Hong Kong seeks swift passage of new ILS legislation

The Government of Hong Kong has introduced a bill to amend its insurance regulation to allow for insurance-linked securities (ILS) such as catastrophe bonds to be issued and will seek to pass it rapidly given the uncertainty caused by the coronavirus outbreak.

The Insurance (Amendment) Bill 2020 was gazetted on March 20th and seeks to drive forwards the policy initiatives announced in the 2018 and 2019 budget, when a focus on ILS and catastrophe bonds was announced.

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China has been targeting insurance-linked securities (ILS) business for a number of years, seeking to establish the country as a venue for the issuance of catastrophe bonds and other reinsurance linked securities.

The issue has been raised regularly in Government policy discussions and budget speeches, with this new amendment of the insurance regulatory regime expected to enable Hong Kong to realise its ambitions as a catastrophe bond issuing domicile.

Part of the driver for this focus is not just attracting issuers from overseas, but to position Hong Kong’s insurance marketplace as the conduit between risks from China and the capital markets.

Hong Kong is uniquely placed to become the transformer for insurance risks from China to get to the capital markets, assisting companies operating within China to access the international capital markets for their reinsurance or retrocession needs, in the form of insurance-linked securities (ILS).

The amendment of the bill will provide for a new regulatory regime for the insurance-linked securities (ILS) business, the Government explained.

“The Bill is important for maintaining Hong Kong’s competitiveness as an international insurance hub and risk management centre. It will also enable the insurance industry to capitalise on the new business opportunities arising from the Guangdong-Hong Kong-Macao Greater Bay Area development and the Belt and Road Initiative. Our target is to strive for early passage of the Bill so as to boost the financial services industry and the economy at large amidst the challenging times,” a Financial Services and Treasury Bureau spokesperson explained.

The Government want to “capture potential business opportunities expected to arise in Asia” as it expects the “rising trend of catastrophic events caused by climate change and urbanisation” to drive further demand for reinsurance from the capital markets in the region.

The bill, which also includes amendment measures for the captive regulatory regime to expand the scope of risks captives can insure, is being rushed into the Legislative Council of Hong Kong for its first reading this week, on March 25th, as the Government hopes to expedite this bill to drive greater competitiveness in financial services.

The Hong Kong Insurance Authority said that the amendment bill is expected to deliver, “A bespoke, streamlined regulatory framework for the issuance of insurance-linked securities (ILS) through the formation of special purpose insurers (SPIs).”

“The Central Government has announced support for Mainland insurers to issue catastrophe bonds in Hong Kong,” explained Dr Moses Cheng, Chairman of the IA. “The proposed legislative amendments will pave way for Hong Kong to become the preferred domicile for ILS, in particular catastrophe bonds. This will facilitate insurers to better capture business opportunities, and more importantly, extend the capacity of the insurance industry; thus enhancing its sustainable development.”

For the Central Government of China to be supporting the move is notable.

China has always had an ambition to take greater control over the way risks are ceded out of the country and to become less reliant on the world’s largest reinsurance companies.

Establishing Hong Kong as a conduit to the capital markets for the issuance of ILS and catastrophe bonds aligns with this ambition, as it will enable Chinese insurers to diversify their reinsurance programs using the capital markets and cede risks more directly to ILS investors from around the globe.

Of course it’s also about bringing Hong Kong’s insurance market offering up to speed with global competitors as well, as ILS can now be issued in a range of domiciles around the globe, including Asian neighbour Singapore.

“Using a principle-based, outcome-focused approach, the new framework will put Hong Kong on a par with international standards and practices, thus strengthening its competitiveness in the global insurance market and reinforcing its position as a regional insurance hub,” Dr Cheng added.