Singapore to fund cat bond issuance costs, to develop ILS market

Singapore has ramped up its focus on developing an insurance-linked securities (ILS) market, taken the radical step of offering an ILS grant that will fund 100% of the upfront costs incurred in issuing catastrophe bonds in the country and setting up a working group to explore opportunities for the country in ILS.

Singapore has been hoping to encourage ILS and catastrophe bond business to its shores for some years now, having developed special purpose reinsurance vehicle (SPRV) legislation, although to date that has not been used.

Speaking at the 14th Singapore International Reinsurance Conference (SIRC) this morning, Mr Lim Hng Kiang, Minister for Trade and Industry (Trade) and Deputy Chairman of the Monetary Authority of Singapore, explained that Singapore is to develop an ILS market and actively looking to bring sponsors to the country.

Singapore wants to become a global capital for Asian risk transfer and capital market solutions such as ILS and cat bonds sit at the heart of this ambition.

Singapore recognises the opportunity to help in narrowing the Asian protection gap, where a vast percentage of economic losses from disaster go uninsured. To achieve this the Monetary Authority of Singapore recognises the value that capital market reinsurance solutions, such as ILS, can provide and wants to stimulate their use in the country.

Mr Kiang commented in his speech this morning that Singapore will aim to, “Develop alternative risk transfer mechanisms like insurance-linked securities and government pools in our repertoire of insurance offerings, so that we are in a position to provide financing quickly and effectively in the aftermath of loss events.”

In tandem with this, Singapore will also seek to offer insurance and reinsurance solutions for new and emerging risks, such as cyber, reputation and environmental liabilities, and will put technology and innovation at the heart of its work in this area.

Kiang noted the consistent growth of ILS and catastrophe bond, as well as the fact that alternative capital has been growing faster than traditional reinsurance. He also noted the significant benefits that catastrophe bonds can offer to sponsors, as well as their attractiveness to investors in the ILS asset class.

He noted that Singapore has its own emerging investor base that is targeting allocating funds into ILS and catastrophe bonds, citing Quantedge Capital as one such example. Artemis found there is growing interest in ILS investing being shown by investors in Singapore at our second annual conference in the country this year.

Kiang said that the Monetary Authority of Singapore (MAS) has, “Seen healthy interest from Asia-Pacific issuers in the development of an APAC market for catastrophe bond issuances, due to the proximity to and better understanding of the underlying risks,” and as a result the Authority has taken, “Progressive strides towards developing the catastrophe bond market in Singapore.”

The first step taken by MAS has been to establish an alternative risk transfer working-group made up of industry experts in the ILS market. This working-group is being chaired by Jon Paradine of Bermudian reinsurance and third-party capital manager Renaissance Re, and it will advise the MAS on initiatives that aim to develop Singapore as an ILS hub.

The second step is more radical and could stimulate significant interest in actually getting a catastrophe bond deal completed in Singapore.

The MAS has launched an ILS grant scheme, which will fund 100% of the upfront costs incurred in issuing catastrophe bonds in Singapore.

The ILS grant scheme will be available for catastrophe bond issuance from January 1st 2018 and can be used for catastrophe bonds and other ILS covering risks outside of natural catastrophes as well, Kiang explained.

With the ILS grant scheme, the MAS hopes to catalyse the development of an ILS market in Singapore.

By removing the upfront costs of issuance Singapore will stand a very strong chance of bringing some ILS business to the country, as costs of issuance are often a major barrier especially for new sponsors.

“It is my hope that this grant scheme will encourage insurers and reinsurers to consider issuing a catastrophe bond here,” Kiang said.

“In fact, MAS is already working with key industry players such as IAG Re Singapore with a view to issuing a catastrophe bond in Singapore,” he continued.

If a large global player, like IAG, could be encouraged to issue a catastrophe bond in Singapore it could be a groundbreaking development for the market.

While the ILS grant scheme could be key for getting a first deal done in Singapore, once one has been completed and if the experience is comparable with other domiciles, Singapore could see a string of transactions as local sponsors in particular look to a regional hub for ILS.

But developing an ILS market is not a quick effort, as most domiciles have found. It takes time, regulation and the establishment of the skills in the insurance and reinsurance market to provide services to potential sponsors.

Singapore is already developing much of the required infrastructure though, with service providers now visiting the country each year to establish relationships and to discuss ILS potential.

There are of course no guarantees of success, but the ILS grant scheme will definitely ensure that potential sponsors take the opportunity of issuing a catastrophe bond in Singapore very seriously indeed.

Kiang commented, “This is but the first step of a longer journey, as we look forward to working more closely with the industry to further deepen our ILS ecosystem here.”

The ILS intiiatives mark the, “Metamorphosis of Singapore’s reinsurance industry as we transform from a mainstream traditional reinsurance hub, to a sophisticated full-fledged global capital for Asian risk transfer,” Kiang closed.