Jacqueline Loh: Unlocking insurance linked securities growth
through Asia
Opening speech by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority of
Singapore, at the Artemis ILS Asia 2018 Conference, Singapore, 12 July 2018.
* * *
Distinguished guests, ladies and gentlemen, a very good morning to all of you.
2 I am very pleased to be here today at the Artemis ILS Asia 2018 conference. The third time that
it is held in Singapore, the conference is a good market barometer that Insurance-linked
securities (ILS) are becoming more prominent in Asia, and prospects are bright for the coming
years.
Alternative Capital becomes Mainstream
3 We are gathering here at an exciting time for the global Insurance-linked securities industry,
with alternative capital being an increasingly important part of an insurer's risk transfer toolkit.
Born from a need to bring additional loss absorbing capacity following the devastating disasters
in the mid-1990s - Hurricane Andrew and the Northridge earthquake in California - the
development of the ILS market has been a remarkable story of innovation.
4 Twenty years later, the global ILS market continues to thrive. Emerging from the HIM (Harvey,
Irma and Maria) hurricane losses, earthquakes in Mexico and wildfires in California, 2017 has
been widely billed as the Global Financial Crisis equivalent for the ILS market, as it registered the
largest losses in more than a decade. Yet, the ILS market has remained largely resilient. Growth
remains strong in 2018, with issuance of catastrophe bonds the most prevalent type of ILS, more
than doubling compared to the same period last year. ILS rates have stabilised after having risen
post these disasters, and subsequently dipping with the influx of capital. Catastrophe bond
managers have continued to launch new ILS funds in response to strong demand from investors.
Today, the ILS market has grown to the point where it now provides 15% of global catastrophe
reinsurance capacity.
5 Let me highlight 2 key reasons why ILS has been growing over the years:
a. First, it offers sponsors a viable alternative to enhance risk transfer programs. ILS
provides diversification of the source of risk capital, multi-year coverage, and also
competitive rates compared to traditional reinsurance.
b. Second, there is strong demand from investors given ILS' low correlation with other
asset classes, and low volatility. To illustrate, the Swiss Re Global Cat Bond Index has an
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annual volatility under 3% , much below the 15% and 5% for equities and corporate bonds
respectively. In addition, catastrophe bonds also offer ILS investors a liquid investment
option as they can be traded on the secondary markets.
6 The ILS market has continued to innovate in response to the growing and changing needs of
sponsors and investors. This innovation is happening along different dimensions, namely in risk
types, geography, and structures.
a. On risk types and geography.
i. ILS has now expanded its scope to cover other lines of business like operational
risks and mortgage risks. Once the preserve of large and complex risks such as
property catastrophe and mortality risks with a long history of well modelled losses, it
is now considered for lines previously deemed uninsurable, such as cyber.
ii. Second, the catastrophe ILS market is no longer dominated by wind exposure in
the United States, and spreads over perils like earthquakes and floods in other
regions such as Japan, Europe and recently Latin America.
b. On ILS structures, the market is moving beyond ILS bonds and increasingly issuing
collaterised reinsurance, sidecars, an d industry loss warranties.
Asia is the next frontier for ILS growth
7 As ILS funds continue to seek diversification opportunities for their investment portfolios, Asia is
poised to be the next frontier for ILS growth. At first glance, the economics of ILS in Asia appear
to be challenging. Asia is still a developing market with low insurance penetration. Traditional
reinsurance coverage is still competitive in the region. Apart from more mature markets such as
Japan and Australia, a large part of Asia has yet to tap the capital markets for their growing
insurance needs.
8 Yet, it is likely that ILS will achieve a breakthrough in the coming years, as the protection gap in
Asia widens. Over the last 20 years, Asia has accounted for almost half of the world's economic
losses from natural disasters, amounting to more than US$900 billion. Economic losses in Asia
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Pacific is projected to exceed US$160 billion annually by 2030 . The protection gap in Asia is set
to widen for the following three reasons:
a. First, the frequency and severity of natural catastrophes is increasing. According to UN
data, the number of natural disasters in the Asia-Pacific has increased from an annual
average of 44 disasters in the 1970s to 146 in the 2000s.
b. Second, the wealth and value of assets at risk have also increased. Strong economic
growth in Asia and growing urbanisation has led to the rise of small highly-populated
megacities, many of which lie along areas that are exposed to natural perils.
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c. Third, insurance penetration is still low in Asia. Just over 8% of natural catastrophe
losses are insured in Asia as compared to 40% in developed regions.
9 ILS, together with other risk management solutions including reinsurance and government
pools, have significant scope to play a larger role in reducing the financial impact of natural
disasters. Globally, UK, Spain and France have already established natural catastrophe
schemes that tap on a combination of traditional and alternative capital.
10 There are positive signs of change, with ASEAN making a push to address its rising
exposures to natural catastrophe. Let me provide some examples of recent developments:
a. ASEAN has commenced a holistic approach to disaster risk management through the
ASEAN Disaster Risk Financing and Insurance (ADRFI) Programme. The Programme will
strengthen ASEAN's disaster risk management capabilities through:
i. Improving data required for assessing disaster risk exposure and financing
solutions.
ii. Enhancing knowledge on disaster financing solutions through capacity building.
iii. Harnessing risk advisory expertise to provide advice and design risk financing
solutions. These building blocks will enable ASEAN members to better understand
their needs and design appropriate disaster risk financing programs including
through transferring risk to capital markets.
b. Governments are increasingly using alternative risk transfer mechanisms such as
government pools, like the Philippines parametric disaster insurance pilot, the Thai crop
insurance scheme and the Vietnam pilot agriculture programme. In May this year, the
establishment of the Southeast Asia Disaster Risk Insurance Facility (SEADRIF) in
Singapore was officially announced. As ASEAN's first regional catastrophe risk facility,
SEADRIF will start by establishing a regional catastrophe pool to insure the flood risks of
Lao and Myanmar. SEADRIF will also seek to sponsor different risk management
strategies, including issuance of catastrophe bonds, or to act as a reinsurer to national
catastrophe pools, to further strengthen the region's financial resilience to disaster risks.
Supporting ILS growth in Asia through Singapore
11 The presence of a full-fledged ILS market and ecosystem in the region will encourage the
development of this risk financing instrument. However, there is currently no established market
in Asia for ILS.
12 As the leading financial centre in Asia, Singapore is well positioned to fill this need:
a. We are a well-established regional insurance hub that offers a comprehensive spectrum
of re/insurance activities through a vibrant ecosystem of re/insurance players and service
providers. There is also a strong catastrophe risk ecosystem to support ILS issuances,
with the leading catastrophe modelling firms with ILS expertise present in Singapore, and
research institutes such as the Earth Observatory of Singapore and the Institute of
Catastrophe Risk Management, to support data and modelling needs. Singapore also aims
to serve as the Asian knowledge centre for new and emerging risks.
b. Singapore is well recognised as a premier asset management centre in Asia, with deep
capabilities across both traditional and alternative asset classes. As the gateway to
alternative capital providers such as pension funds, family offices, and hedge funds in
Asia, ILS fund managers are increasingly assessing Asian investors through Singapore.
c. Singapore has a deep debt capital market, with a broad range of bond offerings to
provide collateral for and to support innovative ILS products and structures. SGX, a
dynamic stock exchange, can facilitate bond trading.
13 Second, Singapore has ready corporate, regulatory and tax frameworks to facilitate ILS
issuances:
a. ILS instruments can be issued and regulated in Singapore via the Special Purpose
Reinsurance Vehicle ("SPRV") regulations, which allows sponsors to readily securitise
insurance risks in Singapore.
b. To provide tax neutrality for ILS vehicles, Singapore offers the Approved Special
Purpose Vehicle ("ASPV") scheme.
14 Third, MAS has taken steps nurture the growth of the ILS market in the region.
a. MAS launched the ILS grant scheme in Jan this year, which will fund 100% upfront
issuance costs of catastrophe bonds in Singapore, up to S$2 million. The aim of the
scheme is to defray the frictional costs of catastrophe bonds issuances.
We have received keen interest from the region, with a healthy pipeline of issuers keen to
tap on the grant scheme to issue a catastrophe bond here. Leading insurance brokers
have expressed support for Singapore as a domicile and are working with their Asian
clients for potential issuances here.
b. We have also formed an industry-led Alternative Risk Transfer work-group to advise
MAS on initiatives to support the development of Singapore as an ILS domicile. The
workgroup will continue to provide feedback on the current ILS regime including on
regulations, tax and structures.
15 Fourth, our proximity to Asian markets allows for a deep understanding of underlying risks and
needs of the sponsors. We have grown as a traditional re/insurance market due to this and it will
likewise be an important consideration for Asian ILS issuers looking to tap capital markets in the
region, and for capital providers that are underwriting the risks.
16 Despite this promising outlook, we recognise that ILS expertise is still nascent in Asia, and
there is much scope for Singapore to learn from international best practices. We hope to
strengthen Singapore's proposition as a ILS domicile in 4 ways:
a. First, we seek to explore the introduction of bespoke corporate structures for the ILS
market, like the Protected Cell Company (PCC) structure, to provide more structuring
options to potential issuers. A PCC structure would facilitate multiple issuances in one
vehicle with its segregation of assets and liabilities, and is sometimes preferred by issuers
for its efficiency in cost and operations.
b. Second, we understand speed to market is a crucial factor for issuers as it provides
certainty for their reinsurance structure. We will work closely with issuers to explore the
potential of further streamlining the licensing requirements and process in Singapore.
c. Third, we recognise that structuring ILS requires specialised roles beyond the
conventional pool of debt capital market teams, such as loss reserve specialists and
capital market advisory teams. MAS will explore support for the setting up of specialist
teams in Singapore, to facilitate knowledge transfer to the local market. To raise the
industry's skills in this area, there are plans to incorporate catastrophe modelling for
catastrophe bonds in existing training programs.
d. Fourth, the need for quality data. Data is key for catastrophe risk quantification and the
design of risk transfer tools like ILS. We know that there is room to improve data quality in
this region and have embarked on the Natural Catastrophe Data Analytics Exchange since
April 2017 to bridge the data gap. High resolution data, obtained through innovative
technology and new methodologies, can complement other traditional sources of industry
data, and support the underwriting of traditional insurance products and structuring of ILS.
Conclusion
17 Asia holds promise for the next phase of growth for ILS given the region's growing needs, and
Singapore can play an important role to facilitate this growth as an ILS domicile. Today's
conference will provide an important platform for the industry to discuss such developments in
the ILS market, and explore the key to harnessing the potential in Asia.
1
Schroders: Spotlight on catastrophe bonds
2
Disasters could cost Asia-Pacific region $160 billion per year by 2030, UN warns, UNESCAP, 2018
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High CAT risks, low penetration in Asia - only two ways out, AIR, 2017