Singapore’s ILS market has grown since its introduction in 2018, and after recently extending the grant scheme until the end of 2022, industry professionals suggest that the market will continue to expand beyond this new deadline
Singapore is the largest Asia Pacific (APAC) captive domicile as well as one of the largest reinsurance centres in Asia. The sovereign island city-state in maritime Southeast Asia has branched out to create a new and powerful reputation in the insurance-linked securities (ILS) sector.
In February 2018, the Monetary Authority of Singapore (MAS) introduced the ILS grant scheme, which seeks to fund up to 100 per cent of upfront ILS bond issuance costs in Singapore.
The scheme was developed in consultation with industry experts and is designed to catalyse the development of Singapore’s ILS market.
In March 2019, the first catastrophe bond was issued under Singapore’s ILS regulatory regime.
The bond was sponsored by Insurance Australia Group (IAG), while GC Securities, a division of Marsh and McLennan Companies, acted as the sole structuring and placement agent.
The bond provides IAG with AUD 75 million of annual aggregate catastrophe protection for three years and is part of its aggregate sideways cover, which in total includes the protection of AUD 475 million excess of AUD 375 million.
James Rayner, vice president, global client development, Crawford & Company, explains that Singapore has made a positive start in its bid to establish itself as a regional centre for ILS and alternative risk transfer, having supported at least nine catastrophe bond issuances since the introduction of its ILS regime. Reflecting on the first catastrophe bond, Orchard, which is sponsored by the IAG, Rayner explains that its cat bond was triggered and exhausted by the 2019/2020 Australian bushfires.
The bushfires blazed for months in large parts of Australia, destroying around 126,000 square kilometres of land and killing 33 people.
Since the IAG bond, there have been seven more catastrophe bonds issued by special purpose reinsurance vehicles (SPRV) established in Singapore.
Stuart Herbert, head of Marsh Captive Solutions, Asia Pacific region, explains: “Following the incorporation of the first SPRV in Singapore in respect of issuance of the ILS transaction in December 2018, Marsh has seen an influx of opportunities over the last 18 months.”
He suggests that in the short span of over a year, the MAS “has certainly gained more experience and understanding of ILS transactions”.
Herbert notes that the MAS has been revising and updating its regulations with understanding, discussions, and feedback to further improve the SPRV/ILS process.
“Further, the experience obtained from various SPRV/ILS deals in Singapore has enriched related professional service providers such as management services, local legal counsels, shares trustee, auditors, and in turn nourished the ILS industry in Singapore,” Herbert adds.
Future
The ILS grant scheme offered by the MAS covers the upfront costs of issuing a cat bond, is a key incentive for issuers to issue cat bonds in Singapore.
Rayner notes that this incentive was due to expire at the end of 2020 but was extended until 31 December 2022.
The Singapore Stock Exchange (SGX) has also been working on reviewing and revising its regulations in order for the notes issued to be listed on SGX.
Herbert explains: “With the determined efforts of the Singapore government to promote and support ILS, continuing development in its regulatory environment, as well as better established professionals locally, it is anticipated that Singapore’s ILS market will continue to expand.”
Over the next few years, the extension of the ILS grant scheme, in addition to Singapore’s growing alternative risk expertise, is expected to make Singapore an increasingly attractive location for ILS.
Rayner comments: “The Asian ILS market, in general, should continue to grow as Asian risks offer an attractive diversification away from mainstream US natural catastrophe risk, and Singapore is taking a proactive role in raising data quality levels in Asia through its support of the NatCatDAX Alliance.”
Singapore can help develop the Asian ILS market further by considering how to offer a broader range of Asian ILS products to investors, according to Rayner. He outlines: “This could include supporting structures such as collateralised reinsurance, sidecars, industry loss warranties (ILWs) or protected cell structures to allow issuers to ring-fence multiple issues, and broadening the risks on offer beyond traditional natural catastrophe risk into emerging ILS areas such as cyber or terrorism, for example.”
Steve Tunstall, general secretary, Pan-Asia Risk and Insurance Management Association (PARIMA), says “it seems inevitable” that this market will grow, at least in the short while the grants are available.
“Whether there will be sufficient momentum for the market to become self-supporting after the grants expire remains to be seen,” he explains.
Although the ILS industry in Singapore is at an introduction stage, Herbert believes that given Singapore’s stable political and economic and financial conditions, along with a reputable regulatory environment, that the ILS space will likely continue to grow over the next three years.
