Hong Kong reduces minimum ILS investment size to US $250k

Following a consultation period, Hong Kong’s new insurance-linked securities (ILS) rules have been amended to reduce the minimum investment size required in an issuance down from US $1 million to US $250,000, while guidance on what constitutes a qualified investor has also been tightened.

The Government of Hong Kong continues to proceed apace on bringing insurance-linked securities (ILS) business, such as catastrophe bonds and collateralised reinsurance arrangements, to the Special Administrative Region.

As we explained recently, the Government 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.

A consultation process was launched last year in which the government sought guidance on the definition of eligible ILS investor, as well as what the minimum investment size for an ILS or cat bond should be.

The consultation process resulted in some changes to the ILS rules, which we report for you here.

On qualified investors, the updated ILS rules, Hong Kong’s Insurance (Special Purpose Business) Rules, now expand on the definition of the kind of investors eligible to allocate capital to ILS, catastrophe bonds and collateralized reinsurance under the new ILS regulatory regime.

This expansion clarifies that ILS are considered unsuitable to ordinary retail investors and so funds targeting the general public, such as Mandatory Provident Fund’s, funds registered under the Occupational Retirement Schemes Ordinance, and retail or collective investment funds under the Securities and Futures Ordinance will not be regarded as eligible ILS investors any more.

The original draft ILS rules were not as explicit in their wordings around the eligible investor definition, but these updates bring them into line with other domiciles.

On the minimum investment size allowed into an ILS or catastrophe bond issued in Hong Kong, the figure has been brought down into line with the global ILS marketplace.

Notes from catastrophe bonds and some other ILS or collateralised reinsurance structures have typically been offered in US $250,000 increments.

Hong Kong’s draft ILS rules had pegged the minimum at US $1 million, but this has now been lowered and brought into line with the global ILS market standard of US $250,000.

The Insurance Authority (IA) of Hong Kong explained that the adjustment will be beneficial for market development, while still offering some protection against unqualified investors accessing issuances.

The IA remains focused on preventing the repackaging of ILS issued in Hong Kong into other forms that could then enable them to be sold to retail investors.