Hong Kong SAR proposes rule change to enable ILS business

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China is targeting insurance-linked securities (ILS) business, with a proposal to amend regulations to enable special purpose structures to be domiciled there.

The proposal was revealed during a recent speech by the CEO of the Hong Kong SAR, Carrie Lam, in which she laid out a number of proposals that aim to make the local insurance and reinsurance industry both more competitive globally and more useful from a risk management point of view.

The introduction of ILS business in Hong Kong, which could include all types of ILS structures from catastrophe bonds to collateralised reinsurance, would not just benefit the SAR, but also mainland China, providing mechanisms through which the country’s catastrophe risks could be ceded offshore.

ILS structures would enhance the range of risk management tools available to Hong Kong’s insurance and reinsurance industry, as well as to domestic Chinese players and could also attract capital to the country at the same time.

Lam explained the proposal, “The Government will make relevant legislative amendments to allow for the formation of special purpose vehicles in Hong Kong specifically for issuing insurance-linked securities with a view to enriching the risk management tools available in the Hong Kong market.”

In addition, Lam said that further measures were to be taken to make Hong Kong’s insurance market more competitive, including, “Tax reliefs to promote the development of marine insurance and underwriting of specialty risks in Hong Kong so as to strengthen Hong Kong’s status as an international insurance hub.”

In addition, Lam said that the local Insurance Authority is expected to announce additional measures to help make Hong Kong’s market more competitive, both regionally and around the globe.

It’s encouraging to see another domicile looking to enhance its offering to include ILS business and in the case of Hong Kong, given the proximity and attachment to China, it could be a particularly compelling proposition.

ILS investors are keen to access Chinese property catastrophe risks and China itself may be keen to cede them in future, hence Hong Kong could act as a conduit between global capital markets and China’s burgeoning catastrophe and severe weather exposure, in years to come.

Of course Hong Kong is not the only Asian domicile looking to develop an ILS market. Singapore too has its plans well underway and efforts to attract ILS business to the country continue.