As Hong Kong continues to focus on developing insurance-linked securities (ILS) as a key market segment, a position paper from advisory body the Financial Services Development Council states that further integrating ILS products into its own investment portfolios would help the government encourage investors to consider allocating to the asset class.
So far there have been six catastrophe bond issuances that have fallen under Hong Kong’s insurance-linked securities (ILS) regulatory regime, four direct issues from special purpose reinsurance vehicles domiciled in the country and two World Bank issues that have seen their notes listed on the exchange there.As we reported recently, the government of Hong Kong has recently demonstrated its commitment to fostering ILS as part of its reinsurance and investment marketplace by announcing a further three year extension to its Pilot ILS Grant Scheme, in order to encourage potential cat bond sponsors there.
But the government is also keen to foster a local investment community around insurance-linked securities (ILS) as well.
The FSDC position paper provides some ideas for areas of focus, to expand awareness of the catastrophe bond and ILS investment opportunity.
Part of which could be through allocations to the asset class by the government itself, the paper states.
“To build confidence and knowledge in ILS products, the Government and the HKMA (Hong Kong Monetary Authority) should exemplify their dedication to supporting the expansion of the ILS market,” the position paper suggests.
Adding, “This could be done by further integrating ILS products into their investment portfolios, creating a signalling effect on the market, and encouraging other eligible investors to consider incorporating ILS within their investment portfolios.”
On top of that, the FSDC position paper calls for minimum investment sizes for cat bonds and ILS to be smaller, to enable broader investor participation.
The paper says, “Furthermore, although the minimum investment size for each ILS transaction has been reduced from the initial proposal of US$1 million or equivalent to the current requirement of US$250,000, potentially lowering or eliminating the minimum investment size would further foster a vibrant market. This reduction or adjustment would encourage eligible investors to explore ILS investments, comprehend associated risks, and assess potential returns, ultimately aiming to attract a broader range of investors to participate in the ILS market.”
There is also a goal to promote financial literacy and awareness of insurance-linked securities (ILS), through education and promotion, especially to Hong Kong’s high-net-worth and family office investor community, the FSDC states.
The FSDC paper says, “Aside from sponsors, investors and financial institutions also play critical roles in fostering the development of the ILS market. Recognising the relatively nascent ILS market in Hong Kong, raising investor and industry awareness and knowledge of ILS, alongside advocating ILS investments across the investment portfolios of the Government and public sector, are crucial to bolster market demand.”
In addition, the FSDC explained that the government of Hong Kong could review the scope of the ILS Grant Scheme “as a part of cultivating a conducive ecosystem for developing the segment.”
The FSDC believes that financial innovations, such as catastrophe bonds and ILS, “hold significant promise for market diversification and overall sectoral growth,” for Hong Kong.
Identifying both ILS and reinsurance as “two areas where the industry aims to intensify its development efforts.”
Once again, the proximity to mainland China as a source of potential ILS sponsors and risk is highlighted.
“Hong Kong’s geographical proximity to Mainland China offers distinct advantages for ILS development. The city can serve as a gateway for Mainland insurers to tap into global capital markets, while investors can benefit from the region’s economic growth expansion and increasing demand for innovative risk management solutions. Additionally, the awareness of climate-related risks continues to grow, ILS are increasing recognised as an effective mechanism for businesses and investors to mitigate disaster risks through alternative financing,” the FSDC paper explains.
The FSDC notes the importance of engaging service providers and stakeholders, as well as having that expertise locally in Hong Kong.
While it also states, “Hong Kong should attract ILS asset management flows and encourage stakeholder collaboration to build a dynamic ecosystem.”
The commentary from the FSDC paper suggests the focus on developing Hong Kong as an ILS hub is set to continue, perhaps intensify.
While the encouragement for the government to invest in ILS, so as to build awareness and encourage investor participation is an intriguing one.
While the focus on mainland China as a source of risk aligns with recent comments from the Insurance Authority of Hong Kong.
Stephen You, Chairman of the IA recently said, “In relation to climate change, we will strive to forge an ecosystem that captures climate data harvesting, catastrophe risk modelling, parametric product design, education of institutional investors and issuance of insurance-linked securities by pooling together relevant risks borne by all 11 cities in the GBA,” referring to the Greater Bay Area.
