South Korea urged to consider insurance-linked securities (ILS) regulatory framework

The government of Korea has been urged to implement and adopt an insurance-linked securities (ILS) regulatory framework to enhance its domestic insurance marketplace and enable access to the capital markets for additional risk capital and reinsurance.

Researchers from the Korea Insurance Research Institute (KIRI) have spotted the success countries including Singapore and Hong Kong have had, in establishing an ILS regulatory regime, starting to see catastrophe bonds transacted using it, and developing the skills and service provision required to build local ILS expertise.

It’s believed that having a domestic market ILS capability can help to make the Korean insurance and reinsurance industry more competitive, while improving its capacity and capital availability.

The use of ILS to efficiently transform natural disaster and other insurance risks to the capital market is seen as likely to be beneficial to domestic Korean re/insurers, while having the ability to issue ILS such as catastrophe bonds could also be a way to attract new business, the researchers state.

It’s also seen as a way to create new jobs and boost the economy through a higher contribution to it from the domestic insurance market in Korea.

The special purpose vehicle (SPV) legislation in Korea will need reimagining, to allow for special purpose reinsurers to be formed for the issuance of ILS securities.

The researches said that establishing specific regulations for ILS will be easier than trying to repurpose the existing rules in Korea’s financial market.

The government is advised to review the existing insurance market regulations first, to see how ILS regulations can best fit in, without needing to completely rewrite legislation where it’s unnecessary.

Korea’s capital markets legislation will also need reviewing, to explore areas of overlap and how best to align any new regulatory regime.

Finally, the researchers note that if Korea wants to attract ILS business to be transacted there, it will also need to ensure any ILS regulations are tax neutral, or offer a tax benefit.

A subsidy system is also seen as a potentially important move to attract ILS to Korea.

As we’ve said before, having ILS regulatory capabilities should be part of any sophisticated financial market regulatory regime, especially where there is a mature domestic insurance or reinsurance market.

Attracting foreign issuers is not easy, so regulators would be advised to focus on setting up ILS rules that suit its own marketplace and provide optionality for local re/insurers or corporates to use a local issuer, should they be exploring sponsorship of ILS such as catastrophe bonds.

Recall that Korean Re, the largest domestic market reinsurance firm, sponsored its first catastrophe bond earlier this year.