2 weeks ago
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While the Asia region is expected to see steadily increasing activity in catastrophe bonds and other insurance-linked securities (ILS), Fitch Ratings believes the participation of regional investors needs to increase, while continued development of regulatory frameworks and local expertise is also required.
Fitch Ratings said that it anticipates, “a gradual increase in insurance-linked securities (ILS) transactions in Asia, supported by rising investor interest and emphasis on climate change mitigation.”
The fact the region now has two hubs for issuance of insurance-linked securities (ILS), in Singapore and Hong Kong, is seen as a positive and a factor that can “bolster market growth and stability.”
But the rating agency says that, “challenges persist, including the need for further development and increased participation from Asian investors.”
Enhancing the potential for insurance-linked securities (ILS) activity in Asia, are the regions “expansive property industry, fixed-income markets and growing focus on climate change,” Fitch said in a report.
But regulatory initiatives and product education need time to take effect, meaning that, “As the market matures, developing local expertise, regulatory frameworks, and investor participation will be essential to fully realise the potential of the Asian ILS market,” Fitch explained.
The issuance hubs, of Singapore and Hong Kong, “bring together Asian investors and sponsors who possess a deep understanding of the region’s unique characteristics and market dynamics, fostering local expertise,” the rating agency continued.
So far in 2024, there have been three 144A catastrophe bonds issued out of Singapore.
First, the March issuance of the $100 million Kizuna Re III Pte. Ltd. (Series 2024-1) catastrophe bond for Tokio Marine & Nichido Fire Insurance Co. Ltd., a five-year rolling aggregate Japan earthquake deal.
Next, also in March, was the $200 million Tomoni Re Pte Ltd. (Series 2024-1) catastrophe bond, sponsored by Mitsui Sumitomo Insurance Co. Ltd. and Aioi Nissay Dowa Insurance Co., Ltd., which provides two of the Japanese insurance carriers owned and operated by MS&AD Insurance Group Holdings with four years of reinsurance against losses from certain Japanese typhoons, floods and earthquakes.
In April 2024, Zenkyoren was next to sponsor a cat bond out of Singapore, with the $150 million Nakama Re Pte. Ltd. (Series 2024-1) transaction, that provides roughly fives years of aggregate Japanese earthquake reinsurance protection.
Also notable from Singapore this year was the latest Phoenix 2 Re Pte. Ltd. (Series 2024) quota share and securitised sidecar transaction for MS Amlin Asia Pacific, that came to market in January at $35.35 million in size.
From Hong Kong this year, we have seen the the World Bank supported $150 million IBRD CAR Jamaica 2024 cat bond having its notes listed there, which provides four years of parametric named storm protection to the Government of Jamaica. This was the second World Bank facilitated cat bond to list its notes on the exchange in Hong Kong.
Both Singapore and Hong Kong continue to work to attract more ILS activity to their respective hubs, providing valuable education and support to local potential issuers, investors and service providers across the Asia region.
Fitch Ratings said, “To further encourage market growth, subsidies and incentives are provided to ILS participants to help cover the costs of structuring deals. These hubs also emphasise regulatory “ease of use,” a benefit that will become more apparent over time as the number of executed deals increases.”
But the rating agency added that, “Nevertheless, the Asian ILS market continues to face challenges.
“In the May 2024 World Bank issuance for Jamaica, only 3% of the 15 investors were located in Asia, while 40% and 43% were from Europe and the US, respectively, with the remainder in Bermuda.
“This highlights the need for further development and participation from the Asian region.”
Interest from investors in the Asia region has been on the rise over the last year, clearly evidenced at our ILS Asia 2024 conference in Singapore where one-third of attending organisations being representatives from regional investors or allocators.
It takes time to convert investor interest into allocations in the cat bond and ILS asset class, but the signs are there that increasing interest will ultimately result in a better-informed regional investor community, so we do expect to see more Asian capital entering the ILS market over the coming years.
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