Asia’s ILS platform to provide complimentary capital: ILS Asia 2021

Highlighted by the efforts of Singapore and more recently Hong Kong, there’s an exciting and growing opportunity for the insurance-linked securities (ILS) sector to play a meaningful role in the Asia region, according to industry experts.

On the opening day of the virtual Artemis ILS Asia 2021 conference, held in association with our headline sponsor AM RE Syndicate Inc., a panel of market professionals discussed opportunities in the region as Hong Kong follows Singapore with its pending ILS regulatory regime.

This panel can now be viewed on-demand here.

“The first thing is, ILS can play a part in this region in a very similar vein to what we’ve seen in other parts of the world, where sponsors and companies have benefited from ILS capacity in driving efficiencies in their risk transfer,” said Andy Souter, Co-Head of P&C at Hong Kong based reinsurer, Peak Re.

“ILS can play a role in multiple facets. It can bring this alternative source of capital to the sponsors. It doesn’t necessarily need to cannibalise what the traditional reinsurers are doing and can actually be complimentary sources of capital,” he continued.

Aided by its ILS grant scheme, Singapore has witnessed a surge in cat bond issuance over the past 12 months or so. Investor interest in ILS is high and as the Asia region looks to capture some of the demand, Hong Kong is also positioning itself to become a hub for ILS business.

With interest in the asset class heightened, panellist Stefan Kräuchi, Founder, ILS Advisers, offered his thoughts on what this might mean for the ILS market in Asia, and also for issuances in Hong Kong.

“We believe that this demand and capacity currently available to cat bond focused managers increases also the demand for new investment opportunities, but has also resulted in reduced spreads available for the typical peak peril cat bonds being issued,” said Kräuchi.

“Both of these developments are positive for Asia focused ILS issuances, where the relative attractiveness, when compared to, for example, a US peak peril investment, is increasing compared to last year,” he added.

Like Singapore, Hong Kong’s ILS regime features a grant scheme designed to cover some of the costs of issuing a cat bond in the region, and Kräuchi feels that this will provide significant benefits to these investment.

“Especially considering that you would expect that most Asia, ex-Japan focused issuances that Hong Kong will be focused on pursuing would also likely be smaller in size. And, therefore, the benefit of the grant scheme, if used in full, is proportionately much more beneficial,” he explained.

The day’s first panel session also included Simon Lam, Executive Director, General Business, Hong Kong Insurance Authority. Interestingly, Lam explained to the audience some of the steps Hong Kong is taking as it attempts to grow the ILS ecosystem around the authority’s regulatory regime.

“The first question we actually asked ourselves is, what differences can Hong Kong make and bring to the ILS market?” said Lam.

“First of all, we want to be able to cultivate sponsors in China, an insurance market which is growing very large, and we have a lot of strong demand. Secondly, we want to be able to add diversification to the ILS market by introducing risks that are not currently in the ILS market. And third, cultivate new ILS investors in Asia, because it is relatively new.

“And the foregoing should have the effect of contributing to the development of the ILS market in Asia, and also solidify Hong Kong’s role as a risk management centre, a reinsurance hub, as well as an international financial centre.”

For an ILS jurisdiction, one of the key factors to success is having access to local expertise and not just international experts.

According to panellist Ricky Spitzer, Partner at Mayer Brown, a global law firm which works on ILS transactions across numerous jurisdictions, this is an area where Hong Kong distinguishes itself from some of the other jurisdictions.

“Hong Kong today is already a financial services and capital markets centre that obviously has nothing to do with ILS. So, a lot of that capital markets expertise is already there, and there’s already a lot of deals. So that can include on the banking side, the trustee side, law firms and things like that,” said Spitzer.

Adding, “So, obviously there is some build up that needs to be done on the sort of specific expertise, I think, that relates to a lot of these experts. But it’s not going to be as necessary as maybe some other jurisdictions to bring people in from the outside because a lot of that already sits in Hong Kong, and sort of aspects of that are already being done there. So I think that’s really going to help to build things out in Hong Kong.”

You can watch this session of ILS Asia 2021 on-demand here.

As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.

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