Hong Kong government budgets for ILS

The government of Hong Kong included insurance-linked securities (ILS) in its budget this week, demonstrating the level of importance being placed on developing appropriate legislation in the Special Administrative Region of China.

Hong Kong began planning for the development of legislation to allow for the establishment of reinsurance related special purpose vehicles for use in ILS transactions and for catastrophe bond issuance last year and it remains a priority focus for 2019.

Hong Kong then said it was targeting getting the work to develop legislation to support ILS vehicle domiciling and transactions into its 2019-20 legislative session, which has now been confirmed at the highest levels.

The budget was announced yesterday, Wednesday 27th February, and during his speech laying out financial priorities for Hong Kong, Financial Secretary Paul Chan said that ILS is officially on the agenda for this year.

On insurance and reinsurance in general, Chan said, “Hong Kong’s insurance industry is well-developed and is an integral part of our diversified financial businesses. We are committed to promoting Hong Kong’s role as an international risk management centre and helping the industry seize the business opportunities brought by the Greater Bay Area development and the Belt and Road Initiative.”

Hong Kong is targeting further development across lines of insurance and reinsurance business, with ILS seen as a natural addition.

There are opportunities seen in specialty lines and reinsurance, with legislation set to be developed and amended to provide tax concessions for marine insurance and underwriting of specialty risks, as well as for issuing and domiciling ILS.

Chan explained, “The Government will propose legislative amendments to provide tax concessions for marine insurance and the underwriting of specialty risks, and allow for the formation of special purpose vehicle companies specifically for issuing insurance-linked securities. We will continue to look into measures that are conducive to the development of the industry.”

With Singapore having successfully launched its special purpose reinsurance vehicle and ILS regulatory regime and now having become home to its first catastrophe bond just this week, other locations like Hong Kong will be spurred on in their efforts to host ILS business.

It is a natural accompaniment to any jurisdiction that already hosts insurance, reinsurance and capital markets business, hence Hong Kong will see a specific opportunity due to its expertise in financial markets, as well of course as its unique relationship with China to develop and grow its own ILS marketplace.