Asia’s cat bond & insurance-linked securities market to expand: Fitch

We should expect accelerating catastrophe bond issuance from Asia’s ILS domiciles, more cat bond and insurance-linked securities sponsors to emerge from the region and a gradual increase in use of alternative reinsurance capital in Asia Pacific, according to Fitch Ratings.

The rating agency explained in a recent report that it anticipates continued momentum in insurance-linked securities (ILS) across Asia.

With a number of catastrophe bonds issued out of Singapore in the first-half of the year, all of which are listed in our extensive Deal Directory, Fitch expects this flow of new cat bond issuance will continue from the domicile, which is now becoming increasingly established.

On top of this, with Hong Kong’s insurance-linked securities (ILS) legislation now finalised, a second ILS and cat bond domicile is anticipated to become active within the region over the coming months.

Given the continued interest in ILS among investors and increasing interest in alternative reinsurance capital among sponsors, Fitch Ratings said it expects the Asian “insurance-linked securities (ILS) market to gain traction in the medium term.”

“The ILS market will benefit from the prolonged low interest-rate environment, which has prompted reinsurers to adopt alternative capital as a funding source in the past few years,” Fitch explained.

Additional issuance of catastrophe bonds from Singapore is one factor set to help the Asian ILS market expand.

It’s not just catastrophe bonds either, the first sidecar transaction in Singapore, the Phoenix 1 Re Pte. Ltd. arrangement sponsored by MS Amlin, is likely to also help to stimulate interest in other kinds of collateralized reinsurance structure.

The emergence of the first registered company that will become a catastrophe bond issuer in Hong Kong is another positive sign for the region, Fitch believes.

We were first to report back in June that Greater Bay Re Limited was established to issue a catastrophe bond on behalf of China Re, with this expected to be the first deal out of Hong Kong.

Fitch also said that it “expects continued effort from APAC reinsurers to source alternative capital through the ILS market.”

Adding, “We think potential catastrophe bond issuers will be from countries whose reinsurers have lower profitability such as Japan and China given the urgency to lower the cost of capital.”

However, Fitch also expects that issuers and sponsors may come from a widening range of Asian nations, suggesting that “reinsurers in Indonesia and Korea may enter the market later.”

All of which is very positive for ILS market expansion and growth in Asia, with positive ramifications for the global ILS market’s growth potential as well.

Learn more about the growing ILS market in Asia by watching the on-demand replays from our recent ILS Asia 2021 conference here.