Rise of the Hong Kong ILS market – Insurance Authority publishes Guidelines on Application to carry on Special Purpose Business

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This article is written by Minny Siu, Cindy Shek and Florence Lau.

The "Guideline on Application for authorisation to carry on Special Purpose Business" (GL-33)[1] recently published by the Hong Kong Insurance Authority (IA) signals another milestone in the rollout of insurance-linked securities (ILS) regime in Hong Kong. GL-33 takes effect on 30 June 2021.

To encourage firms in applying for authorisation as a special purpose insurer (SPI) to carry on special purpose business (SPB) in or from Hong Kong, the IA has also announced details[2] of the two-year Pilot Insurance-linked Securities Grant Scheme (Grant Scheme) to promote the introduction of ILS to strengthen Hong Kong's status as a risk management centre.

This article outlines the key requirements for an SPI applicant as set out in GL-33 and the steps that firms should be taking in order to apply for authorisation as an SPI, and the details of the Grant Scheme.

Overview of GL-33

Subsequent to the gazettal of the Insurance (Amendment) Ordinance 2020 and the Insurance (Special Purpose Business) Rules (Cap. 41P of the Laws of Hong Kong) (SPB Rules), the regulatory framework and regime for SPIs came into effect on 29 March 2021. GL-33 provides further guidelines on the application requirements for an SPI to issue ILS in and from Hong Kong.

For an overview of the Hong Kong ILS regime, please refer to our previous client alerts: Fostering growth as reinsurance and risk management centres in the GBA – Hong Kong sets to introduce insurance linked securities legislation and Greater Bay Area Series – Developments for Hong Kong insurance linked securities.

Requirements for authorisation of an SPI

Under section 6(1) of the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong) (Insurance Ordinance), no person shall carry on any class of insurance business in or from Hong Kong except a company authorised under section 8 or 8A of the Insurance Ordinance to carry on that class of insurance business, Lloyd's or an association of underwriters approved by the IA. Any company which intends to carry on SPB in or from Hong Kong must apply to the IA under section 8A of the Insurance Ordinance.

An SPI applicant is expected to fulfil the following requirements:

Requirements Details
Appointment of administrator(s) and directors

The SPI applicant must have at least one individual administrator and two directors, one of which being a resident in Hong Kong. The appointment of each of these key operators must be approved by the IA.

The IA must be satisfied that the administrator(s) and directors of the SPI applicant are fit and proper persons to hold such positions in the applicant before it may grant authorisation. In considering whether a person is fit and proper for the position, the IA will take into account all relevant factors as set out in section 14A of the Insurance Ordinance and the Guideline on "Fit and Proper" Criteria[3], including qualifications, experience, ability to act competently, honestly and fairly, reliability and integrity, as well as financial status.

Financial and solvency requirements

The SPI must be fully funded, meaning that its full liabilities must be fully backed by assets including funds raised through debt or other financing arrangements.

To further illustrate, the IA notes that the reinsurance contract entered into between the SPI and the cedant will be considered fully funded if the value of the assets held under the terms of the reinsurance contract by, or on behalf of, the SPI for the benefit of the cedant is not less than the amount of the SPI's liabilities (whether actual or potential) under the reinsurance contract at any time and under all reasonably foreseeable circumstances, taking into account (i) the obligations of the SPI to the cedant under the reinsurance contract; and (ii) the expenses the SPI expects to incur.

Bankruptcy remoteness and limited recourse

Each reinsurance agreement between the SPI and its cedant(s) must include a clear and unequivocal limited recourse clause which ensures that the maximum amount recoverable from the SPI under the reinsurance contract is limited to the lower of: (i) aggregate limit under the reinsurance contract; or (ii) available assets held under the terms of the reinsurance contract by, or on behalf of, the SPI for the benefit of the cedant(s).

An SPI must also be "bankruptcy remote". That is: 
  • the SPI must not be a company within the same group of companies to which the cedant belongs; and
  • the ILS investors must have no recourse to the assets of the cedant, in the event the SPI defaults on its payment obligations under the ILS it has issued.
An SPI applicant must obtain a written legal opinion to confirm its bankruptcy remoteness for submission to the IA, as a supporting document for the IA's approval.

Selling restrictions

Under the SPB Rules, ILS issued by an SPI can only be offered, sold to and purchased by "eligible ILS investor". 

The IA requires undertakings to be made by the SPI applicant and the arranger/placement agent of the ILS that the selling restrictions will be strictly adhered to.
Auditor appointment The SPI applicant is required to appoint an auditor within one month from the date on which the SPI commences its SPB, and notify the IA accordingly.

Restrictions on the sales of ILS

The IA puts emphasis on compliance with Rule 3(1) of the SPB Rules, which limits the scope of persons to whom ILS may be offered or sold. In particular, the SPB Rules imposes a minimum investment size of US$250,000 (or its equivalent in other currency) for each ILS transaction, and an SPI and ILS investor (in the event of a secondary transaction) must not sell or offer to sell any ILS to another person who is not an "eligible ILS investor" as defined under the SPB Rules.

The SPI and any intermediary involved in an ILS transaction must also observe the sales restrictions in the SPB Rules as well as guidelines, codes, circulars, and other requirements issued by the IA and other regulatory authorities from time to time.

Corporate governance and risk management

The IA emphasises that an SPI is required to have sound and effective corporate governance and risk management frameworks in place that are proportionate to its risk profile. The frameworks should facilitate effective and efficient operations and address the organisational structure of the SPI, including segregation of duties and management of conflicts of interest.

Reporting, record-keeping and filing requirements

GL-33 also provides that the SPI is required to keep and maintain proper accounting and other records at any of its offices in Hong Kong, or offices of its accountant in Hong Kong, as long as it is authorised as an SPI.

The SPI will generally be subject to more simplified reporting requirements, and will be required to submit a director's report, balance sheet, revenue account and profit and loss account to the IA.

Disclosure requirement

GL-33 imposes certain mandatory disclosure requirements in the offering and contractual documentation, including:

  • a statement that the SPI is "bankruptcy remote";
  • the rights of the ILS investors under the ILS notes are fully subordinated to the claims of policy holders (i.e. the cedant(s)) under the SPI's reinsurance contract;
  • the investment guidelines governing the composition of the SPI's assets, including the types, issuers, and target credit ratings of the investments;
  • if the SPI will be reused for subsequent issuance of ILS, the allocation of assets to different contracts and the aggregated limit of each contract in order to demonstrate that the SPI will meet the fully-funded requirement at all times; and
  • an SPI and ILS investor (in the event of a secondary transaction) must not sell or offer to sell any ILS below the monetary threshold as set out in SPB Rules.

SPI application pack

An SPI applicant is required to complete and submit an SPI application form (which can be obtained directly from the IA) together with supplementary information and documents for the IA's consideration, including:

  • IA's specified forms – Particulars of the applicant and its service providers, including the proposed administrator(s) and the director(s) of the SPI;
  • Undertakings – Written and binding undertakings to be provided by the SPI and/or written representation from the placement agent(s)/arranger(s) of the proposed ILS transaction in respect of compliance with the selling restrictions under the SPB Rules;
  • Details of the SPI applicant and cedant(s) – Investment strategies and types of potential investments by the SPI, financial projections of the SPI and copies of the financial statements of the cedant(s);
  • Details of the ILS transaction – Types of perils to be covered and respective triggering events and draft term sheet and draft offering document(s) for the ILS;
  • Draft contractual documentation – indenture, reinsurance contract to be entered into by the SPI and cedant(s) and such other contractual documentation relevant to the ILS transaction); and
  • a detailed written explanation of how the SPI will satisfy the "fully-funded" requirement under the Insurance Ordinance.

In the event the SPI will be "recycled" for issuing multiple ILS, the SPI applicant should also disclose such intention to the IA in its SPI application. Any subsequent issuance of ILS using the same SPI would require the IA's no objection.

ILS Grant Scheme

With reference to the IA's press release dated 3 May 2021, authorised SPIs may qualify for the reimbursement of eligible expenses attributable to issuing an ILS bond in Hong Kong if:

  • at least 20% of the upfront issuance costs of the ILS are attributable to the revenue of Hong Kong-based service providers; and
  • the ILS issuance takes place in Hong Kong, with an issuance size of at least HK$250 million (or the equivalent in foreign currency).

Priority of the Grant Scheme will be given to first time issuers and sponsors, and issuances lodged with and cleared by the Central Moneymarkets Unit operated by the Hong Kong Monetary Authority, where feasible.

The sum of grant for each issuance is:

  • for ILS with a maturity of three or more years – the lesser of:
    • HK$12 million; or
    • 100% of total upfront costs incurred; or
  • for ILS with maturity of one year to less than three years – the lesser of:
    • HK$6 million; or
    • 50% of total upfront costs incurred.


By introducing the ILS regime, Hong Kong seeks to further sharpen its competitive edge in asset and wealth management as a regional centre for ILS issuances. Prospective SPI applicants should consult the IA on its proposal before lodging a formal application.

We observe that a number of interested market players have been engaging in soft consultations for SPI applications with the IA in advance of the publication of the GL-33. A dedicated team at King & Wood Mallesons across our network has been working on insurance, regulatory, licensing and taxation advice to support the upcoming ILS regime in Hong Kong. We look forward to working with our clients on this latest regulatory initiative for Hong Kong. Please speak to us if you have any questions.


*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".



[2] Insurance Authority's press release dated 3 May 2021, available at:

[3] Available at:

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