hong Kong market.
While "sidecar" insurance, securities, and catastrophe bonds are all related, they differ fundamentally in risk transfer logic, return generation mechanisms, and product structure characteristics.
Industry experts note that the structure of Sidecar Insurance-Linked Securities (ILS) typically aligns closely with underlying quota share reinsurance treaties. The process is relatively standardized; since they do not necessarily involve a public offering, their establishment and issuance cycles are often shorter, with more focused and simplified disclosure obligations. In contrast, Catastrophe Bonds often require listing on stock exchanges or issuing to a broader base of public investors, necessitating stricter regulatory disclosures, complex model validation, and rating processes. The core value of Sidecar ILS extends beyond simple risk hedging; it serves as a dynamic capital management tool. It enables insurers to flexibly and rapidly expand underwriting capacity for specific lines of business and optimize solvency capital usage without direct equity raises. For investors, Sidecar ILS offers an alternative asset class with very low correlation to traditional equity and bond markets. Its returns stem from insurance underwriting profits—a scarce opportunity in today's global low-interest-rate environment.
Xie Yuantao noted that from the perspective of catastrophe risk governance, the issuance of this side-car insurance-linked security demonstrates that "insurance + capital markets" can layer-share catastrophe and concentrated risks, providing a replicable template for typhoons, earthquakes, floods, and new energy risks. It advances the development of data, models, SPVs, regulatory frameworks, and investor ecosystems, thereby enhancing insurability of catastrophe risks.
"More insurers are expected to follow suit, but adoption will be phased and tiered. Large insurers and those with significant exposure to risks such as new energy or catastrophic events are likely to lead the pilot phase, while smaller players will mainly participate via platforms, resulting in a gradual overall pace," predicted Xie Yuantao.
Beijing Business Today reporter Li Xiumei
