Hong Kong continues to strengthen its position as a global risk management centre by introducing a pilot grant scheme for insurance linked securities. The move comes on the heels of new legislation introducing a regulatory framework for insurance linked securities. In this article, we review the details of the new grant scheme. Our earlier article provides background to the new special purpose insurer legislation which enables the issuance of insurance linked securities.
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On May 3, 2021, the Insurance Authority (“IA”) announced details of a new grant scheme (“ILS grant scheme”) to subsidize the issuance of insurance linked securities (“ILS”). The ILS Grant scheme aims to boost Hong Kong’s position as a global risk management centre like Bermuda and follows in the footsteps of Singapore, which introduced its own legislation and grant scheme for insurance linked securities in 2018
In announcing the details of the ILS grant scheme, Mr. Clement Cheung, Chief Executive Officer of the IA, stated:
The Grant Scheme and new regulatory regime catapult Hong Kong into an attractive domicile for issuance of ILS, which will in turn help to enhance sustainable development of the insurance industry and reinforce our status as a global risk management centre.
As a firm, as of the date of publication of this article, we have already received enquiries as to the possible establishment of a Hong Kong based captive to issue insurance linked securities in Hong Kong. If the experience in Hong Kong will be similar to that in Singapore, Hong Kong should see its first insurance linked securities issuance within a year.
What Is The ILS Grant Scheme?
The ILS grant scheme will subsidize upfront costs in connection with the issuance of insurance linked securities depending upon the maturity date:
Maturity of 3+ Years – Where the maturity of the insurance linked securities is 3 or more years, the subsidy will cover 100% of the upfront costs subject to a cap of HK$12 million
Maturity < 3 Years – Where the maturity of the insurance linked securities is less than 3 years, the subsidy will cover 50% of the upfront costs subject to a cap of HK$6 million
The level of subsidy for issuances of 3 or more years is consistent with Singapore, which, like Hong Kong, subsidizes 100% of the upfront costs subject to a cap in Singapore Dollars of just under HK$12 million.
Who Is Eligible For The ILS Grant Scheme?
The ILS grant scheme is open to both onshore and offshore issuers of insurance linked securities and their sponsors, including supranational and multinational organizations.
Hong Kong has recently introduced new legislation to create a new class of insurance business known as special purpose business to facilitate the establishment of special purpose vehicles based in Hong Kong which will underwrite risks and will issue insurance linked securities to cover those risks.
What Are Eligible Issuances Under The ILS Grant Scheme?
Under the ILS grant scheme, an issuance is only eligible if it takes place in Hong Kong, the size of the issuance is at least HK$250 million (or its equivalent in foreign currency) and at least 20% of the upfront costs are earned by service providers based in Hong Kong.
Priority is given to first-time issuers and sponsors as well as issuances lodged with and cleared by the Central Moneymarkets Unit operated by the Hong Kong Monetary Authority.