Clyde & Co
The Monetary Authority of Singapores is taking steps towards its goal of becoming a global insurance marketplace in 2018 by establishing itself as a positive environment for creating catastrophe bonds. Ian Stewart, partner at Clyde & Co, explains more
The Monetary Authority of Singapore (MAS) aims to establish itself as both Asia’s leading insurance hub and a global insurance marketplace. What are they doing and how far away are they from achieving that goal?
Singapore has pursued a strategy of encouraging the development of a thriving and competitive local and international insurance and reinsurance market and has gone a considerable way towards establishing itself as both a regional leader and credible participant in the global marketplace.
Whereas other Association of South East Asian Nations’ (ASEAN) markets continue to limit participation, whether by refusing to issue new licences or limiting or reducing the level of permitted foreign investment, Singapore has kept its doors open, actively encouraging new entrants and foreign participation.The regulatory regime that has been implemented is transparent and whilst it continues to evolve, has remained relatively stable for a number of years, thereby providing certainty to the market.
The establishment of the Lloyd’s Asia platform in Singapore has facilitated its rise as a major reinsurance hub and the MAS has taken a leading role in the development of a more integrated ASEAN insurance market. It established an attractive offering for captive insurance and has become a leading regional centre for captives.
And more recently, the MAS has positioned itself to both facilitate and take advantage of the transformation of the insurance industry via financial technology and insurance technology innovations.
What role does this new ILS grant scheme have in the achievement of that goal?
The purpose of the insurance-linked securities (ILS) grant scheme is to ‘catalyse’ the development of Singapore’s ILS market. The initiative has arisen in response to market interest in the development of a regional ILS platform.
Cat bonds have for some time now been seen by investors as an effective asset diversification instrument with low volatility and stable returns and 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 deeper understanding of the underlying risks.
In essence, the development of a Singapore ILS market can therefore be viewed as a regulator’s response to market appetite and a broader acknowledgement that, in order to remain competitive on a global stage, Singapore must continue to develop products and markets that offer flexibility in addressing changing risk transfer and investment requirements.
Who will be eligible for the grants and how will they work?
The grant will be made available to all Singapore insurers and will apply to ILS bonds covering all forms of risks, not just those relating to natural catastrophes.
The grant scheme officially commenced on 1 January this year, and provides for all of an issuer’s upfront set up costs involved in issuing bonds in Singapore to be met by the grant. By removing the upfront costs of issuance, Singapore will stand a much better chance of bringing some ILS business to the country, as costs of issuance are often a major barrier especially for new sponsors.
Further specific details regarding the scheme have yet to be disclosed.
It should be noted that in addition to the grant scheme, the MAS has also established an alternative risk transfer working group made up of industry experts in the ILS market.
This working-group will continue to advise the MAS on initiatives that aim to develop Singapore as an ILS hub.
Why are they targeting the ILS market specifically?
The development of a local ILS platform can be viewed as a response by the MAS to market demand from both potential investors and issuers.
With some predicting that the global ILS market may be valued at $90 billion by 2019, it is also a recognition by the MAS that in order to remain competitive as a global reinsurance hub, it needs to position itself to participate in what is a rapidly growing business sector.
However, it should also be seen as a local response to local challenges. Much has been made of the need to address the ‘Asian protection gap’, whereby a vast percentage of economic losses from disasters go uninsured. Over the last 20 years, Asia has accounted for almost half the world’s economic losses from natural disasters, valued conservatively at more than $900 billion.
Yet less than 5 percent of those economic losses in developing Asia were insured, compared with 40 percent in more developed countries. Developing alternative risk transfer mechanisms like ILS can play an important role in meeting this challenge.
What are the targets/predictions for ILS in Singapore in 2018?
It is generally accepted that the development of an ILS platform will not occur overnight and that 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.
The issuance of the first local cat bond in Singapore during 2018 would be regarded as a vindication of the scheme and would create significant optimism for future growth.
With the emergence of London as a potential ILS player as well, is the market becoming more competitive?
The ILS market is definitely becoming more competitive. And with the prediction that the global value of such products could hit $90 billion by 2019, it stands to reason that leading insurance hubs around the world will seek to secure an increasing market share.
