Hong Kong ILS regulatory regime effective, ironing out implementation details

Changes to Hong Kong’s insurance and reinsurance market regulation came into effect on March 29th, including the new regulatory regime for insurance-linked securities (ILS) business.

The Insurance Authority (IA) of Hong Kong has been working hard to put in place the necessary regulatory and tax regime for insurance-linked securities (ILS) issuance and business to be undertaken in the the Special Administrative Region.

As we previously explained, the Government of Hong Kong revealed its plans for an ILS grant scheme that will cover around US $1.6 million of costs for issuers and sponsors.

While the Hong Kong Insurance Authority (IA) said that it hopes the ILS regulatory regime will be fully-ready for use this year and that a first ILS or cat bond would be issued in 2021.

The regulations are still being honed and implementation details ironed out, with a recent move to lower the minimum investment size required in an ILS or catastrophe bond issuance down from US $1 million to US $250,000, while guidance on what constitutes a qualified investor was also tightened.

As these finer details continue to be ironed out in preparation for allowing ILS issuance, including catastrophe bonds or other collateralised insurance and reinsurance structures to be domiciled in Hong Kong, the main regulatory changes are now effective.

The Hong Kong IA said that it is still ironing out some implementation details and to achieve this it is drawing reference from overseas experience, while taking into account local circumstances.

That’s critical, as Hong Kong has a unique opportunity to be a conduit for connecting insurance and sovereign or government-related risks from China with the global capital markets using insurance-linked securitization as the vehicle for risk transfer.

With China, as a source of catastrophe risk, relatively untapped by the global ILS market, Hong Kong could help the country benefit from efficient, capital markets backed risk capital, while expanding access to risks from the country for ILS investors and ILS funds.

The IA expects that the pilot ILS grant scheme will “provide added attraction to potential sponsors,” leading it to continue expecting that Hong Kong’s first ILS issuance will take place before this year is over.

The IA has also seen its amendments to the group-wide supervision (GWS) framework come into effect, with which it hopes to attract more major insurance and reinsurance groups to Hong Kong, as well as legislation to expand the scope of insurable risks for captives located there.

The captive legislation updates are also interesting, as Hong Kong wants to become the preferred domicile for captives formed by state-owned enterprises from mainland China, as well as to attract captives of multinational conglomerates and local corporates.

Finally, tax concessions for reinsurance business of direct insurers are also hoped to promote Hong Kong’s insurance market and help it to grow.