Singapore to introduce protected cells for collateralised reinsurance

by Artemis on July 17, 2018

Singapore has ambitions to become an insurance-linked securities (ILS) domicile for the Asian region or global issuers looking for an alternative, and with a special purpose reinsurance vehicle (SPRV) already regulated for, the addition of protected cell company (PCC) regulation is a natural next step.

ils-asia-2018-brandingSpeaking at Artemis’ third annual insurance-linked securities (ILS) conference in Singapore last week, ILS Asia 2018, Jacqueline Loh, a Deputy Managing Director of the Monetary Authority of Singapore (MAS), explained that Singapore’s ambitions are to offer a full suite of ILS structuring options to the market, in order to foster market expansion and greater ILS penetration into the Asian region.

Loh explained that Asia can be the next frontier for the ILS market, a location where the need for insurance risk capital is clear and premiums are destined to rise, providing opportunities for ILS funds and investors to play a greater role in provision of disaster risk capital.

But in order for ILS to become truly embedded into Asian risk transfer and investment markets it is important for it to be possible to transact and locate the instruments in the region, which is where Singapore’s ambition comes in.

“The presence of a full-fledged ILS market and ecosystem in the region will encourage the development of this risk financing instrument,” Loh explained. “However, there is currently no established market in Asia for ILS.”

Singapore is well positioned to provide this regional ILS hub, Loh said, explaining why the country can offer a marketplace where Asian ILS activity could be situated.

Loh explained, “We are a well-established regional insurance hub that offers a comprehensive spectrum of re/insurance activities through a vibrant ecosystem of re/insurance players and service providers. There is also a strong catastrophe risk ecosystem to support ILS issuances, with the leading catastrophe modelling firms with ILS expertise present in Singapore, and research institutes such as the Earth Observatory of Singapore and the Institute of Catastrophe Risk Management, to support data and modelling needs.

“Singapore is well recognised as a premier asset management centre in Asia, with deep capabilities across both traditional and alternative asset classes. As the gateway to alternative capital providers such as pension funds, family offices, and hedge funds in Asia, ILS fund managers are increasingly assessing Asian investors through Singapore.

“Singapore has a deep debt capital market, with a broad range of bond offerings to provide collateral for and to support innovative ILS products and structures. SGX, a dynamic stock exchange, can facilitate bond trading.”

Singapore already has a regulatory environment that can support catastrophe bonds and other insurance-linked securities (ILS), having the Special Purpose Reinsurance Vehicle (SPRV) regulations in place to allow for the securitisation of insurance risks in Singapore.

In addition Singapore has addressed tax neutrality for ILS vehicles as well, through its Approved Special Purpose Vehicle (ASPV) scheme.

That puts the Singapore ILS regulatory environment on a level playing field in some respects with other established and newer ILS domiciles, but the one thing missing is a reusable, segregated cell corporate structure to allow for collateralised reinsurance and to make multiple transactions in a single structure easier.

But that is now on the horizon as well and Loh of the MAS said that the regulator would look to introduce such a structure in due course and is working to ensure Singapore can offer comparable facilities and speed to market as well.

“We seek to explore the introduction of bespoke corporate structures for the ILS market, like the Protected Cell Company (PCC) structure, to provide more structuring options to potential issuers. A PCC structure would facilitate multiple issuances in one vehicle with its segregation of assets and liabilities, and is sometimes preferred by issuers for its efficiency in cost and operations,” Loh explained in her speech at the Artemis conference last Thursday.

During a panel later during the conference when the Singapore initiative was discussed again, Stephanie Magnus, a Principal at local law firm Baker & McKenzie, Wong & Leow LLC explained a little more about the PCC initiative.

“One of the things that they are looking at at the moment is a similar structure to a PCC structure, that you have in Bermuda and more recently in the UK as well,” Magnus said.

“We have our own variation of a PCC structure, an S-VACC or Singapore Variable Capital Company, and at the moment MAS is looking to see whether the S-VACC can be extended so that it can be used for ILS vehicles here in Singapore.”

This work is in progress and MAS is Liaising with industry and legal experts to establish how the current S-VACC regulatory framework could be extended or adapted to allow for protected cell ILS vehicles to be domiciled in the country.

Loh of the Monetary Authority of Singapore went on in her speech to explain that the regulator would seek to ensure that Singapore can offer an attractive ILS option for the region and alternative for issuers or investors anywhere in the world.

“We understand speed to market is a crucial factor for issuers as it provides certainty for their reinsurance structure. We will work closely with issuers to explore the potential of further streamlining the licensing requirements and process in Singapore.

“We recognise that structuring ILS requires specialised roles beyond the conventional pool of debt capital market teams, such as loss reserve specialists and capital market advisory teams. MAS will explore support for the setting up of specialist teams in Singapore, to facilitate knowledge transfer to the local market. To raise the industry’s skills in this area, there are plans to incorporate catastrophe modelling for catastrophe bonds in existing training programs,” Loh said.

Loh concluded that the need for data will also remain key and to that end the MAS is working with industry partners to establish exposure databases and indices that could be utilised for ILS transactions in the Asian region.

She said, “High resolution data, obtained through innovative technology and new methodologies, can complement other traditional sources of industry data, and support the underwriting of traditional insurance products and structuring of ILS. ”

Singapore has an ambition to offer ILS as an option for risk transfer in Asia and beyond. It’s going to be an interesting journey for the country, but as we wrote last week if they are successful it really could unlock a new phase of ILS market growth.

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