The Monetary Authority of Singapore is providing strong support to encourage development of a local ILS sector

First published in Insurance Day.

Despite the substantial losses incurred during the hurricane season last year the cat bond and insurance-linked securities (ILS) market at the end of 2017 surpassed $31bn for the first time, according to Artemis.bm.

Although investors took a pretty big hit on hurricanes Harvey, Irma and Maria – three of the five costliest hurricanes in US history with total losses estimated around $125bn – they have stayed in the market, underlining the attractiveness of ILS as a route to growth. More positively, the challenges posed over the past 12 months have, in the eyes of many, shown the ILS market is both resilient and primed for further growth.

Up to now, Bermuda has been the established leader in this area, but new ILS centres are emerging to challenge its position. In the UK new regulations to create an ILS framework came into law in November. Neon became the first market participant to make use of them, setting up a $60m sidecar the following month. More are set to follow. Lloyd’s also looks set for a surge of activity on the back of these regulations, with Lloyd’s itself announcing it is exploring using ILS protection to provide cover for the Central Fund under the new regulations and major players Brit, Chaucer and Canopius also at varying stages of planning their own deals.

But a new challenger is emerging. The Monetary Authority of Singapore (MAS), the combined central bank and insurance regulatory authority, recently announced the city-state will pursue the development of its own regulatory framework for ILS transactions as it seeks to capture a share of a market predicted to grow to $90bn by 2019.

Singapore’s ambition

This is an ambitious move but not totally unexpected. The MAS has for many years held a long-term objective of becoming both Asia’s leading insurance hub and a global insurance marketplace. The announcement Singapore is establishing itself as a viable marketplace for the creation of cat bonds is simply the next step in the implementation of that plan.

While an initial regulatory framework was put in place by the MAS to accommodate cat bonds some years ago, none has ever been issued out of Singapore and the MAS aims to address this gap in its insurance offering and kick-start the development of its ILS market in a unique way.

On January 1 the MAS officially launched a grant scheme, which offers to fund 100% of an issuer’s upfront set-up costs – a major barrier to entry, especially for new sponsors – involved in issuing bonds in Singapore. The grant will apply in respect of ILS bonds covering a wide range of risks, not just those relating to natural catastrophes.

Although details of the grant scheme have yet to be fully articulated, it has been reported funding of up to S$2m ($1.5m) may be available for each qualifying transaction. Qualifying transactions comprise bonds valued at more than S$50m in which the notes will be listed on the Singapore stock exchange.

In a further bid to attract ILS business, the MAS has also established an alternative risk transfer working group comprising industry experts in the ILS space. This group will continue to advise the MAS on initiatives that aim to develop Singapore as an ILS hub.

Two-pronged rationale

The purpose of the ILS grant scheme is to catalyse the development of Singapore’s ILS market, which is driven by two factors. First, it can be viewed as a response by the MAS to market demand from both potential investors and issuers. Cat bonds have for some time now been seen by investors as an effective asset diversification instrument with low volatility and stable returns.

On the supply side Asia-Pacific issuers have expressed a growing belief in the advantages of developing a regional market for cat bonds that will benefit from a better understanding of the underlying risks.

Second, it should also be seen as a local response to local challenges. Much has been made of the need to address the protection gap in Asia, whereby a vast percentage of economic losses from disasters go uninsured. Over the past 20 years, Asia has accounted for almost half the world’s economic losses from natural disasters, valued conservatively at more than $900bn. Yet less than 5% of those economic losses in developing Asia were insured, compared with 40% in more developed countries. Developing alternative risk-transfer mechanisms like ILS can play an important role in meeting this challenge.

Further evidence of this was seen last year. In the aftermath of Hurricane Irma, the CCRIF SPC made payouts totalling $31.2m to six countries in the Caribbean within 14 days, underlining the key benefits of ILS products using parametric triggers: speed and certainty of settlement.

It is generally accepted the development of an ILS platform will not occur overnight and the establishment of a functioning market will take time as the necessary regulatory framework is established and refined and gradually the expertise necessary to provide services to potential sponsors is put in place.

However, the grant scheme, coupled with the commitment by the MAS to regulatory flexibility, is expected to lead to the first Singapore cat bond issued this year. This will send a clear and positive signal Singapore is arriving as a new ILS marketplace to compete with those jurisdictions that lead the way in ILS offerings at present.