Hong Kong’s ILS regime must show its competitiveness: ILS Asia 2021

While the Hong Kong regulator’s insurance-linked securities (ILS) grant scheme is expected to attract sponsors to the region, the new regime must show its competitiveness against existing and established ILS domiciles, say industry experts.

Hong Kong’s emergence as a new Asian domicile for the issuance of catastrophe bond and ILS transactions provides sponsors with another choice.

To help the new ILS platform gain momentum, issuers are able to take advantage of a grant scheme designed to cover some of the issuance costs of a catastrophe bond.

As in Singapore, the grant scheme is expected to play a key role in attracting cedents from around the world and not just Asia.

“The grant scheme will be one thing, but you need to be able to show competitiveness against platforms such as Bermuda, Singapore,” said Andy Souter, Co-Head of P&C, Peak Re. “And what do we mean by that, well, it’s not just cost, but we’ve got to think about the process, the simplicity, the time to get to market.”

Souter’s comments came during the opening panel of Artemis’ virtual ILS Asia 2021 event, held in association with our headline sponsor AM RE Syndicate Inc. During the session, participants explored the new ILS regime in Hong Kong.

This panel can now be viewed on-demand here.

From a legal perspective, Ricky Spitzer, Partner at global law firm Mayer Brown, explained that the biggest issue for sponsors entering a new ILS jurisdiction is the unknown.

“Obviously, there’s a new regime being put in place and the regulator is very focused on creating an efficient process that makes sense. But if you’re a sponsor, you don’t always want to be the first going into a new jurisdiction, because you don’t know what you’re getting involved with until you get started, and then sometimes it’s better for someone else to go through the pain of that first process,” said Spitzer.

Drawing on Bermuda and Singapore as examples, Spitzer went on to explain that this is not a barrier and is something that you can get over, but stressed that it is something potential issuers will consider.

“I think a big component to that is timing. I think one of the things that we’ve seen over the past few years, and frankly, even more so this year, ILS is simply an alternative to traditional reinsurance. And companies are managing their capital, they’re managing their reinsurance towers, and they’re looking at what is the most efficient, what is the cheapest,” said Spitzer.

Later adding, “I think like anything, the first few deals that go through and the experience of companies, that is really going to guide, I think, the success or not as much success of a new domicile for ILS.”

The first deal to be issued out of Hong Kong is poised to be Greater Bay Re Limited, sponsored by China Re, marking just the second time the carrier has entered the catastrophe bond market after its $50 million Panda Re issuance in 2015.

Commenting on this deal and the region’s ILS framework more broadly, panellist Simon Lam, Executive Director, General Business, Hong Kong Insurance Authority, explained to the audience how legal intricacies and issues around timelines were contemplated from the outset.

“Obviously we are putting ourselves in potential sponsors shoes to say why Hong Kong? Why not Singapore? Why not Bermuda? If you look at how things are being done so efficiently, and it’s basically proven.

“So we tried to address this right at the outset, to work with all the ILS market stakeholders to make sure that all the key success factors, and also the key expectations are being incorporated in the way that we manage our process,” said Lam.

Lam noted that while there is always a learning curve, Hong Kong’s aim is to close the gap as soon as possible as quickly as possible.

“So, as I mentioned in our interview, we are already working on the first case, so that would be a test case. And we are also expecting that the ILS community will be looking at these first couple of issuances and to see for themselves how effective and how efficient we will be.

“Hong Kong is already well known for our open and mature capital market, a sound legal system, which Ricky already mentioned, and also a wealth of professional talent with international perspective,” said Lam.

The arrival of Hong Kong also provides ILS investors with another domicile and many will be hoping for increased access to diversifying risk in places like China, which is experiencing rapid insurance market growth and accumulating risks.

According to Stefan Kräuchi, Founder of ILS Advisers, since Hong Kong announced its ILS intentions the curiosity for ILS as an asset class both locally, and in mainland China has increased.

“We have had numerous investors contact us to better understand the asset class. While they do understand the benefits of a diversifying asset class between their investment portfolios, the actual take-up rate has lagged. And, as a result probably from the difficulties post 2017 and 2018…

“This is a region, of course, as you know that has a significant amount of natural catastrophes like typhoons, earthquakes and floods, which historically have caused a relatively low insurance loss impact. But at the same time, despite the low impact in terms of insured loss, it had quite an impact in terms of the perception of investors of Asia as a location to invest in perils sourced out of Asia,” said Kräuchi.

Despite this, Kräuchi feels that issuances from local sponsors that regional investors are familiar with, something highlighted throughout ILS Asia 2021, would heightened investor willingness.

“Additionally, I think knowing that there is a government sponsored grant scheme involved, which directly enhances the return potential, we feel that this has increased the interest in at least for some of the investors looking at the asset class,” said Kräuchi.

You can watch this session of ILS Asia 2021 on-demand here.

As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.

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