ILS complementary for transferring, funding risks of large infrastructure projects: Singapore’s MAS

Insurance-linked securities such as catastrophe bonds are seen as a complementary mechanism to help provide the necessary capital to transfer and fund the risks of large infrastructure projects in Asia, according to Lim Cheng Khai of the Monetary Authority of Singapore (MAS).

Speaking at International Association of Engineering Insurers annual conference in Singapore earlier today, Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore highlighted the efforts being undertaken to attract more insurance-linked securities (ILS) business to the country and how this is relevant to Asia’s digital infrastructure and related power build-out.

“Look around Asia today. Almost everywhere, something is being built. New grids, new railways, new data centres, new power plants and renewable energy projects. The scale is considerable,” he explained. “The Asian Development Bank (ADB) estimates that Southeast Asia needs around US$210 billion of infrastructure investment every year, to maintain its economic growth, tackle poverty, and address climate impacts.”

Data centres are among the fastest growing infrastructure project and investment category in the Asian region, as the artificial intelligence build-out continues. Asia-Pacific alone is expected to require more than US$280 billion in additional data‑centre capacity by 2030, Lim Cheng Khai said.

He went on to highlight that someone needs to understand that risk, someone has to reduce it and ultimately capital needs to bear it, including insurance, reinsurance and ILS capacity.

“This is where the insurance industry has an important role to play. I would describe that role in three parts: understanding risk, reducing risk, and connecting risk with capital,” he stated.

With these being new exposures at considerable scale, he explained that it will take all parts of the insurance, reinsurance and capital markets to work to understand and transfer these risks to the correct forms of capital able to bear them.

“Even with the best engineering and risk management measures, some risks will remain, and must ultimately be borne. Given the scale of Asia’s infrastructure needs, and growing and increasing risk exposures, expanding and accessing new risk-bearing capacity will also be important,” he continued.

Adding that, “Traditional insurance and reinsurance will remain central. Alternative sources of capital can complement this capacity, by broadening the pool available to absorb risk.

“Insurance-linked securities or ILS provide one way of bringing insurance risk and capital markets together. Singapore has been steadily building out the ecosystem needed to support the growing needs for risk transfer.”

Highlighting Singapore’s track-record in catastrophe bonds so far and its plans to introduce a new protected cell company that could be utilised for more efficient ILS issuance, including reinsurance sidecars and collateralised deals, he further said, “These issuances create a complementary system to our existing network of insurers and reinsurers, where risks can be structured, modelled, transferred and funded through more channels.”

Further saying that, “At scale, large infrastructure projects exposed to low‑frequency, high‑severity risks make these alternative risk transfer arrangements particularly relevant. Such tail risks are less easily diversified within traditional insurance balance sheets.”

Lim Cheng Kai concluded, “Asia does not simply need more insurance capacity. It needs more “risk capacity”. The capacity to understand risk, to reduce it, to price it. And the financial capacity to absorb what remains.

“Engineering insurers have an important role to play to increase this risk capacity. You see the entire chain – from design to construction, operation and in some cases, failure. Your expertise to help stakeholders understand, reduce and mitigate risks determine how much resilience can be built into a complex project through the value chain.

“This perspective will be important, as Asia builds the infrastructure for its next stage of growth. And in Singapore, where capital, talent, and risk converge, we offer you the ideal platform to hold these conversations.”

Read other Artemis articles about the data centre risk transfer opportunity for ILS here.