Industry Insider: Why Asia needs alternative risk transfer now
While shifting policy priorities and macroeconomic headwinds have moderated the global climate focus, the reality of acute physical climate risk in the Asia Pacific remains unaltered. This risk is magnified by a vast and growing insurance protection gap, fuelled by a paradox of progress: rapid economic development and urbanisation are concentrating asset values in high-risk areas - especially coastal regions - faster than insurance coverage can keep pace.
In 2024, an estimated 95% of the $74 billion in economic losses from natural catastrophes in the Asia Pacific went uninsured, severely hampering development and causing significant business interruption.
The urgency of this exposure was underscored in 2025 by the increasing frequency and severity of weather events across the region. Including a record number of Hong Kong's highest-level black rainstorm warnings, devastating floods in India that displaced tens of thousands, and an unprecedented summer heatwave that saw Japan repeatedly break its national temperature records.
This environment necessitates innovative risk transfer solutions. One mechanism gaining prominence is Insurance-Linked Securities (ILS)—an alternative asset class providing a capital markets approach to building resilience.
This article explores their structure, Asian application, inherent risks, and complementary corporate actions.
HOW CAT BONDS WORK
At the intersection of capital markets and insurance, Insurance-Linked Securities (ILS)—most notably catastrophe (cat) bonds—transfer specific insurance risks to institutional investors. These instruments offer investors both a low correlation to traditional financial markets, as their triggers—such as typhoons or earthquakes—are independent of economic cycles, and attractive yields.
Yields are generated from a risk-free collateral return (e.g., from U.S. Treasuries) plus a substantial risk premium paid by the sponsor. This premium compensates investors for bearing catastrophe risks and the possibility of principal loss.
The key benchmark is the non-investable Swiss Re Global Cat Bond Index. As it is heavily weighted to US perils and uncorrelated with broader financial markets, its performance is largely reflective of that specific risk landscape.
While recent performance has been strong, the index has also experienced periods of flat and negative returns.
After years of modest positive returns, the index experienced a negative return in 2022, as bonds were broadly discounted in the secondary market following Hurricane Ian in the U.S. This was followed by a record-breaking annual return of 19.69% in 2023, fuelled by the recovery of bond prices discounted after the hurricane, an influx of new capital, and strong returns.
In 2024, the index achieved a return of 17.29%, the second highest in its history, supported by high interest rates and generating significant returns for investors.
(Source: Bloomberg)
The structural execution of a cat bond is complex, requiring a Special Purpose Vehicle (SPV) or Special Purpose Insurer (SPI) - an entity created to issue the bond and collateralize the proceeds. A sponsor pays a premium to the SPV or SPI, which in turn issues the bond to investors whose principal is held in a trust. If a pre-defined event occurs, this collateralized principal is paid to the sponsor; if not, it is returned to investors at maturity.
This structure, along with the variety of potential triggers and precise setting of their parameters, adds to the complexity. Most bonds use an Excess of Loss (XoL) model, which cover specific layers of risk. For instance, a JPY ¥100m typhoon cat bond might cover losses between a JPY ¥500m "attachment point" and a JPY ¥600m "exhaustion point." Losses below the attachment point trigger no payment; the portion of losses between these two points is paid out, and losses at or exceeding the exhaustion point result in a full payout of the bond's principal. This model has fuelled significant market growth, with total outstanding cat bonds now surpassing $55.8 billion.
(Source: Swiss Re)
ILS IN ASIA
The broader Asian market, excluding Japan, remains a small player, constrained by a supply-demand challenge where low insurance penetration and scarce loss data limit the issuance of regional cat bonds.
Still, recent transactions signal emerging institutional capacity. A notable example is the innovative multi-peril bond from Hong Kong-based reinsurer Peak Re, issued via its SPI, Black Kite Re. The deal proved that complex Asian risks can be structured and placed with investors, extending coverage in Japan for earthquake and typhoon events while also introducing parametric covers for earthquake risk in China and India.
A parametric trigger is not based on actual losses but on a specific, measurable event, such as an earthquake of a certain magnitude. Its appeal lies in speed and transparency, providing rapid financing by removing the need for lengthy loss adjustment. This approach, however, introduces significant basis risk—a mismatch between the bond’s trigger and the actual financial damage. A World Bank-issued bond for the Philippines illustrates this dual nature: it successfully paid out following Super Typhoon Rai in 2021, yet failed to trigger after another devastating storm in 2022.
Investors also confront model risk. The catastrophe models used to price risk carry inherent uncertainty, amplified in Asia by the same lack of granular data that impedes the broader insurance market. Addressing these risks is a critical prerequisite for the market's sustainable growth—a challenge that will only intensify as more bonds covering perils beyond Japan come to market.
CAPITAL MARKETS TO CORPORATE ACTION
While catastrophe bonds operate at a macro level, tangible risk management is also evolving at the corporate level, demonstrated by a compelling case in Hong Kong. Following the record-breaking rainstorms of 2023, real estate manager Link Asset Management faced the primary financial risk not of direct damages, which were insured, but of sharply higher subsequent insurance premiums.
In response, the company implemented physical flood resilience measures such as drainage capacity upgrades, alongside updates to policies, procedures and protocols, according to Woody Chan, senior manager of sustainability at Link Asset Management.
This approach yielded an 11.7% reduction in property insurance premiums for Link Asset Management in 2025, outperforming the industry’s average of 3%.
"Companies may not feel directly exposed to climate related losses because they are insured, but they are absolutely exposed through the impact on their premiums." This demonstrates that proactive, on-the-ground risk mitigation can yield direct financial benefits, offering a complementary strategy to capital market-based risk transfer.
RESILIENCE AS A STRATEGIC ASSET
As governments confront escalating climate costs, the need for innovative risk transfer is undeniable. While Insurance-Linked Securities offer a powerful long-term path to channel private capital, their immediate effectiveness is constrained by the same data scarcity that drives the region’s protection gap., I believe the most direct path to ensuring insurability and affordability lies in improving on-the-ground preparedness through tangible corporate actions that mitigate risk.
In an environment defined by a challenging macroeconomic landscape and AI reshaping job functions, the imperative for professionals to demonstrate tangible value is intensifying. Proactive risk management and climate adaptation offer paths to delivering it. Ultimately, solutions that align resilience with commercial incentives—translating proactive risk management into tangible financial performance—are the ones likely to gain the most traction.
Editor's note: The title of this article has been updated.
Rodney Gollo, Founder of Rhodes Point Advisors, draws on global experience—including his tenure as Head of Risk for Bupa in Hong Kong—to analyse the investment landscape. He translates complex global risks into clear, actionable, and commercial insights.
He welcomes your feedback and ideas on LinkedIn.