Hong Kong’s Carrie Lam highlights ILS resilience through pandemic as opportunity

Carrie Lam, Chief Executive of the Government of Hong Kong, has highlighted catastrophe bond market growth in 2020 and a buoyant outlook for insurance-linked securities (ILS) as an opportunity for the Special Administrative Region as it moves towards enabling issuance of new ILS securities.

The Hong Kong Special Administrative Region (HK SAR) of the People’s Republic of China has been preparing to allow insurance-linked securities (ILS) issuance from its financial market for a number of years now, seeking to establish itself as a venue 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 later said it was targeting a full introduction of the new ILS regulatory regime by the end of 2020 or early 2021.

That target remains, although shifted into early 2021 and, speaking at an event yesterday, Carrie Lam noted “the growing significance of insurance amidst an unprecedented public health crisis” and explained the opportunity to “transform Hong Kong into a regional insurance hub and global risk-management centre.”

2021 is key for Hong Kong’s insurance and reinsurance market ambitions, with a number of initiatives set to come to fruition.

These include tax concessions for specialty insurance and reinsurance companies, as well as the development of the countries insurance-linked securities (ILS) legislation and regulatory regime.

Lam highlighted the resilience of the insurance-linked securities (ILS) market through the COVID-19 pandemic, which serves to further underline the importance of the sector and the opportunity in it for Hong Kong.

“The trail of disruptions left by COVID-19 is a sobering reminder that we are all susceptible when confronted with natural perils,” Lam explained.

“The total insurance-linked securities issued in the first half of the year has already exceeded the total of last year – and by about 20 per cent,” she continued. Adding that, “It clearly suggests that this alternative investment tool has thrived, rather than faltered, in a world beset by uncertainties.”

Lam further explained that, “The Central Government acknowledges Hong Kong’s ability to offload the risks of Mainland insurers into the capital market by issuing insurance-linked securities like catastrophic bonds.”

Before reiterating her government’s previous target, “We responded by amending our law, again in July, to provide a framework for issuing insurance-linked securities. We are now looking forward to implementing the new regime in early 2021.”

So the target remains, for Hong Kong to be ready to host its first ILS or catastrophe bond issuances early next year.

As yet, no announcement has been made about any grant program, similar to Singapore, or reduction in costs to attract issuers. But there is every chance one is announced, to at least put Hong Kong on a level playing field with Singapore when it comes to issuance costs for sponsors.

But the opportunity really lies in encouraging Chinese insurers to secure reinsurance, or indeed the Chinese government or provinces to look to secure disaster insurance protection, from the capital markets using catastrophe bones issued out of Hong Kong.

Hong Kong began developing legislation to allow for the establishment of reinsurance related special purpose vehicles for use in ILS transactions and for catastrophe bond issuance in 2018.

Insurance-linked securities (ILS) funds and their investors have always been keen to access Chinese insurance risks and if mainland Chinese insurers can more directly cede risks to the capital markets through Hong Kong domiciled structures it is a significant opportunity for the country to become the conduit for connecting Chinese insurance risks with international capital markets.