Hong Kong targets ILS as important driver of reinsurance growth

The Hong Kong government’s Financial Services Development Council (FSDC) has said in a report that it sees insurance-linked securities (ILS) as an important driver of future growth for the Hong Kong reinsurance market.

The FSDC notes that the Hong Kong insurance market is facing increasing competition regionally, with reinsurance one of the impacted areas of business.

With other Asian re/insurance markets threatening its business, the FSDC is hoping to make Hong Kong an even more attractive reinsurance hub for Chinese re/insurers to use and for regional players to domicile their businesses and transactions in, with support for ILS business such as catastrophe bonds now targeted.

Chairman of the FSDC, Mrs Laura M Cha, explained; “The recent departure and downsizing of the Hong Kong offices of various international insurance and reinsurance companies highlights the need for Hong Kong to further develop our insurance and reinsurance industry. Further departures are likely in the near future if action is not taken.

“Hong Kong has all the necessary ingredients to be a leading insurance and reinsurance hub in Asia. Hong Kong insurers and reinsurers have played a critical role in supporting Mainland Chinese companies to transfer and manage their risks, particularly as they expand into new territories, specifically in the regions in the Belt and Road Initiative. Mainland Chinese companies and insurers will be able to take advantage of the benefits in terms of efficiency, best practices, language and ease of doing business by transacting reinsurance in Hong Kong.”

Updates and enhancements to the regulatory framework for doing insurance and reinsurance business in Hong Kong are seen as vital to grow its share of the market, with regulations to support ILS transactions a likely outcome.

“ILS products are ironically under-developed in Hong Kong with over 75% ILS transactions still being completed in Bermuda, despite our integrated financial system and adequate supply of talents from across the financial industry,” the FSDC explains.

The FSDC advises the Hong Kong insurance regulator issues guidance notes on insurance-linked securities (ILS), in order to bring the regime up to international standards and in order to offer a comparable ILS domicile to other locations around the world.

The FSDC believes that reinsurance is changing and that ILS and the capital markets are becoming increasingly important as a result.

It explained; “We see a clear tendency for reinsurance transactions shifting from a traditional practice – facultative and treaty underwriting to a more solution driven practice such as capital market solutions and private transactions.”

Proximity and the relationship with China is seen as a key opportunity for Hong Kong’s insurance market, and the FSDC says that reinsurance premiums routed internationally out of China should be transacted into Hong Kong instead.

This proximity to sources of Chinese insurance and reinsurance risk is a key reason that Hong Kong feels ILS is part of its future growth plans.

The FSDC said; “Stemming from the rapid development of Mainland China insurance industry – absolute size, sophistication of insurance transactions as well as for the sake of reinsurance efficiency/ effectiveness, we firmly believe ILS are going to be an important driver of the future growth of Hong Kong reinsurance industry.”

The FSDC notes that ILS is underutilised by Asian re/insurers as a way to access reinsurance and retrocessional capacity from the capital markets, but hopes that its efforts to attract ILS business may help to ultimately grow the use of ILS in Asia as well as benefit its own insurance market.

As Hong Kong throws its hat into the ILS ring it faces significant competition from established domiciles such as Bermuda, Cayman, Dublin and Guernsey, newcomers London, Gibraltar and Malta, and others considering establishing ILS regulatory regimes.

Additionally, the desire to onshore ILS and catastrophe bond transactions is a topic of conversation that increasingly crops up in our discussions with some regions of the world. That may be another interesting trend affecting the location of ILS transactions in the future.