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Why Asia is set to be a key player in the ILS market

18 September 2020

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With Singapore raising its profile in the alternative risk market, and Hong Kong introducing a new insurance bill, ILS opportunities in Asia are going from strength to strength.

Insurance-Linked Securities (ILS) are an alternative asset class which allow insurers to transfer a part of their insurance risks to investors. Historically, the majority of ILS expertise hasn’t been situated in Asia, except for Japan, and has largely been positioned in North America. However, as set out in this article, Asia is expected to grow significantly in the ILS market especially due to the success of the ILS grant scheme in Singapore and the introduction of an insurance bill in Hong Kong.

In 2018 the Monetary Authority of Singapore (MAS) launched an ILS grant scheme, which aims to fund up to 100% of upfront issuance costs of catastrophe bonds in Singapore. Catastrophe bonds are a type of insurance securitisation and arguably the most common form of ILS. These bonds are intended to raise funds for companies in the insurance industry upon the occurrence of a specific event – usually a natural disaster. Companies can transfer a part of their risk to investors who buy catastrophe bonds. The investors, in turn, can diversify their portfolios and benefit from attractive rates of investment return.

The ILS grant scheme is part of Singapore’s strategy to position itself as a key global hub for alternative risk products. It was originally valid through December 2020 but it was recently extended for another two years, until 31 December 2022.

Since 2018, Singapore has supported nine catastrophe bond issuances. Of these, eight have required a trustee company in Singapore to act as Shares Trustee of the respective Special Purpose Reinsurance Vehicle (SPRV) which issues the catastrophe bonds to investors in the capital markets.

Golden opportunity

Since the establishment of the MAS ILS grant scheme, we’ve acted as Shares Trustee for each of the eight SPRVs set up in Singapore to issue catastrophe bonds. This includes participating in the very first catastrophe bonds issuance in Singapore: Orchard ILS by Insurance Australia Group. The Orchard ILS transaction involved not only the first SPRV licensed in Singapore by the MAS, but also the first catastrophe bonds that were issued out of Singapore and an Asian domicile.

In addition to acting as Shares Trustee of the SPRV, we’re able to undertake various other roles in the life cycle of a standard catastrophe bonds transaction. We’re able to provide the full suite of corporate services necessary to incorporate and run the SPRV including acting as company secretary and providing accounting and directorship services. In certain scenarios, we may also act as trustee of the catastrophe bonds themselves.

Widening the net

In addition to Singapore, Hong Kong is also poised to develop its ILS offering. In March 2020, the Hong Kong government introduced the Insurance (Amendment) Bill 2020 which allows the issuance of ILS in Hong Kong through special purpose insurers. There’s no exact timeline for the passage of the bill but the goal is for it to be implemented in the relatively near future. The bill will position Hong Kong as another viable ILS jurisdiction in Asia and it’s likely that Hong Kong will take advantage of the increased opportunities in Mainland China’s reinsurance market.

Investors will continue to embrace ILS as a tool to diversify risk and the recent developments in both Singapore and Hong Kong have proven that the ILS market is growing. We’re proud to be able to build on our ILS expertise in Europe, particularly in the United Kingdom, and to contribute to ILS’ growth in Asia.

As a professional services firm with global capital markets expertise, we look forward to helping our clients and business partners excel in this area and continue to look for further opportunities where we can contribute to this growing market.

Please get in touch with our experts to find out how we can help you navigate the ILS market in Asia.