1. Introduction

Insurance linked securities (ILS) are financial securities issued in public or private offerings that are linked to insurance risks. It is a way for insurance companies to transfer risks to capital markets, where investors can trade these securities like any other financial instrument. The value of ILS is linked to non-financial insurance-related risks such as natural disasters, catastrophes and life or health insurance.

The ILS market surfaced in the mid-1990’s as a popular vehicle for insurers to access the capital in global markets. ILS are attractive to investors who wish to diversify their portfolio as they come with higher interest rates and have little to no association with debt and equity markets. These include sovereign wealth funds, pension funds, multi-asset investment managers and family offices. To facilitate issuance, special purpose reinsurance vehicles (“SPRV”) are incorporated to issue ILS such as catastrophe bonds, reinsurance sidecars, contingent capital structures, mortality bonds, longevity swaps and industry loss warranties.

This paper provides an overview of ILS in Singapore, the process of setting up SPRVs, the compliance and regulatory requirements of SPRVs and the recent regulatory changes on SPRVs in Singapore. It is not, however, a substitute for legal advice. This paper is written on 12 June 2023.

2. ILS Market in Singapore

Singapore is now a leading domicile for ILS issuance in the Asia-Pacific region, with our ILS market share accounting for 14% of the global market*.1 Singapore aims to be the leading ILS hub in Asia, which will complement the debt capital market as a reinsurance and specialty insurance centre. The Monetary Authority of Singapore (“MAS”) has adopted a three-pronged approach to grow the ILS market:

1. Improving data quality and the standardization in the region to develop industry-loss based indices upon which ILS can be structured;
2. Establishing and enhancing our regulatory, tax and legal infrastructure to support various ILS instruments; and
3. Developing Singapore ILS ecosystem through incentivizing ILS issuers to domicile their ILS in Singapore through our grant schemes, encouraging ILS service providers to anchor their operations here.

The MAS had previously announced a scheme that funds 100% (capped at SGD 2 million) of upfront ILS bond issuance costs covering all forms of risks such as longevity, mortality and operational risks, beyond just natural catastrophes. After the scheme originally expired at the end of December 2022, it was announced on 20 April 2023 that it would be extended for another 3 years, continuing to the end of 2025. With a stronger focus on Asia Pacific risks, it has an expanded scope which includes additional climate risk financing instruments such as sidecars and collateralized reinsurance issuances. The extended scheme taps on the S$15 million grant given under the Finance for Net Zero Action Plan. The grant will cover the cost of issuing catastrophe bonds as well as other ILS focusing on Asia risks.

To enhance better risk financing solutions, the ASEAN Disaster Risk Financing and Insurance programme has also been launched to leverage the expertise of academia, governments and industry to construct a high resolution and objective natural catastrophe database.

*Reported by the Monetary Authority of Singapore in June 2021.

1.2 ILS SPRVs in Singapore

For many sponsors, Singapore has been chosen as the jurisdiction to either domicile or register their SPRVs. They include:

At the time of writing, only the following ILS under its respective SPRVs are listed on the Singapore Exchange:

3. Establishing a SPRV in Singapore

3.1 Relevant criteria

To apply to establish a SPRV in Singapore, the MAS takes into account the following criteria:

1. Track record, financial soundness and reputation of the applicant, including the applicant’s compliance with its home regulations. In assessing this criteria, MAS will consult the applicant’s home supervisory authority.
2. Domestic and international rankings of the applicant by factors such as premiums and assets.
3. Past and present credit ratings by international rating agencies, including Standard and Poor’s, A.M Best, Moody’s and Fitch.
4. SPRV should be established as a bankruptcy remote vehicle separate from the ceding insurer or originator.
5. Ability of the SPRV to remain fully funded at all times.
6. Robust risk management systems and processes that are commensurate with the size and complexity of the business.
7. Competence and expertise of its proposed managers in insurance management.
8. Fitness and propriety of the licensee, any director or key executive person, all of its substantial shareholders, and all persons having effective control of the licensee.

3.2 Documents to be submitted

 To establish a SPRV in Singapore, the following documents will have to be submitted to the MAS:

1. A certified true copy of the licence issued by the insurance supervisory authority in your country for your company to carry on insurance business in your country;
2. A certified true copy of the letter from the insurance supervisory authority in your country granting your company approval to establish insurance operations in Singapore, if such approval is required. If approval is not required, a statement to this effect should be provided;
3. A copy of the annual report and financial statements of both the applicant and its ultimate parent company for each of the last 3 years;
4. A copy of the feasibility study conducted in respect of the proposed Singapore operations. The following must be included:
   1. financial projections for the proposed Singapore operations (e.g. revenue, profitability and start-up and development costs by business line, assets, capital, fund solvency margins and capital adequacy ratios for the next 3 years); and
   2. estimated timeline to incorporate the SPRV and execute the insurance securitization transaction.
5. Actuarial investigation of underlying business, taking into account the financial projections provided above, to demonstrate that the SPRV is fully funded at all times in accordance with the requirements of the Insurance (General Provisions and Exemptions for Special Purpose Reinsurance Vehicles) Regulations 2018 (“SPRV Regulations”);
6. A written opinion from an independent external legal counsel confirming the following:
   1. the SPRV is or will be a legal entity separate from any third party involved in its establishment;
   2. the proposed legal documents/agreements of the SPRV governing the issuance of the insurance securitisation transaction, including a condition that for any debt security issued or to be issued by the SPRV, the holders of the debt securities undertake not to initiate or participate in winding up proceedings against the SPRV until the debt securities are discharged; and
      
   3. description of any other measures to enable the SPRV to remain solvent and thus not be petitioned into bankruptcy at all times.
7. Constituent documents of the proposed Singapore operations which should include the permissible activities of the SPRV and any restrictions on such activities, such as the ability to enter into additional reinsurance contracts, issue/invest in additional securities, to borrow money or to make loans to other persons, and any provisions for the modification of the constituent documents of the relevant entity;
8. Draft copies of the following:
   1. Reinsurance agreement(s) to be entered between the proposed SPRV and the ceding insurer(s);
   2. Reinsurance trust agreement and Deed of Charge;
   3. Prospectus/offering circular/transaction term sheet/private placement memorandum;
   4. Indenture and the Series Supplement;
   5. Note Purchase Agreement;
   6. Claims Reviewer Agreement and Loss Reserve Specialist Agreement (if any); and
   7. Management agreement to be entered between the proposed SPRV and the appointed insurance management company (if any).
9. Rating agency’s report on the preliminary rating given to the SPRV or the ILS, if any.

3.3 Overview of global operations

 The SPRV applying to be registered or domiciled in Singapore must also provide the following information to give an overview of its global operations:

1. History of the applicant, the ultimate parent company and the Group;
2. Description of the business activities of the applicant and the Group,
3. especially any areas of insurance and other financial activities which the Group has particular strength in, both globally and regionally;
4. A brief description of the applicant’s experience with insurance securitization;
5. Details of the ultimate parent company of the applicant and a diagrammatic structure of the Group;
6. Information on the financial position and performance of the applicant for each of the last 3 years; and
7. Information on the applicant and the Group’s financial strength ratings or equivalent for the last 3 years.

3.4 Overview of global operations of the originator

 The originator is any entity which creates the liabilities being reinsured, which are then being securitized, or any entity which purchases, or advises, or causes an SPRV to reinsure the liabilities of a third party which are then being securitized. Where the applicant SPRV is not the originator, the following information must be provided:

1. A brief description of the business activities of the originator and the Group, especially any areas of insurance and other financial activities which the originator’s group has particular strength in, both globally and regionally;
2. A brief description of the originator’s experience with insurance securitization;
3. Information on the financial position and performance of the originator for each of the last 3 years; and
4. Information on the originator’s financial strength ratings or equivalent for the last 3 years.

3.5 Detailed information on the proposed Singapore operations

 The following detailed information on the SPRV’s proposed operations in Singapore must also be furnished to the MAS:

1. The proposed name of the SPRV to be licensed in Singapore;
2. Information on the proposed amount of issued and paid-up share capital, including any planned increases in capital;
3. Information on the proposed legal structure of the SPRV;
4. The names and particulars of all proposed directors as specified in MAS 106 Appointment of Director, Chairman, Member of Nominating Committee, and Key Executive Person for Insurers (“MAS 106”); and
5. The name and particulars of the proposed Chief Executive as specified in MAS 106.

3.6 Detailed information on the insurance securitization transaction

Finally, the SPRV must also provide the following information on the insurance securitization transaction:

1. Describe the reinsurance contract to be issued by the SPRV;
2. Described the method by which losses that occur prior to but continue to develop after the termination of the contract period, and are covered by the SPRV reinsurance contract, are to be addressed under the SPRV contract;
3. The cashflow schematics to illustrate the flow of funds between the SPRV and the relevant stakeholders at different intervals including but not limited to the following: (i) date of issuance of the ILS; (ii) periodic payments; (iii) principal repayment; (iv) loss payment; and (v) termination of the SPRV;
4. Summarise how the cash flows generated by the asset pool will be allocated among the different classes of ILS after deducting fees and expenses, to the extent necessary to understand the payment characteristics of each class of ILS being offered;
5. Identify any optional/mandatory redemption or termination features of ILS;
6. Identify any enhancement for the ILS being offered and briefly describe what protection or support is provided by the enhancement, including details relating to the potential use of financial guarantors on any of the tranches of notes to be issued;
7. Indicate whether or not the ILS will be listed for quotation on any securities exchange, and provide the name of the securities exchange, if any;
8. Describe the  nature and  terms of the applicant’s direct and indirect economic interest in the transactions of issuance of the reinsurance contract and ILS;
9. Provide details of the investors that the ILS will be offered to;
10. Information on the risk control systems of the SPRV, including descriptions on how the SPRV will be fully funded, retrocession arrangements, underwriting and claims arrangements, outsourcing arrangements, anti-money laundering arrangements, investment arrangements, information technology arrangements, capital management, business continuity arrangements, internal audit arrangements, enterprise risk management and corporate governance framework, if applicable, and whether any of these arrangements are made with the applicant or a related company of the applicant;
11. Names of appointed advisors and service providers, and their experience in insurance securitization;
12. Information on types of permitted investments that the SPRV can invest in; and Details on circumstances under which the SPRV will be voluntarily wound up and the intended winding up procedures to be implemented at that time. 

4. Regulatory Compliance of SPRVS in Singapore

4.1 Paid-up ordinary share capital, fund solvency and capital adequacy requirement

Under the SPRV Regulations, SPRVs must have a paid-up ordinary share capital of at least $20,000. The fund solvency requirement of an SPRV is that the assets of the fund must not at any time be less than the liabilities of the fund. Lastly, under the capital adequacy requirement, the assets of the SPRV must not be less than its liabilities.

4.2 Approvals required by the MAS

The following sets out the MAS approvals that must be sought by SPRVs:

4.3 Notifications required by the MAS

The following sets out the notification requirements that must be provided by SPRVs to the MAS:

4.4 Regulatory submissions to the MAS

 The following sets out the regulatory submissions that must be made by SPRVs to the MAS:

5. Singapore Exchange ILS Listing Compliance

In order to issue retail ILS on the Singapore Exchange (“SGX”), the issuing SPRV will have to comply with the SGX rules.

Under Rule 303 of the SGX Mainboard Rules (“SGX Rules”), issuers who wish to offer local debt securities must fulfil one of the following requirements:

1. For issuers whose equity securities are listed on the SGX, the issue of debt securities must be at least S$750,000 in principal amount;
2. For issuers whose equity securities are not listed on the SGX:
   1. The issuer must fulfil requirements in SGX Rules 210(2), (3), (4) and (5)* for listing of equity securities, and the issue of debt securities must be at least S$750,000 in principal amount;
   2. The issue of debt securities must be at least S$750,000 in principal amount and at least 80% must be subscribed by specified investors;
   3. The issuer must be the Singapore Government or government agency; or
   4. The issue of debt securities must have a minimal credit rating of investment grade.
3. Where requirements (1) and (2) above are not met, the issuer’s obligations under the issue of debt securities must be:
   1. Guaranteed by an SGX-listed entity and the issue of debt securities must be at least S$750,000 in principal amount;
   2. Guaranteed by an entity who meets the requirement in Rule 210(2), (3), (4), and (5) and the issue of debt securities must be at least S$750,000 in principal amount; or
   3. Guaranteed by the Singapore Government or government agency.
4. The issuer / guarantor must meet criteria for exemption under the Securities and Futures (Offers of Investments) (Exemption for Offers of Straight Debentures) Regulations 2016; or
5. The issuer / guarantor must meet the eligibility criteria under Part VI of the SGX Rules.

* SGX Rules 210(2), (3), (4) and (5) are requirements related to the quantitative criteria, profit test, financial position and liquidity, and directors and management of the issuer respectively.

5.1 Prospectus requirement

 When issuing debt securities such as the ILS, an accompanying prospectus and a product highlights sheet must be included. The prospectus must include all information that investors and their professional advisers would reasonably require to make an informed assessment of the issuer’s business, financial conditions, prospects and risks.

5.2 Exemptions from prospectus requirement

A prospectus must be issued unless the offer qualifies as a small offer,3 a private placement,4 or is made to accredited or institutional investors.

There are also additional exemptions from the issuance of prospectuses granted by the regulatory authorities. The first of which is the Exempt Bond Issuer Framework. Instead of a prospectus, the issuer only has to provide a simplified disclosure document and a product highlight sheet when offering to retail investors. Bonds under this framework will be offered to all investors (retail, institutions, and accredited investors) at issuance. However, at least 20% of the initial offering must be made to accredited and institutional investors.

The second exemption is known as the Seasoning framework. Instead of a prospectus, the issuer only has to provide an offering memorandum or circular, and a product highlight sheet. Under this framework, the initial issue is made to accredited and institutional investors in the wholesale bond market. The bonds are then made available for trading on the SGX by retail investors in board lot size of S$1,000 after a 6-month seasoning period. Issuers can also make subsequent offers of new bonds with the same terms as those that have undergone the seasoning period.

6. Recent Regulatory Changes

In a Consultation Paper on Proposed Revisions to Enterprise Risk Management, Investment and Public Disclosure Requirements for Insurers in 2021, the MAS has made two proposed regulatory changes in relation to SPRVs.

First, the MAS has proposed to exclude SPRVs from requirements concerning certain investment related requirements for insurance and reinsurance companies registered in Singapore under MAS Notice 125 on Investments of Insurers (“MAS 125”). MAS 125 sets out the principles that govern the oversight of investment activities of a licensed insurer and the investments of its insurance funds, and in the case of an insurer that is incorporated or established in Singapore, the investment of both its insurance and shareholders’ funds.

Under the new changes to MAS 125 that came into effect on 1 January 2023, SPRVs no longer not need to comply with regulations on the investments of the insurer and shareholders’ funds specifically in relation to the oversight required by the board of directors and senior management, reports to the board of directors, duties of the investment committee and asset-liability management.

Second, the MAS has proposed to exclude SPRVs from public disclosure requirements set out under MAS Notice 124 on Public Disclosure Requirements (“MAS 124”). The requirements under MAS 124 apply to all licensed insurers, except for captive insurers, marine mutual insurers and run-off insurers. The rationale for the proposed change as such: as the policyholders of SPRVs are the sponsors of the ILS, they are given access to the relevant information to appreciate the risks of the SPRVs, and the way in which such risks are managed.

Under the new changes to MAS 124 that came into effect on 1 January 2023, SPRVs are no longer subject to the public disclosure requirements set out in MAS 124.

Further Information

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Key contact
Robson Lee
Partner
t: +65 6436 4322
e: robson.lee@kennedyslaw.com