Hong Kong targets issuance of first ILS or cat bond in 2021: IA

Hong Kong’s proposed insurance-linked securities (ILS) grant scheme, that will pay a share of issuance costs for catastrophe bond sponsors electing to use the domicile once its ILS regulatory regime is ready, is seen as an initiative to enhance the development of the local marketplace and could result in a first transaction being issued this year.

This is according to 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.

Hong Kong’s regulators and lawmakers have been working to introduce a regulatory framework for insurance-linked securities (ILS) issuance from its financial market, as it seeks to establish itself as a new location for the issuance of catastrophe bonds and other reinsurance linked instruments.

The Hong Kong Government’s Legislative Council passed the Insurance (Amendment) Bill 2020 on July 17th and now targets a full introduction of its new ILS regulatory regime in 2021.

As we explained last month, the Government of Hong Kong is readying itself for the launch of its ILS business sector, with its latest budget including an allowance for a pilot insurance-linked securities (ILS) grant scheme.

During that budget speech in February, Financial Secretary of Hong Kong Paul Chan revealed 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 any sponsors electing to use Hong Kong.

Chairman of the Insurance Authority (IA) Moses Cheng welcomed the ILS grant scheme pilot announcement, saying, “The Pilot ILS Grant Scheme will attract insurance enterprises or organisations to issue insurance-linked securities (ILS) in Hong Kong.

“Together with the new regulatory regime to be launched later this year, it will pave way for Hong Kong to become the preferred domicile for ILS, in particular catastrophe bonds.

“This will enhance the sustainable development of our insurance industry.”

The IA is now preparing for the implementation of its new ILS regulatory regime, with the full details of the Pilot ILS Grant Scheme expected to be revealed in the coming weeks.

The IA has an aggressive timetable and aims to see the first ILS issuance in Hong Kong before the end of 2021.

While aggressive, that target seems entirely achievable as sponsors are clearly looking to reduce the costs of catastrophe bond and ILS issuance at this time, with a number moving their cat bond domiciles to Singapore in the last year to take advantage of its ILS grant program.

We expect some sponsors will look favourable on Hong Kong for the same, an ability to reduce the still very high costs of ILS issuance and so, as long as the regulatory framework is fully implemented within the next few months, getting its first catastrophe bond or other ILS deal ready to market later this year seems entirely achievable.

More choice is good for ILS sponsors, as too are the savings on offer.

But, perhaps most exciting is the potential for Hong Kong’s ILS regulatory regime to become the conduit between China risk and global capital markets, as well as between global risks and China’s institutional investor community.

As a gateway for developing an ILS market in China, both ILS risk transfer and investment, Hong Kong stands uniquely placed to become the linchpin to enable a raft of China-linked ILS and catastrophe bond activity in years to come.