Hong Kong’s ILS grant scheme to cover ~US $1.6m of issuance costs

Hong Kong’s Government has revealed some of the details of its proposed insurance-linked securities (ILS) grant scheme, through which it will pay a share of issuance costs for any ILS structures issued out of the Special Administrative Region.

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China has been preparing to allow insurance-linked securities (ILS) issuance from its financial market for a number of years now, seeking to establish itself as a venue for the issuance of catastrophe bonds and other reinsurance linked instruments.

The Hong Kong Government’s Legislative Council passed the Insurance (Amendment) Bill 2020 on July 17th and later said it was targeting a full introduction of the new ILS regulatory regime by the end of 2020 or early 2021.

That target shifted into 2021 and in a sign that the Government of Hong Kong is readying itself for the launch of its ILS business sector, the latest budget includes an allowance for a pilot insurance-linked securities (ILS) grant scheme.

Financial Secretary the Paul Chan delivered his 2021-22 budget speech earlier today and in it made reference to the Hong Kong Government and Insurance Authority’s work on an insurance-linked securities (ILS) regulatory and tax framework, with a goal of bringing ILS business to the Special Administrative Region.

Here, Singapore set a trend of offering ILS sponsors some financial support to offset issuance costs if they used it as a domicile, which has proved an attractive option and brought some sponsors to the country for their catastrophe bond issuances.

Singapore then extended its insurance-linked securities (ILS) grant scheme to the end of 2022, which sees the country funding 100% of the upfront issuance costs of catastrophe bonds in Singapore, up to 2 million Singapore dollars.

That equates to just more than US $1.5 million of potential ILS grant savings a sponsor can benefit from in Singapore.

Today, Financial Secretary of Hong Kong Paul Chan said, “I propose launching a two-year Pilot Insurance‑linked Securities Grant Scheme to attract insurance enterprises or organisations to issue ILS in Hong Kong.

“The amount of grant for each issuance will be capped at $12 million, depending on the maturity of the ILS.”

That converts to slightly more than the Singapore grant at today’s rates, closer to US $1.6 million of potential ILS or catastrophe bond issuance cost savings.

Chan said that the Hong Kong Insurance Authority will announce the details of the pilot ILS grant scheme in due course.

Hong Kong really had no choice but to offer a grant, in a similar vein to Singapore, to level the playing field.

As we’ve said before though, the Hong Kong offering has a unique angle in being a direct connect route to the China insurance and investment marketplace, which could present opportunities both for transferring risk out of China and to the ILS market, as well as attracting Chinese institutional investors to ILS offerings issued from Hong Kong.

Hong Kong began developing legislation to allow for the establishment of reinsurance related special purpose vehicles for use in ILS transactions and for catastrophe bond issuance in 2018.

Insurance-linked securities (ILS) funds and their investors have always been keen to access Chinese insurance risks and if mainland Chinese insurers can more directly cede risks to the capital markets through Hong Kong domiciled structures it will present a significant opportunity for Hong Kong to become the conduit for connecting Chinese insurance risks with international capital markets.