Hong Kong’s third ILS brings diversification of risks
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The latest launch of insurance-linked securities in Hong Kong last month shows the city can cover a variety of risks, a lawyer has said.
The ILS issuance also helps generate confidence from global investors in Hong Kong, added Cindy Shek, partner at law firm King & Wood Mallesons.
Her comments came in response to Hong Kong’s third ILS in December in a form of a catastrophe bond amounting to $32.5m (£27.2m) to provide coverage for earthquake risks in China.
The bond is sponsored by Chinese insurer PICC Property and Casualty Company via a special purpose insurer, Great Wall Re.
The first cat bond, issued in October 2021, was sponsored by China Re through Greater Bay Re, to secure protection against losses inflicted by typhoons in mainland China. The second catastrophe bond, amounting to $150m, was issued in June 2022 and sponsored by Hong Kong reinsurer Peak Re via Black Kite Re to cover industry losses inflicted by typhoons in Japan.
Shek noted the latest ILS is the second issuance in Hong Kong sponsored by a major insurance group from Mainland China.
She said: “The issuance further develops the use of ILS for major Mainland insurers and fortifies Hong Kong as the premier location for such issuances.”
The Insurance Authority, the city’s regulator, welcomed the move. It “reinforces our crucial role as a risk management centre, serving unique needs of the country while offering full and open access by the rest of the world”, said Clement Cheung, chief executive officer of the IA.
Bermuda is known as one of the world’s major ILS markets but the Hong Kong regulator has stepped up efforts to make the city an attractive domicile for ILS issuances. Like the previous issuances, the latest bond is eligible for the Pilot ILS Grant Scheme, a programme rolled out by the government in May 2021, which offers up to HK$12m (£1.3m) for each application.
What are ILS and why are they attractive for insurers?
According to Shek, insurance-linked securities are financial instruments, usually issued in the form of bonds, that allow protection buyers such as insurers or reinsurers to transfer their insured risk to capital markets investors through securitisation.
“The protection buyers obtain capital for insurance protection, while the investors receive part of the protection buyer’s insurance premiums in the form of bond yield,” she said.
This instrument is attractive because it is an alternative way for re/insurers to obtain insurance protection and raise capital, Shek added.
“This allows the insurers to have greater insurance capacity and may sometimes be a cheaper option than obtaining traditional reinsurance.”
What is the outlook for the ILS market in 2023?
Shek said her firm is optimistic there will continue to be new and existing players joining the Hong Kong ILS market in 2023.
She said: “Despite the challenging global economy, we believe there will nonetheless continue to be interest in the market to deploy capital in the ILS market for diversification purposes, in addition to the release of capital from previous ILS issuances.”
Can Hong Kong beat Bermuda to become the world’s biggest ILS hub?
