Hong Kong targets PCC structure for efficient ILS issuance, wants to invigorate ILS investment

Hong Kong’s new five-year plan highlights insurance-linked securities business and the ongoing development of its ILS regulatory regime as key strategic goals, with a PCC structure being explored for more cost-efficient ILS and catastrophe bond issuance, as well as ways to invigorate the investor side as well.

The inaugural Five-Year Plan of the Hong Kong Special Administrative Region (HKSAR) shows the continued determination of the government and authorities to foster an ILS market and grow it into a meaningful piece of its overall insurance and reinsurance activities.

Since launching its ILS regulatory regime in 2021, Hong Kong has hosted a number of catastrophe bond transactions, more as listing location than as actual issuance domicile, but steady progress has been made.

In addition, a number of catastrophe bond sponsors from mainland China have come to market for the first time through Hong Kong, as well as the Hong Kong headquartered global reinsurance firm Peak Re.

But Hong Kong continues to have ambitions to enhance its ILS regulatory regime and to offer more options for protection buyers to access reinsurance capital markets through its ILS legislation and structures.

The five-year plan calls out ILS as an area for ongoing focus and development, “We shall strengthen Hong Kong’s role as an international risk management centre. We endeavour to deepen regulatory cooperation with the Mainland and overseas markets, and fully leverage our competitive edge in the international insurance, reinsurance, and capital markets to advance the synergised development of traditional insurance and non-traditional risk management tools.

“These will enable us to unleash the synergy effect of multi-layered risk transfer and pooling mechanisms through insurance-linked securities, captive insurers, and a marine specialty risk pool, consolidating our strategic role as a regional and global catastrophe and specialty risk management hub.

“In the meantime, we will strengthen the insurance industry’s risk-based capital regime, promote the investment of insurance capital in infrastructure projects in Hong Kong and the Mainland, and enhance the industry’s risk prevention and control capabilities as well as risk management culture.”

Key, among planned initiatives in ILS, is the development of protected cell company (PCC) legislation, to allow for more efficient ILS transactions, presumably including collateralised reinsurance and private cat bonds, as well perhaps as reinsurance sidecar arrangements.

Legislative amendments are being explored to “introduce a protected cell company (PCC) structure to lower the costs of establishing captive insurers and issuing ILS,” the plan details.

Recall that, just recently Singapore launched a consultation process on the regulatory framework for a Protected Cell Company (PCC) structure that can be used for collateralised reinsurance arrangements, including sidecars, and efficient insurance-linked securities (ILS) issuance.

It makes that Hong Kong would also see this as a priority, as it is perhaps a more likely source of ILS activity growth than purely in 144A catastrophe bond issuances, where other domiciles remain more dominant like Bermuda.

Alongside continuing to promote the development of the Hong Kong insurance-linked securities market, the government and regulator intends to further review investor restrictions to “invigorate the ILS fund trading market.”

Which is interesting, as today Hong Kong is not a hub known for ILS investing or ILS investment management, but perhaps sees an opportunity to develop that side of its capital market as well.

The five-year plan is just the latest signal that Hong Kong’s most senior government ministers continue to support the push to bring more ILS market activity to the SAR, so those efforts look set to persist.