Steve Evans, Editor-in-Chief of Artemis
Ladies and gentlemen
Introduction
1. Good morning. Thank you for having me back at the Artemis ILS Asia Conference. I am happy to see the conference back for its sixth installation in Singapore. To our international guests, a warm welcome.
2. Artemis Asia is always a highlight in the insurance industry’s calendar of events. It is an important platform for risk cedants, sponsors and investors to exchange insights and identify valuable opportunities in the ILS market, with a focus on Asia.
A Growing ILS Market
3. The global ILS market experienced strong growth in the number of issuances in 2023, which continued into 2024.
- Alternative reinsurance capital exceeded the US$110 billion mark in the second quarter of this year, after breaking the US$100 billion mark for the first time last year
[1] . - The catastrophe bond market saw a record issuance volume of US$15 billion in 2023
[2] , partly driven by growing participation in ILS markets.- 13 new cedants entered the catastrophe bond market last year, accounting for US$2.1 billion of capital
[3] . - There was also good growth in first time cedants from France, Germany, Korea and New Zealand, covering wind and earthquake perils.
- 13 new cedants entered the catastrophe bond market last year, accounting for US$2.1 billion of capital
- This growth in ILS issuances covering non-US risks is attractive to fund managers and investors, who are keen to diversify their ILS portfolio to include more non-US exposures.
- This momentum continues in 2024. In the first half alone, new catastrophe bond issuances have already reached US$12.1 billion
[4] , or 80% of the full year volume in 2023.- This included Puerto Rico Parametric Re Ltd. which was the first issuance by the Government of Puerto Rico.
- This year also saw the issuance of the first catastrophe bond to cover cloud outage risks
[5] , a segment of the cyber reinsurance market where retrocessional coverage is often lacking.
- Singapore saw four catastrophe bond renewals this year – a vote of confidence from the cedants on Singapore’s value as an ILS domicile
[6] . - We also continue to receive interest from potential issuers covering risks from India and Africa.
Capturing Investor Interest
4. ILS investors have enjoyed good returns and relatively lower volatility, and also portfolio diversification benefits.
- ILS have low correlation with traditional financial assets that dominate most portfolios.
- They can also offer a competitive risk-return profile relative to other financial assets.
- Last year, the average yield of an ILS fund and cat bond fund reached record highs of 15.4%
[7] and 19.7%[8] respectively. They outperformed other alternative asset classes, such as infrastructure, real estate and hedge funds[9] . - ILS instruments have delivered better annual returns than comparable assets of similar credit quality. Over the past fifteen years, ILS instruments
[10] delivered annualised[11] returns of 6.42%[12] . This compares with 4.86%[13] for similarly-rated high yield bonds, over the same period.
- Last year, the average yield of an ILS fund and cat bond fund reached record highs of 15.4%
- At the same time, ILS instruments also experienced lower volatility than traditional financial assets – 4 times lower than the S&P 500 and 3 times lower than high yield bonds.
- The attractive returns from ILS assets are capturing mindshare, with greater interest and growing demand from clients in Asia, albeit from a small base.
5. ILS can also help investors achieve their ESG objectives.
- In 2020, Mexico’s catastrophe bond supported by the World Bank, was the first catastrophe bond where the proceeds could be used by the World Bank Group’s International Bank for Reconstruction and Development, or IBRD, to fund sustainable development programmes in its member countries
[14] . The World Bank has continued this practice since. - In the past two years, two catastrophe bonds that were issued in Singapore invested their bond proceeds into sustainable collateral, in the form of Sustainable Development Bonds issued by the IBRD.
- The collateral finances projects under the World Bank Group that achieve positive environmental and social outcomes in country programmes, such as increasing renewable energy supply or increasing access to water and sanitation services.
- Such structures can help cedants to align ILS issuances with their own ESG objectives, while making ILS more attractive to investors with ESG mandates.
6. There is good potential for the growing institutional and private wealth investor base in Asia, including Singapore, to invest in ILS.
- Traditionally, ILS investors have been pension funds, institutional investors, and private wealth clients in North America, Europe and Japan.
- The accumulation of family wealth and institutional capital in Asia-Pacific presents opportunity to tap into a bigger investor pool.
- From 2011 to 2022, total assets under management or AUM in Asia-Pacific grew at an annual rate of 14%, outpacing the global average of 9%
[15] . - Wealth in the Asia-Pacific affluent segment is estimated to expand at an annual rate of 11% from 2021 to 2026
[16] . There will also be continued growth in pension assets. This is estimated to reach US$32.4 trillion[17] , driven by reforms to existing pension systems and shifts towards alternative investments[18] .
- From 2011 to 2022, total assets under management or AUM in Asia-Pacific grew at an annual rate of 14%, outpacing the global average of 9%
7. To promote investor interest, MAS has been working with industry partners on investor outreach and education.
- In the past year, we have partnered SGX, Aon, and Amundi to host investor education sessions. MAS has also engaged private banks, and the Wealth Management Institute in Singapore to build mindshare on ILS as an asset class.
- While some are not immediately ready to allocate capital to ILS, it is an important first step for the private wealth segment and institutional asset owners to be apprised of opportunities in this asset class.
- Market participants have also shared with us that they are beginning to see some private wealth clients in Singapore allocating to ILS, through their banks’ discretionary allocations.
- We welcome more stakeholders in the ILS ecosystem to partner with MAS and other opinion multipliers to engage the investor base in Singapore.
8. Against these tailwinds of increasing ILS volumes and a growing pool of investors, ILS fund managers too, have grown their assets under management.
- The combined AUM for the top tier ILS fund managers globally has increased by 4.2%
[19] over the past six months to US$80 billion[20] . - MAS has been engaging some ILS fund managers that are considering setting up offices in Singapore.
Opportunities in Asia
9. Asia also presents a good match for investors and fund managers’ demand for geographical diversification in their ILS portfolios.
- Asia is vulnerable to climate risks and natural disasters.
- Over the past thirty years, Asia-Pacific countries experienced six natural disasters yearly on average, double that of countries in Latin America and the Caribbean, and triple that of sub-Saharan Africa
[21] .
- Over the past thirty years, Asia-Pacific countries experienced six natural disasters yearly on average, double that of countries in Latin America and the Caribbean, and triple that of sub-Saharan Africa
- There is scope for private-public partnerships to help Asian governments, at sovereign and municipal levels, to tap the alternative risk transfer market to protect key assets, or vulnerable segments of their population, from natural catastrophes.
- This is already common in Latin America and some African states. Countries such as Jamaica, Mexico, Chile and Peru, with the support of the World Bank, have issued catastrophe bonds in recent years.
- It enhanced their governments’ ability to undertake reconstruction and rehabilitation of housing and public infrastructure in the events of natural perils, while maintaining fiscal resilience. And this lessened impact on the livelihoods of their citizenry.
- For example, the Peru catastrophe bond was triggered by a magnitude 8.0 earthquake in 2019. The payout of US$60 million aided Peru’s recovery from the earthquake.
- The World Bank is growing its capabilities in Singapore, to actively support the risk financing needs and promote solutions in Asia.
- To facilitate proper pricing and underwriting, we will need better data and risk modelling.
- Singapore is committed to supporting these efforts.
- To address data gaps, Singapore, in partnership with the ASEAN Secretariat and the Nanyang Technological University Institute of Catastrophe Risk Management, supported the ASEAN Disaster Risk Financing and Insurance Phase 2 programme (ADRFI-2). A data exchange and analytics portal which provides high resolution exposure and loss data to ASEAN member states has been developed, to support ASEAN governments to manage and mitgate their natural catastrophe risk exposures.
- We also have a growing base of professional service providers and insurance expertise to support ILS issuances, including legal professionals, insurance managers, risk modellers, claims reviewers and loss reserve specialists in Singapore.
- Lastly, issuers can tap on MAS’ ILS Grant scheme, which defrays the costs of ILS issuances in Singapore. The ILS grant scheme has supported 28 catastrophe bond issuances over the past 5 years, raising a total of US$4.4 billion. It was enhanced in 2023 to allow cedants to issue a broader spectrum of ILS instruments, including sidecars and collateralised reinsurance arrangements. We are also looking into the required regulatory, tax and legal infrastructure required to support these instruments, and will progressively implement them.
Innovation in ILS Markets
10. Looking ahead, the ILS market will continue to innovate and grow, to meet market needs and demand for risk transfer and sharing. Just like how the ILS concept all began in the aftermath of Hurricane Andrew.
- The twinning of ESG features with ILS is one. For example, Generali published its Green ILS Framework in 2019 and issued its first green catastrophe bond in 2021 – a €200 million transaction that freed up €28.1 million of regulatory capital for the insurer and avoided 35.1 tonnes of carbon dioxide equivalent
[22] .- In the debut Generali green catastrophe bond, the solvency capital that was freed-up was channelled towards investment in green assets or underwriting green businesses.
- The Green ILS proceeds would also be invested in a portfolio of green high quality liquid assets.
- Another recent innovation is the use of blockchain and smart contracts to make the issuance and trading of catastrophe bonds more efficient and transparent.
- This began in 2016 when Nephila and Allianz successfully piloted the use of smart contract in a natural catastrophe swap transaction. This was followed the following year by the first issuance of a private catastrophe bond on a blockchain.
- Just two days ago, Schroders Capital, in partnership with Hannover Re, announced the launch of a pilot ILS tokenisation project which aims to enhance how ILS assets are managed and invested
[23] . During testing, it successfully enabled reinsurance contracts to be tokenised and traded on a public blockchain. It enabled many time-consuming processes to be automated, and reduced settlement time.
11. We encourage the ILS industry to also use Singapore as a test-bed for innovative products, tapping on our deep sustainable finance and digital assets eco-systems here.
12. To round up, MAS will continue to work closely with the ILS industry to offer Singapore as a conducive base for Asia’s ILS market, and match Asia’s risk financing needs with growing investor interest.
13. I look forward to our discussions today, and I wish you a fruitful time at Artemis ILS Asia 2024.
Thank you.
[1] Aon Reinsurance Market Dynamics Report, July 2024
[2] Swiss Re Institute: Surge in Catastrophe Bond Issuance Stablilises Transfer of Mounting Peak Risks, Dec 2023
[3] Swiss Re Insurance-Linked Securities Market Insights, Edition XXXV, February 2024
[4] Artemis, https://www.artemis.bm/news/catastrophe-bond-issuance-in-2024-hits-12-1bn-running-29-ahead-of-prior-year/
[5] Cumulus Re (Series 2024-1)
[6] Phoenix 2 Re, Kizuna Re III Pte Ltd (Series 2024-1), Nakama Re Pte Ltd (Series 2024-1), Tomoni Re Pte Ltd
[7] Eurekahedge ILS Advisors Index, as of end FY 2023
[8] Swiss Re Cat Bond Index, as of end FY 2023
[9] CAIA Association, Alternative Investments. Data source from Bloomberg and eFront Insight research benchmarking. The yield for infrastructure, real estate and hedge funds was 5.3%, -7.9% and -0.4% respectively.
[10] This refers to the Swiss Re Cat Bond Index.
[11] From May 2007 – June 2023.
[12] Catxre.com
[13] Catxre.com
[14] IBRD/FONDEN 2020 transaction
[15] KPMG, 2023, Growing in a turbulent world: Finding the next growth engine in APAC asset management
[16] KPMG, 2023, Growing in a turbulent world: Finding the next growth engine in APAC asset management
[17] Statistica: Public Pension Funds AUM worldwide from 2108 to 2023, forecasted until 2030
[18] Thinking Ahead Institute’s Global Pension Assets Study
[19] Insurance Insider ILS
[20] Artemis, https://www.artemis.bm/news/schroders-capital-reports-growth-in-ils-as-aum-surpasses-5bn/#:~:text=With%20an%20ILS%20AUM%20of,%244.4%20billion%20across%20its%20strategies.
[21] 2024 Asia-Pacific Human Development Report.
[22] Artemis, https://www.artemis.bm/news/generali-updates-insurance-linked-securities-framework-to-green-social-sustainable/
[23] Schroders Capital, https://www.schroderscapital.com/en/global/professional/media-centre/schroders-capital-launches-innovative-tokenised-ils-pilot/
