IFSCA can set up guidelines for the insurance-linked securities (ILS) and support initial issuance by way of cost subsidy/ grant on the lines of Singapore and Hong Kong. These incentives are important for creating a conducive ecosystem for ILS in the initial years, G Srinivasan panel recommended
Mumbai: A panel constituted by India’s International Financial Services Centers Authority (IFSCA) has suggested regulatory initiatives for setting up alternate risk transfer (ART) arrangements for launching global financial instruments like catastrophe bonds, insurance-linked securities(ILS) and reinsurance sidecars, industry loss warranties and weather derivative contracts that will boost the Indian re/insurance industry.
IFSCA is a unified authority for the development and regulation of financial products, financial services and financial institutions at the India’s sole international financial services centre at GIFT City, Gandhinagar.
The IFSCA’s Re-insurance Regulations recognize ART and to prepare operational guidelines at par with global standard, it had in February 24 constituted a working group under G Srinivasan, former CMD of New India Assurance and current MD&CEO of Galaxy Health Insurance.
Some of the international members of the panel include, Hitesh Kotak from Munich Re, Matthew B. Stern from Gallagher, Kelvin Lam from Aon who all had relevant domain expertise.
ILS are risk management tools that allow insurers/reinsurers to raise capital by transferring natural catastrophe and other risks to the capital markets through securitization, and are often described as another form of reinsurance.
Unlike conventional reinsurance coverage whereby an insurer transfers a portion of its risk to another reinsurer by way of reinsurance, ILS enables (re)insurer to transfer insurance risk to the capital markets. This can improve the supply of capital to the insurance industry, make the (re)insurance coverage more affordable and thereby enhances the insurance industry’s sustainable development.
India is highly prone to floods, cyclones, droughts, and earthquakes—making it relevant for risk transfer through cat bonds. Today, India’s insurance market is expanding rapidly, with increasing regulatory focus on climate resilience and financial
innovation. IFSCA can play a crucial role in making India a hub for cat bonds, especially as climate risk intensifies and the global ILS market seeks geographic diversification, said the panel.
Given a rising trend of catastrophic events caused by climate change and urbanization, global issuance of ILS has grown substantially in recent years but the risk exposure of such ILS is currently mainly confined to the United States and Europe with an exception of few cases of Japan, New Zealand, and some World Bank driven projects.
The panel has recommended that IFSCA may consider adding a new class of insurance business, namely special purpose insurer (SPI), under its purview and come out with regulatory framework on acquiring of insurance risk from another (re)insurer under a reinsurance/risk transfer contract and then issuing ILS to investors to collateralize the risk acquired.
According the panel, key requirements for ILS issuance in India should be that it should be issued in GIFT City and it should should have a minimum size of USD $50m.
ILS are investment assets generally thought to have little to no correlation with the wider financial markets as their value is linked to insurance-related, non-financial risks such as natural disasters, other insurable specialty risks and life and health insurance risks including mortality or longevity.
They allow insurance and reinsurance carriers to transfer risk to the capital markets and raise capital or capacity. They also allow insurers to release the value in their policies by packaging them up and issuing them as asset-backed notes.
Investors for these securities are typically large institutional investors such as pension funds,sovereign wealth funds, multi-asset investment firms and funds, endowments, as well as some family office investors.
“Though, traditional reinsurance has been maintaining a stable supply of capacity to the market for a very long time now, it may prove to be limited in the light of modern-day challenges that face the insurance industry. Unconventional reinsurance, often referred to as alternative reinsurance, addresses specific needs and challenges in the reinsurance market that traditional methods may not fully meet,’’ said the report.
As securities, some ILS (mainly CAT bonds) can be and are traded among investors and on the secondary market.
Traditional reinsurance is neither equitably distributed nor is sufficient for the modern-day exposures like Natural Catastrophes (NATCAT), climate change, Cyber-attacks and Pandemics (like COVID-19). This gap in availability of capital is being addressed through ART solutions, explained the panel.
India and IFSCA in particular, could also provide opportunities for being a hub to issue alternate risk transfer instruments to support global needs and attract investors within IFSCA and Indian market to subscribe to global perils bonds/instruments, suggested the panel.
India will need to compete with set ups like Singapore and Hong Kong to become an alternate ILS centre in Asia, said the panel.
The IFSCA will need to support development of the ILS infrastructure in India like Cat modelling agencies, SPV managers, ILS Legal specialists among others. The regulatory guidelines for ILS have to enable not only cost-efficient operation, but also faster decision making. The sponsors will need shortest lead time to market to address the protection needs of the organisation in shortest span of time.
IFSCA can set up guidelines for the ILS and support initial issuance by way of cost subsidy/ grant on the lines of Singapore and Hong Kong. These incentives are important for creating a conducive ecosystem for ILS in the initial years, panel recommended.
However, this will require strategic regulatory reforms, investment in risk modeling, and strong collaboration between the government, private sector, and international partners.
According to Swiss Re, the global ILS market continued the growth trend of recent years in 2024, with the last 12 months marked by a robust performance for cat bond investors in the absence of events large enough to have a significant impact on the market. The ILS market has grown by 10.5% year-on-year and is on track to exceed the USD 50 billion mark of outstanding notional in the near future.
Also, nearly $ 17.2 billion of notional was issued in the cat bond market in 2024, said Swiss Re