(Yicai) Oct. 16 -- PICC Property and Casualty has issued China's first sidecar insurance-linked securities (ILS) in Hong Kong, bringing in USD12 million from investors to share insurance risks associated with China's offshore wind farms.

The transaction was announced recently by Hong Kong's Financial Services and the Treasury Bureau. Beijing-based PICC P&C, a major provider of coverage for infrastructure and industrial projects, said it will help international investors better understand China's green energy insurance business and open new channels for sharing renewable energy insurance risks.

A sidecar is an ILS structure that allows insurers to transfer risks to capital market investors through proportional reinsurance. Investors provide capital in exchange for a share of premiums, with returns depending on insurance claims.

According to a team led by Nankai University Associate Professor Zhao Yang, insurers use sidecars to transfer risks to special purpose insurers (SPIs) through proportional reinsurance. SPIs raise funds by issuing equity or debt securities, investing the proceeds in low-risk, highly liquid assets held in trust accounts to cover potential claims.

Why Offshore Wind Power?

Industry insiders said sidecars are an effective securitization tool for spreading catastrophe and other insurance risks, with considerable growth potential as China improves its catastrophe insurance framework.

A senior executive at a property insurer told Yicai that offshore wind power was selected for the first issuance because of its particular risk characteristics. Individual offshore wind projects require substantial investment, concentrate significant risk exposure in a single location and frequently face natural catastrophe threats, including typhoons.

Sidecar structures allow insurers to transfer some of these risks to capital market investors through proportional reinsurance, effectively supplementing traditional reinsurance capacity, the executive said.

Christopher Hui, Hong Kong's secretary for financial services and the treasury, said the issuance represents significant progress by the city's insurance and capital markets in risk transfer and the use of alternative capital, with support from the central government. It also strengthens their ability to manage catastrophe and other specialized risks, he added.

Although Chinese insurers have only just begun issuing sidecar securities, the international market is already well established. According to incomplete statistics cited by Zhao's team, 230 reinsurance sidecars were established worldwide between 2005 and June 30, 2024, providing more than USD55 billion in risk capital to the insurance industry.

Editor: Emmi Laine