Hong Kong aims for functioning ILS regulatory regime by early 2021

The Legislative Council of the Government of Hong Kong has now passed its new insurance legislation to allow for insurance-linked securities (ILS) such as catastrophe bonds to be issued there.

The Insurance (Amendment) Bill 2020 was originally gazetted on March 20th and moved for swift approval by the Legislative Council (LegCo).

The bill will drive forwards policy initiatives announced in Hong Kong’s 2018 and 2019 budget, when a focus on ILS, catastrophe bonds and expanding the Special Administrative Region’s reinsurance activities was announced.

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China has been targeting insurance-linked securities (ILS) activity for a number of years now, as it sought to establish itself as a venue for the issuance of catastrophe bonds and other reinsurance linked securities.

The passage of the Insurance (Amendment) Bill 2020 by LegCo finally occurred on July 17th and was welcomed by the Government.

Secretary for Financial Services and the Treasury, Christopher Hui, welcomed the passage of the Bill, which will amend the Insurance Ordinance (Cap. 41) to provide for a new regulatory regime for insurance-linked securities (ILS) business and also expand the scope of insurable risks of captive insurers set up in Hong Kong.

Hui said that the contents of the Bill will “create new business opportunities for the insurance sector and generate demand for related professional services.”

This is expected to help consolidate Hong Kong’s position as an international risk management centre.

Moving forwards, the Government of Hong Kong and the Insurance Authority will commence the next stage of preparatory work for the introduction of ILS in the country.

This includes the formulation of specific implementation details and the drafting of any necessary subsidiary legislation.

The new ILS regulatory regime could even be ready for use by the end of this year, which would be interesting as the options for sponsors would increase at a time of busy issuance.

Hong Kong’s Government said that it targets introducing the new ILS regulatory regime by the end of 2020 or early 2021.

The Bill provides for the establishment of an ILS specific special purpose insurer (SPI) structure with uses possible for catastrophe bonds, as well as other collateralised reinsurance arrangements.

The SPI will be enable insurance and reinsurance risks to be transferred to institutional investors, while fully collateralising its obligations.

As we explained before, Hong Kong aims to position itself as a conduit to the capital markets for the issuance of ILS and catastrophe bonds, for regional issuers and also the China market to which it is directly connected.

In this way, Hong Kong can leverage this new legislation to enable Chinese insurers to diversify their reinsurance programs using the capital markets and cede risks more directly to ILS investors from around the globe.

Also for Chinese investors to gain greater access to international insurance and reinsurance risks, structured in ILS vehicles domiciled in the SAR.

The move is also about bringing Hong Kong’s insurance market offering up to speed with its global competitors as well, with ILS transactions now possible in a number of domicile locations around the globe.