Hong Kong government highlights ILS market commitment in budget

The government of Hong Kong wants to attract more insurance-linked securities (ILS) sponsors to the Special Administrative Region, as it highlights a commitment to develop its ILS market and build on early successes there.

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China published its insurance-linked securities (ILS) regulations and grant scheme a few years ago.

The first Hong Kong based cat bond was the $30 million Greater Bay Re Ltd. (Series 2021-1) cat bond sponsored by mainland and state supported reinsurance giant, China Re Group in September 2021, but that transaction did not utilise the grant, perhaps as it was a private placement.

Early successes were had and the ILS Grant Scheme was first used by Hong Kong based reinsurance company Peak Re, which benefited from the pilot for its first-time catastrophe bond sponsorship of the Black Kite Re Limited (Series 2022-1) deal in June 2022.

Chinese domestic insurer PICC Property and Casualty Company Limited was next, sponsoring a $32.5 million Great Wall Re Limited deal, to provide it with earthquake reinsurance in China, that also took advantage of the ILS Grant Scheme in Hong Kong.

After that, notes from a fourth catastrophe bond transaction, the World bank facilitated IBRD – Chile 2023 cat bond, was listed on the Hong Kong Exchanges and Clearing Limited (HKEX), which meant it could also benefit from the ILS Grant Scheme.

That was close to one year ago and in the government’s budget this week, Hong Kong again expressed its commitment to growing its ILS marketplace and attracting more catastrophe bond sponsors.

Hong Kong’s Financial Secretary the Hon Paul Chan explained, during his budget speech this week, that the government is committed to its insurance‑linked securities (ILS) offering.

“As an international risk-management centre, Hong Kong provides diversified risk-management channels, including professional insurance services,” Chan explained.

Going on to highlight ILS, explaining, “We are also promoting the development of insurance-linked securities (ILS) by establishing a dedicated regulatory regime and launching a pilot grant scheme.

“To date, we have facilitated the issuance of four catastrophe bonds in Hong Kong, one of which marked the inaugural listing of its type of ILS.

“We will continue to attract more issuing institutes to Hong Kong, while nurturing talent and propelling the industry’s development.”

Attracting foreign sponsors to utilise Hong Kong as a domicile for ILS and catastrophe bond issuance takes time, but the Grant Scheme remains a strong draw and should result in incremental issuances over time.

The real opportunity for Hong Kong is in fostering the development of ILS risk transfer via catastrophe bonds for the Chinese marketplace, so attracting more Chinese re/insurers to seek reinsurance capacity from the capital markets via cat bond issuances domiciled there.

The other opportunity for Hong Kong is in extending its ILS regulatory regime to support collateralized reinsurance, protected cells and therefore offer more options for asset managers to enter the ILS marketplace.

Mr Stephen Yiu, Chairman of the Insurance Authority (IA) of Hong Kong, commented on response, “We welcome the 2024-25 Budget and are ready to provide sophisticated risk management solutions for large corporations with a global footprint.

“In parallel, the IA will sustain efforts to promote Hong Kong as a platform for issuance of ILS and a conduit for international investors to gain access to the Mainland market, in particular the Guangdong-Hong Kong-Macao Greater Bay Area.”

The Hong Kong Federation of Insurers (HKFI) commented that it “welcomes the measures with relevance to the insurance sector” made during Chan’s budget speech.

Adding, “Looking ahead, the HKFI is fully committed to continuously collaborating with the Government to bring these objectives to fruition, further enhancing Hong Kong’s position as the International Financial Centre and Risk Management Hub.”