Tracking Asia’s path as the “next frontier for ILS”

July 27 2020 by Yvonne Lau

In an encouraging move for the insurance-linked securities (ILS) market in Asia, the Monetary Authority of Singapore (MAS) announced in early July the extension of their ILS grant scheme until the end of 2022.

The grant scheme launched in 2018, and the Lion City has already supported nine catastrophe bond issuances since.

Benny Chey of the MAS said in a recent speech: “Singapore remains strongly committed to grow the Asian ILS market. We will continue to explore ways to enhance our regulatory, corporate, tax and bond listing regimes to support a wider range of ILS risks.”

And in neighbouring Hong Kong, the government passed a bill on July 17 to establish an ILS regime — the details of which should be finalised by the end of 2020 or early 2021. The bill fosters hopes of attracting business after a tumultuous year of social unrest and pandemic crisis.

“Asia is the next frontier for ILS growth,” said Tow Lu Lim, partner at law firm Mayer Brown.

Global growth and Singapore’s progress 
Globally, the ILS market is resilient and seeing growth.

Investor appetite continues to grow, with cumulative ILS issuances worldwide growing by 10% in 2019 to US$120 billion. Despite Covid-19, Q1 of 2020 saw 27 issuances valued at US$5 billion — a whopping 82% increase year-on-year, the most active first quarter in a decade.

“Asia [as a] nat cat prone region with low insurance penetration and high economic value, [holds] strong potential for ILS and alternative capital in both Singapore and Hong Kong.” Richard Green AGCS

Catastrophe bonds in particular, have been a high-growth area. By the end of 2019, cat bonds reached US$40 billion, the highest-ever seen in the market. Asia Pacific accounted for 45% of the globe’s natural catastrophe economic losses last year — a whopping US$66 billion of loss.

The region’s vulnerability to extreme perils and their associated costs, means a compelling need to address these risks through innovation and alternative products.

As Richard Green, Allianz Global Corporate and Specialty’s (AGCS) Asia Pacific head of alternative risk transfer, told InsuranceAsia News (IAN): “Asia [as a] nat cat prone region with low insurance penetration and high economic value, [holds] strong potential for ILS and alternative capital in both Singapore and Hong Kong. We will see more interest in ILS from Asia-based funds and investors.”

The extension of the MAS’ grant scheme, which “funds 100% of upfront issuance costs of cat bonds up to S$2 million (US$1.43 million), will [allow] issuers to focus on [this] growing asset class while removing near-term frictional costs of issuances.”

In Singapore in March, Mitsui Sumitomo (part of MS&AD Group) sponsored a US$75 million cat bond to cover Japan typhoon and flood risks — the first cat bond issuance covering Asian nat cat risk.

Last November, the ILS market in Asia reached a milestone with the listing of two World Bank Philippines cat bonds in Singapore. The deal was the first cat bond listed on an Asian exchange, and the first to be sponsored by an Asian sovereign. The bonds finance up to US$225 million of protection.

Overall, the MAS looks to establish a wholesale ILS ecosystem supporting a wide range of risks (from climate, pandemic to cyber), utilising different types of instruments. The Singapore Exchange (SGX) is also assessing the feasibility of a platform for cat bond listings.

Richard Spitzer, insurance finance partner at Mayer Brown’s New York office told IAN that given the development and activity in Singapore, the market will enjoy a “first-mover advantage until Hong Kong’s regime catches up.”

Green added that one of the key challenges is “getting investors comfortable with Asia’s risk,” associated models and the pricing on offer from Asia-based reinsurers.

Hong Kong frontier
As for Hong Kong’s market, Lim of Mayer Brown is optimistic: “Hong Kong is poised to capitalise on its developed capital markets, legal system and proximity to mainland China [to] become an ILS hub in Asia.”

The ILS bill will enable special purpose vehicles (SPVs) in the city to issue — catastrophe bonds, mortality bonds, industry loss warranties, sidecars and other collateralised insurance and reinsurance products.

“Hong Kong is poised to capitalise on its developed capital markets, legal system and proximity to mainland China [to] become an ILS hub in Asia.” Tow Lu Lim, Mayer Brown

Lim said that the licensing process must be “swift and straightforward” for the SAR to catch up — given Singapore’s fast-track ILS regime. The speed of approvals can be facilitated by the Insurance Authority (IA) developing user-friendly application forms, clearly denoting licensing requirements, key documents and more.

The regulatory focus during the licensing process, continued Lim, should be on the “certainty of the contractual arrangements governing the special purpose insurer (SPI) and the full collateralisation of the policy limits of the risks ceded to the SPI.” 

And the IA has been prioritising its ILS focus. Clement Cheung, IA chief executive, recently said that an ILS regime in Hong Kong fundamentally fits with the vision of promoting the SAR as a risk management and (re)insurance hub and its integration into mainland Belt and Road (BRI) and Greater Bay Area (GBA) projects.

Indeed, both Hong Kong and Singapore have made regulatory progress. Asia’s geographic diversity also means a “real advantage” for ILS portfolios, noted AGCS’ Green. Mayer Brown’s Spitzer added Asia’s demand is certainly set to grow, with the regulatory efforts in both cities.

While all signs seem to point to go, the key now is to develop a wholesale ILS ecosystem including modelling and ratings agencies, tax and legal expertise, said Green. Ultimately, “speed, cost and efficiency will be important in attracting business from the more-established hubs, like Bermuda,” he concluded.

*This story was updated on August 5.

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