Insurance Linked Securities (ILS) - Hong Kong doubles down extending its subsidy grant scheme

In its Hong Kong 2023-24 Budget, the Financial Secretary announced an extension of its insurance-linked securities ("ILS") grant scheme for a further 2 years. The scheme subsidises the cost of structuring ILS, thus encouraging the issuance of ILS. ILS, also known as catastrophe bonds, enable insurers to fund specific insured events and provide returns to investors to the extent those events do not materialise. For insurers, ILS provide a means of risk mitigation and method of raising capital independent of an insurer's own capital base. For investors, ILS provide relatively high yields uncorrelated to the returns of traditional assets and thus offer a means of generating alpha and providing portfolio diversification. Research from Shroders suggests that ILS funds generated annualised returns of 8.3% from 2002 to 2013.