The sight of the word “catastrophe” in the name of a financial product might not seem like an attractive pitch, but bonds issued under this moniker are beginning to attract attention.
There are signs that the market for so-called Catastrophe Bonds (Cat Bonds) could take off in Asia in general and Singapore in particular.
By way of background, Cat Bonds are risk-linked securities that allow vulnerable countries and reinsurance companies to tap the capital market to fund insurance risks arising from specific catastrophes, such as an earthquake or a typhoon.
The Lion City is committed to developing the market for Insurance-Linked Securities (ILS) as an alternative risk-financing solution, with the country’s financial regulator backing the initiative.
By all estimates, the ILS sector is poised for a period of substantial growth. Asia has accounted for almost half of the world’s economic losses from natural disasters in the last 20 years, according to data from the United Nations. And by 2030, economic losses in Asia-Pacific could exceed US$160 billion annually.
Disasters that are still fresh in many people’s memories include the category 10 Typhoon Mangkhut that slammed into Hong Kong last year and the devastating March 2011 earthquake and tsunami that struck Tohoku, Japan.
Worryingly insurance penetration remains low in Asia, with just 8% of natural catastrophe losses insured compared to 40% in more developed regions. Hence, there is a substantial opportunity for ILS to significantly reduce the protection gap and financial impact of natural disasters.
Singapore-based Simon Goh, head of insurance and reinsurance practice at law firm Rajah & Tann Singapore LLP, one of the drivers behind the ILS push, spoke with The Asset about the unbridled potential for this asset class in Asia.
Goh has worked on the first three Cat Bonds issued out of Singapore and is currently working on a pipeline of other deals. He is also an influential force in promoting Singapore to take up the mantle as the leading regional hub for ILS.
In an effort to mitigate the costs associated with issuing a Cat Bond, the Monetary Authority of Singapore (MAS) has introduced an ILS grant scheme and refined the relevant tax incentive schemes.
The schemes basically allow for reimbursement of up to S$2 million (US$1.48 million) of the upfront costs attributable to issuing an ILS bond in Singapore through a special purpose vehicle and income tax exemption on overseas noteholders, and on the income derived by that special purpose vehicle.
Goh is part of a MAS alternative risk transfer working group that came up with the ILS grant idea and assisted the regulator in drafting up the necessary incentive framework to bring ILS business opportunities to Singapore.
At present, Bermuda and the Cayman Islands lead the pack when it comes to the issuance of the instruments, while Ireland appears to be the main base for ILS in Europe. The Lion City has deep-rooted ambitions to be the leading Cat Bond jurisdiction in Asia.
Having cemented its place as the leading fintech and reinsurance hub in Asia, Singapore’s progressive regulator is keen to add another arrow to its growing sheaf of business opportunities.
The journey to issuance has not been an easy one for Goh and his associates, certainly not an overnight success.
“We've been trying to do this for quite a few years. I've had endless engagements and discussions going back to 2012. It's been a long process getting to this point,” says Goh.
He is now keen to engage local lenders and is active in educating them on the potential of ILS. Currently, it’s a foreign-bank realm as the market is well established in the US and Europe.
“We sense a lot of interest from the Singaporean banks because they want to see how they can get some skin in the game, get involved,” Goh adds.
There is expectation that this nascent market will be given further impetus by the Southeast Asia Disaster Risk Insurance Facility (SEADRIF), an initiative announced at the 21st ASEAN+3 Finance Ministers meeting held in Manila last May.
SEADRIF will be established to provide climate and disaster risk financing and insurance solutions including a regional catastrophe risk insurance pool for the participating member states. An announcement confirming this move is imminent.
Hong Kong also harbors ambitions to be a focal destination for the ILS market and be a specialist insurance hub, however recent political events may have cast a shadow on those aspirations.
