Hong Kong’s Carrie Lam reaffirms intentions on ILS & cat bonds

Hong Kong is still aiming to establish itself as a local market hub for insurance-linked securities (ILS) and catastrophe bond business, with its key focus to help Chinese mainland insurance or reinsurance companies access the capital markets.

Hong Kong is uniquely placed to act almost as a type of transformer for insurance risks, helping companies operating within China to access the international capital markets for reinsurance or retrocession.

As a result, the country continues to work towards establishing a local market for insurance-linked securities (ILS), despite the other important issues that its legislative has had to deal with over recent months.

Speaking at a conference in Hong Kong yesterday, the government’s Chief Executive Carrie Lam highlighted the opportunities that the country’s insurance industry has today, not least from the significant projects being undertaken as part of the Belt and Road and Greater Bay Area developments.

Hong Kong already has a global status as a hub for insurance and reinsurance risk transfer, with many international firms represented in the city.

Key policy measures have been developed to ensure delivery of the Greater Bay are development plan, with Hong Kong’s insurance capabilities set to play an important role.

Among these are the ambition for Hong Kong to be able to support mainland Chinese insurance and reinsurance firms to access the capital markets, as a source of reinsurance or retrocession.

Lam said that her Central Government is focused on enabling Chinese companies to issue catastrophe bonds through Hong Kong.

“My Government is determined to help the industry seize these outsized opportunities,” she explained.

“In last year’s Policy Address, I announced that my Government would enable the issuance of insurance-linked securities, including “cat bonds”, in Hong Kong,” she continued.

Adding that, “Our goal is to introduce the relevant legislative amendments into the Legislative Council (LegCo) early next year.”

The target has always been to introduce the necessary legislation to support ILS vehicle set-up, domiciling and transactions, with the target being to get this into the 2019-20 legislative session.

So Hong Kong’s plans remain on target, despite the evident disruption seen in the country as protests and demonstrations have continued to flare up in recent weeks.

The government remains committed and clearly recognises the potential size of the opportunity, given the likely growing need for reinsurance of the Chinese domestic insurance industry.

“My Government is entirely committed to reinforcing Hong Kong’s role as a global risk management centre and insurance hub,” Lam explained.

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

In 2019, ILS was formerly added to the budget for the year and the development of legislation continues apace, to meet Lam’s timetable of having it introduced early in 2020.

Insurance-linked securities (ILS) funds and their investors are certainly 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 could be an enormous opportunity for the country to become the conduit for connecting Chinese risks and international capital.