As published on: wealthbriefingasia.com, Monday 17 July, 2023.
The term "insurance-linked securities" covers a space including areas such as catastrophe bonds. Supposedly, it has low correlations with mainstream asset classes – an attractive proposition, advocates say. The Singapore regulators said demand is growing from investors such as family offices.
Asia’s share of the world’s $100 billion insurance-linked securities market is relatively small but it is growing on the back of economic growth and commercial development. Singapore’s main financial regulator has said that reforms can also help turbocharge the sector's growth.
Within the overall reinsurance sector, there’s a growing investor base from family offices and institutions in Asia, the Monetary Authority of Singapore said late last week.
The insurance-linked securities market is driven by companies’ desire to insure against adverse events and these tend not to be correlated with the business cycle, so it is gaining adherents from its perceived diversification benefits. Probably the best known part of the ILS market is catastrophe bonds, or “CAT” bonds. These are generally issued by insurance or reinsurance companies to transfer part of the risks associated with exceptional natural events, such as hurricanes, earthquakes or tidal waves, to other operators and thus reduce their own exposure to natural disasters.
There’s great potential for growth in Singapore and the surrounding region, Lim Cheng Khai, executive director, Financial Markets Development Department, MAS, told a conference late last week. He said Asia has a “sizeable protection gap.”
“The region experienced close to $1.2 trillion in economic losses from natural catastrophes (“nat-cat”) from 2013 to 2022. However, only 13 per cent of these losses were insured. This is much lower than the global average of 37 per cent,” he said.
Globally, alternative reinsurance capital, to give a broad term for the whole space, reached the $100 billion mark for the first time in 2023 after some years of stagnation. “Reinsurance pricing is seeing a correction, with a hardening market and reinsurers being increasingly selective about risks they undertake,” Lim said.
Property catastrophe bond issuances in the first half of this year closed out at an all-time high of $9.7 billion. As of April 2023, the average yield on catastrophe bonds was 12.7 per cent which is over seven times higher than they were in 2016, he continued.
Innovation in the insurance-linked securities market includes those in the cybersecurity space, Lim said.
In Singapore, more asset owners, including sovereign wealth funds and pension funds, have set up offices in Singapore to tap regional opportunities, Lim said. North American and European investors in the ILS space also want to broaden exposures, and are looking at Asia, he said. "On potential demand, the institutional and family office investor base in Asia is growing," he said.
To stimulate growth, Singapore must build more data on risks facing Asian markets, help build a “savvy ILS investor base in Asia, and support ILS issuances and structuring capabilities," Lim said.
“Today, ILS is still a relatively niche asset class among Asian investors. Only some pension funds, sovereign wealth funds and asset owners in the region are familiar with ILS. Some are also cautious due to the investment losses from ILS in recent years. But fundamentally, ILS remains a viable alternative asset class for portfolio diversification,” Lim said. “As a fund and wealth management centre, Singapore is well positioned to promote the growth of ILS investment products, and grow a well-informed investor base,” he added.