Asia is expected to see a steady and continuing increase in insurance-linked securities (ILS) activity, with regionally tailored catastrophe bonds likely to become more of a feature, as heightened climate awareness drives a need for risk transfer and reinsurance, Fitch Ratings has said.
2025 has not seen a particularly significant amount of Asian risk ceded in catastrophe bond form, but deal-flow has continued and rating agency Fitch expects this flow will persist and perhaps grow over time.
Which would be welcomed by cat bond and ILS fund managers and investors, as the portfolio diversification offered by non-US cat bonds can be very attractive.
However at times the spreads above expected loss are too thin to be especially compelling, with certain Asian perils heavily discounted in the traditional reinsurance market and this remains one key reason we don’t see more Asian cat bonds and ILS.
In one of its reinsurance market reports timed around the Monte Carlo Rendez-vous event, Fitch Ratings said it continues to see potential for Asian cat bond expansion.
Soft market conditions persist in the Asia Pacific reinsurance market, with relatively benign catastrophe loss experience, and relatively satisfactory performance translating into lower risk‑adjusted pricing at recent renewals, Fitch explained. Adding that, “However, climate change and severe weather continue to pose significant risks to earnings and capital.”
As a result, “The industry remains well capitalised, but climate‑driven volatility heightens the need for risk transfer,” the rating agency said.
Stating that, “Fitch expects a steady rise in Asian insurance-linked securities (ILS) issuance, supported by fixed‑income markets and growing climate awareness, while regulatory measures should further spur market development and encourage catastrophe bonds and other ILS activity.”
Fitch Ratings highlights the Hong Kong and Singapore ILS market hub efforts, where a number of catastrophe bonds and ILS have been issued over recent years.
But, activity does remain slower in Asia at this time, with only a handful of new cat bond or ILS transactions issued from either marketplace in 2025 so far.
Regulatory measures may stimulate further issuance, as well as the continued availability of subsidies in the form of grant funding in Hong Kong, Fitch noted.
But Fitch is positive on the longer-term potential for Asian focused catastrophe bonds, even though the majority of issuers may end up not being domiciled in the region.
“The market is likely to see more catastrophe bonds tailored to regional perils and growing interest in ESG-linked structures, reflecting a broader emphasis on sustainability. Against this backdrop, record ILS issuance is likely to continue, offering insurers and reinsurers effective tools for managing natural disaster risks, while providing investors with attractive total returns, diversification and low risk compared to other asset classes,” the rating agency said.
Fitch also noted that the cost of issuance may be an issue, with higher risk spreads in the market through 2024.
But, as risk spreads have now fallen back closer to levels seen in 2022, this perhaps can make catastrophe bonds a more cost-comparable offering to reinsurance again, although the initial set-up and onboarding to the market for a first-time sponsor can still be burdensome (hence the attraction to subsidies still).
Summing up, Fitch said, “APAC reinsurers are exploring alternative risk transfer options such as catastrophe bonds. Climate volatility and changing risks require continued innovation in risk transfer strategies, despite strong capitalisation.”
