Strong appetite for ILS in Asia-Pacific but ‘it needs a better investor story’

The use of insurance-linked securities (ILS) as a risk transfer tool is gaining traction in Asia-Pacific, particularly in markets such as Hong Kong and Singapore where regulators are actively encouraging ILS activity. But further education of potential issuers and investors is needed.

That is the message from Justin Ward, managing director, head of capital advisory APAC at Guy Carpenter. He told EAIC Today that he is optimistic about the future of ILS in Asia-Pacific, citing both the appetite for it and the innovative approaches being explored by insurers.

“To diversify catastrophe risks, insurers are seeking overseas reinsurance support and tapping into the ILS market and catastrophe bonds,” Ward said. “Additionally, insurers are more open to exploring and adopting innovative solutions, such as parametric and multi-year structures.”

“More than 95 percent of investments in cat bonds are from investors outside the region.”

This willingness to innovate is driving interest, but the ILS market in Asia-Pacific still faces challenges. Investors in the region have yet to fully embrace ILS due to a lack of understanding and guidelines for these types of investments within their portfolios.

“There’s a strong appetite for ILS, but we need a better investor story in the region,” Ward said, noting that GC Securities estimates that more than 95 percent of investments in cat bonds are from investors outside the Asia Pacific region.

“Investors in the region may still be relatively unfamiliar with ILS,” Ward added. “As a result, they haven’t moved to incorporate ILS into their fund guidelines to allow for such investments.”

Efforts to educate the market are underway. Initiatives such as the ILS Conference organised by the Hong Kong Insurance Authority are focused on increasing awareness of ILS and positioning Hong Kong as an ILS domicile. “We expect familiarity with this type of product to change over time,” Ward said.

The next step in fostering growth, according to Ward, is building the infrastructure necessary for ILS products. “There is work to be done in terms of building local expertise in the services that support the issuance of such securities. Beyond structurers and bookrunners, any issuance requires lawyers, catastrophe modellers, reporting agents, captive mangers, fund managers, etc, who are willing to offer services specific to this space,” Ward explained.

A positive step in this direction is the Hong Kong government’s grant scheme, which helps subsidise issuance costs for cat bond sponsors. Ward said this scheme “is helping to build initial interest in issuance in Hong Kong”.

A mix of challenges

ILS offers promising solutions, but the broader insurance market in the region continues to face an evolving risk environment. As Ward points out, the region’s diversity, encompassing highly developed markets such as Japan and Australia as well as rapidly emerging economies such as China and Southeast Asia, creates a unique mix of challenges.

“Asia-Pacific is a very diverse market,” he said. “It’s a mix of developed and developing economies, which creates a dynamic environment from a cost perspective, as insurers navigate different levels of market maturity and regulatory requirements.

“We’re seeing many conversations around managing increased volatility. Volatility remains omnipresent for many of our clients as they manage the transition to higher retentions,” Ward explained.

The transition to higher retentions—where insurers assume a greater portion of risk before turning to reinsurance—has become a major focus. “This situation is complicated by the evolving risk environment, including perils such as flood and fire, geopolitical tensions and the coverage hangover from COVID-19,” Ward said.

He highlighted that inflationary pressures in the region, which have posed a challenge in recent years, appear to be easing. 

Additionally, Ward noted: “We’re seeing an increased reliance on data integrity and a better understanding of risk.” By leveraging better data and analytics, insurers are looking to refine their risk models and improve decision-making.

As well as managing volatility and risk, insurers in Asia-Pacific face mounting pressure on their balance sheets. “Balance sheets are strained due to increased losses, higher retentions, and operating model pressures such as IT investment and regulatory change,” Ward explained. 

The combination of rising losses from natural disasters and higher operational costs is pushing insurers to rethink their capital strategies. 

Ward concluded that he is bullish about the future of ILS and the growing reliance on data integrity in Asia-Pacific, citing the appetite for these developments and the innovative approaches being explored by insurers.

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