Hong Kong reveals insurance-linked securities (ILS) grant details

Hong Kong’s Insurance Authority (IA), the independent insurance and reinsurance regulator for the Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China, has now published initial details of its insurance-linked securities (ILS) grant scheme.

Back in February of this year, Financial Secretary of Hong Kong Paul Chan revealed plans for a Pilot Insurance‑linked Securities Grant Scheme that will pay as much as HK $12 million per issuance, which is close to US $1.6 million of potential ILS or catastrophe bond issuance cost savings for sponsors choosing to use Hong Kong as a domicile.

The Hong Kong Insurance Authority (IA) has now published details of a two-year Pilot Insurance-linked Securities Grant Scheme, which it says “provides an incentive for insurance companies and organisations to issue insurance-linked securities (ILS) in Hong Kong.”

The IA said that the grant scheme will incentivise ILS and catastrophe bond issuance in Hong Kong, while the IA continues efforts to finalise its regulatory scheme for Special Purpose Insurers, which as we explained recently are being ironed out.

There was also a recent move by Hong Kong 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 in these reinsurance linked assets was also tightened.

Hong Kong is ambitious and would like to see its first insurance-linked securities (ILS) or catastrophe bond issuance this year, with the ILS grant scheme likely to be a key driver in attracting the countries first sponsors.

Clement Cheung, Chief Executive Officer of the IA, commented, “The Grant Scheme and new regulatory regime catapult Hong Kong into an attractive domicile for issuance of ILS, which will in turn help to enhance sustainable development of the insurance industry and reinforce our status as a global risk management centre.”

Both onshore and offshore sponsors of insurance-linked securities (ILS) will be eligible for the grant scheme in Hong Kong, as long as issuance takes place there.

Insurance and reinsurance company sponsors can also be from supranational and multinational organisations, the IA’s ILS grant scheme documentation explains.

While ILS issuances that qualify for a grant, must be at least HK$250 million (or equivalent in foreign currency, approx US $32m) in size, and at least 20% of the ILS transaction upfront issuance costs must go to service providers based locally in Hong Kong.

First-time catastrophe bond or ILS sponsors will be prioritised as well, which is a positive step for the entire market as the savings made can be compelling for any company looking to access insurance or reinsurance capital from institutional markets.

In addition, ILS issuances lodged with and cleared by the Central Moneymarkets Unit operated by the Hong Kong Monetary Authority will also be prioritised for the ILS grant scheme.

A grant can also be available to ILS transactions with a shorter tenure, as the ILS grant in Hong Kong can cover upfront issuance costs of up to HK$12 million (around US $1.55m) or 100% of total upfront costs for an ILS with a three or more year tenure, and up to HK$6 million (around US $775m) or 50% of total upfront costs if maturity of the ILS is up to three years.

Hong Kong’s IA said before that it expects the pilot ILS grant scheme will “provide added attraction to potential sponsors.”

Sponsors have certainly been incentivised to target new domiciles due to the availability of grants, like Singapore, so there is every reason to believe Hong Kong could have its first ILS issuance underway later this year now the details of this grant are available.

Hong Kong’s IA is inviting interested parties to get in touch to discuss the ILS grant scheme: [email protected]