[HK Insight] "Sidecar" Instruments Expand Hong Kong's Risk Management Toolkit

PICC Property and Casualty Company Limited (hereinafter "PICC P&C") successfully issued US$1200 million in sidecar insurance-linked securities (ILS) in Hong Kong to provide reinsurance coverage for its onshore offshore wind power insurance portfolio. This marks the first sidecar ILS issuance in the Hong Kong market, further strengthening Hong Kong's risk management capabilities. The successful offering underscores significant progress in risk transfer and alternative capital utilization within Hong Kong's insurance and capital markets, supported by national initiatives, and reinforces Hong Kong's position as a global center for risk management.

"Sidecar" is a typical structure of insurance-linked securities (ILS). Through issuing such securities, an insurer cedes insurance risk to a specially established special purpose insurer via proportional reinsurance. The sidecar vehicle then raises claim payment funds by issuing equity or debt-type securities and deposits these funds into a trust account invested in low-risk, highly liquid assets to ensure timely claim payments. In this case, the issuer PICC Property & Casualty issued "sidecar" notes through Great Wall Reinsurance Limited. The returns and losses of the sidecar ILS are linked to the gains and losses of the proportional reinsurance contract. Its issuance structure reflects the distinctive features of insurers sharing benefits with capital market investors, sharing risks, and offering flexible entry and exit—hence the vivid term "sidecar."

Previously issued insurance-linked securities (ILS) in the Hong Kong market have all been structured as catastrophe bonds. Under this structure, investors receive periodic coupon payments and principal repayment at maturity, but may incur partial or total loss of principal if a predefined catastrophic event occurs. This sidecar issuance expands the trading structures and business scenarios for ILS in Hong Kong. To date, 7 catastrophe bonds have been issued in Hong Kong. With this new sidecar product, total issuance volume has reached approximately 63 billion HKD.

Currently, the natural disaster protection gap in the Asia-Pacific region reaches 88%. Traditional reinsurance capacity is limited, while insurance securitization tools can help supplement underwriting capacity. China's 15th Five-Year Plan has identified strengthening the catastrophe risk protection system and risk-sharing mechanisms as key priorities. In 10 of 2025, the National Financial Regulatory Administration issued a notice supporting domestic insurers willing to issue sidecar insurance-linked securities on the Hong Kong market.

Hong Kong's first five-year plan proposes fully leveraging the comparative advantages of international insurance, reinsurance, and capital markets to promote the coordinated development of traditional insurance and non-traditional risk management tools. The Hong Kong SAR government launched a pilot grant scheme for insurance-linked securities (ILS) in 2021 and extended it until 2028. Under this scheme, eligible ILS transactions receive grants covering up to 100% of initial costs. The program is open to both onshore and offshore sponsors and covers all risk types and regions. The Chief Executive's Policy Address in 2026 announced that the Hong Kong SAR government and the Insurance Authority will continue to promote ILS, narrow gaps in coverage for catastrophic and other specific risks, and review investor restrictions to activate the ILS fund trading market. The Insurance Authority also stated plans to amend regulations to introduce "protected cell companies," which allow captive insurers greater operational flexibility to mitigate risk, further reducing the cost of issuing ILS.

A $1 billion catastrophe bond issued by the World Bank in Hong Kong and backed for Jamaica was fully triggered following Hurricane Matthew at the end of 2025, demonstrating the critical role of insurance-linked securities (ILS) in post-disaster recovery. Today, catastrophe bonds, sidecar ILS, and captive insurance offer diversified pathways for Chinese enterprises expanding overseas to manage and transfer risk. As mainland companies go global, their growing risk management needs will further expand the scope of risk scenarios, underscoring Hong Kong's emerging role as a premier international risk management hub. (Source: Economic Daily | Author: Liu Liang)