New grant scheme will let insurers recover costs from issuing catastrophe bonds in Singapore

Lim Hng Kiang, minister for trade and industry in Singapore, said the measure is designed to "catalyse the development of Singapore’s ILS (insurance linked securities) market".

The grant scheme, which will be delivered by the Monetary Authority of Singapore (MAS), will run from 1 January 2018 and will apply to "ILS bonds covering all forms of risks beyond just natural catastrophe risks", the minister said in a speech on Wednesday.

Lim, who is also deputy chairman of MAS, said: "It is my hope that this grant scheme will encourage insurers and reinsurers to consider issuing a catastrophe bond here. In fact, MAS is already working with key industry players such as IAG Re Singapore with a view to issuing a catastrophe bond in Singapore. This is but the first step of a longer journey, as we look forward to working more closely with the industry to further deepen our ILS ecosystem here."

Expert in financial services regulation Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said: "This is another interesting example of how forward looking the insurance market is in Singapore. ILS structures are very much a focus for development in insurance centres like London too, and this demonstrates the ambition for further development in the Singapore market."

ILS, or catastrophe bonds as they are sometimes known, offer insurers an alternative to traditional reinsurance as a form of risk mitigation. An ILS arrangement enables an insurer to transfer large and complex risks, such as catastrophic risks arising from natural disasters, to the capital markets rather than a reinsurer.

Lim said "a lack of risk awareness and data paucity" are factors which have stifled the insurance market in Asia to-date and that, as a consequence, "less than 5% of disaster losses in Asia were insured over the past decades".

The minister said that Singapore is eager to support growth in the ILS market, and announced that "an alternative risk transfer work-group comprising industry experts in the ILS space" has been set up in the country to advise MAS on "specific initiatives that will support the development of Singapore as an ILS hub".

He said the ILS market offers benefits to both reinsurers and investors.

"Catastrophe bonds present unique benefits to reinsurers:  they provide multi-year capacity and pricing certainty; they are more secure due to their fully collateralised nature and ability to be rated; they are a good alternative  to traditional reinsurance for risks that are hard to model; and they are capital-efficient," Lim said.

"To an investor, catastrophe bonds proffer strong benefits too: their low correlation with the financial markets make them an effective asset diversification instrument; they have low volatility and stable returns; they provide liquidity; and they can be issued via private placements or as tradable securities," he said.

Lim said Singapore had seen "healthy interest from Asia-Pacific issuers in the development of an APAC market for catastrophe bond issuances, due to the proximity to and better understanding of the underlying risks".

Regulations which will establish a UK framework governing the tax and regulatory treatment of ILS were laid before the country's parliament last month. The global ILS market could be worth as much as $87 billion by 2019, according to research previously cited by the UK Treasury.