Source: Beijing Business Today
Reporter: Li Xiumei
Domestic insurance institutions launch their first "sidecar" insurance-linked securities (ILS). On 10 month 14, reporters learned that PICC Property and Casualty recently successfully issued a sidecar ILS in Hong Kong with a total amount of 1200 USD (approximately 9400 HKD), providing reinsurance coverage for its offshore wind power insurance business. This marks the first sidecar-structured ILS issuance in the Hong Kong market and the first time a domestic insurer has issued such a product. What is a sidecar-structured ILS? What functions does it serve, and how does it help disperse catastrophic risks?
First Order Conversion
Catastrophe bonds link insurance to securities. An insurer transfers insurance risk to a Special Purpose Insurer (SPI) via proportional reinsurance. The SPI raises funds for claims 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."
Expanding our distribution channels continuously
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 pointed out that, from the perspective of catastrophic risk governance, the issuance of this sidecar insurance-linked security demonstrates how "insurance + capital markets" can layer and share catastrophic and concentrated risks, providing a replicable model for typhoons, earthquakes, floods, and new energy risks. It also advances the development of data, models, SPVs, regulatory frameworks, and investor ecosystems to enhance insurability in catastrophic risk scenarios.
"More insurers are expected to follow suit, but adoption will be layered and gradual. Large carriers and those with significant exposure to new energy or catastrophe risks are likely to pilot first, while smaller players will primarily participate via platforms, resulting in a phased rollout," predicted Xie Yuantao.
