First Singapore catastrophe bond start of ILS expansion in Asia-Pacific

The first catastrophe bond has been domiciled in Singapore under its new insurance-linked securities (ILS) laws, sponsored by Insurance Australia Group (IAG). The bond is part of IAG’s 2019 catastrophe aggregate reinsurance cover and represents the first such transaction by the company. GC Securities, the sole structuring and placement agent for the bond issued by Orchard ILS Pte Ltd, said it highlights the potential of the ILS market in the region, and is aligned with Singapore’s efforts to establish itself as a global hub for Asian risk transfer. The bond provides IAG with AUD75m of annual aggregate catastrophe protection for three years and is part of its aggregate sideways cover, which in total provides protection of AUD475m excess of AUD375m. GC Securities said Orchard ILS adds a new element to the company’s risk transfer programme and diversifies its suite of available reinsurance solutions. The Monetary Authority of Singapore (MAS) introduced the ILS grant scheme in February 2018, which funds upfront ILS bond issuance costs. “The scheme complements a progressive regulatory system that supports the incorporation of a purpose-built reinsurance entity in Singapore to securitise risks, and a tax framework that provides tax neutrality to the reinsurance entity and ILS investors,” said GC Securities. Ng Yao Loong, assistant managing director, development and international group, MAS, said: “The IAG cat bond issuance is a significant milestone in the development of Singapore’s ILS market. It demonstrates the growing capabilities of the Singapore financial sector in delivering such innovative capital market solutions. The (re)insurance industry, multilateral organisations and sovereigns are now able to tap additional risk transfer mechanisms to better address Asia’s disaster protection needs.” David Priebe, vice-chairman at Guy Carpenter, added: “Singapore’s ILS grant scheme is an excellent initiative that has played an important part in enabling this transaction to take place. We hope the pioneering work of IAG, MAS and GC Securities provides a springboard for greater use of insurance-linked securities to close the protection gap in Asia and promote sustainable economic development in one of the most dynamic regions of the world.” Ian Stewart, partner at Clyde & Co, said: “The emergence of an Asian ILS market is something we have been tracking for a while. The rise of alternative capital is a trend that shows no sign of reversing – the global catastrophe bond and related ILS market ended 2018 at a new record size – and Asian financial centres are keen for a piece of the action. Singapore has for a long time stated its long-term objective of becoming both Asia's leading insurance hub and a global insurance marketplace, and last year the regulator announced the introduction of grants to fund 100% of the upfront costs incurred in issuing catastrophe bonds out of the city-state.” He added: “Given the exposure of Asia-Pacific to natural catastrophes – it was one of the hardest-hit regions by nat cats in 2018, with economic losses of over $89bn – we expect this will be just the start. Further cat bonds will be issued out of Singapore and, in time, other ILS covering a wide range of risks. And, with the Hong Kong government also looking to set up an ILS market, we expect this to be a significant growth area across the region.”