Alternative Risk Transfer - a Singapore Perspective

Sep 9

*image credit - Markus Winkler, Unsplash*

With the recent MAS Consultation on the legal framework for protected cell companies (“PCC”) which closed on 7 August 2026,1 alternative risk transfer vehicles and instruments, such as captives, sidecars and catastrophe bonds have once again come under the limelight. Not many legal advisers and professionals outside of the reinsurance industry may be familiar with alternative risk transfer (“ART”). This article seeks to shed light on a few common terms and concepts relating to ART.

Regulatory Attention on ART in Singapore

ART structures are not new to the insurance industry players and regulators in Singapore. As early as August 1999, then-Deputy Prime Minister Mr Lee Hsien Loong noted in a speech that Singapore had the largest number of captive insurers in Asia, and that Singapore was aiming to become a centre for ART, with market players offering a wide range of activities and services covering captive insurance, financial reinsurance, and the securitisation of risks.2 In the same month of August 1999, the MAS issued notices on financial reinsurance for general and life businesses.3

In October 1999, then-Minister for Health and Second Minister for Finance, Mr Lim Hng Kiang mentioned Tokio Marine as the first Japanese insurer who turned to the world’s capital markets to lay off its earthquake risks through a bond issue to investors who were willing to take the risks for higher returns, complementing traditional reinsurance coverage. Mr Lim said Singapore, as a leading insurance hub in Asia, would monitor the developments in the area of risk securitisation closely and position itself to play a more significant role.4

A more comprehensive roadmap was set out in May 2000, during the keynote address of Mrs Hauw Soo Hoon, then-Executive Director of the Insurance Department of MAS, given in the 2nd Conference on Alternative Risk Transfers in Asia. Mrs Hauw discussed developments in the captive insurance industry, including the growing popularity internationally of rent-a-captives and PCC structures.5 Interestingly, Mrs Hauw said MAS would be formulating the regulatory framework for rent-a-captives and PCCs and was looking into issues involved in enacting PCC legislation. Other forms of reinsurance products mentioned were finite risk reinsurance, and risk securitisation (particularly for natural catastrophe covers).

The Insurance (General Provisions and Exemptions for Special Purpose Reinsurance Vehicles) Regulations (the “SPRV Regulations”) and the Insurance (General Provisions and Exemptions for Captive Insurers) Regulations were made in 2018. Following the SPRV Regulations, numerous catastrophe bonds have been issued by special purpose reinsurance vehicles (“SPRV”) set up and licensed in Singapore. As mentioned above, the PCC framework is still in the MAS consultation stage as at the time of writing.

Terminologies

Given the increasing relevance of ART in Singapore, its terms and terminologies can be expected to surface more frequently. In a media release on Mrs Hauw’s speech given in May 2000, the MAS provided the following definitions and explanations, which remain relevant and helpful today.6 We set them out below, together with elaboration provided in more recent insurance legislation and authorities.

ART

There is no commonly agreed definition for ART. It is a term often used to describe a broad range of products which have been brought about by a perceived convergence of insurance market and capital market practices. ART solutions are typically tailored to meet clients’ specific needs in respect of their total risk management, covering insurance, financial and business risks. The ART market encompasses a wide variety of mechanisms including captives, finite risk insurance, and securitisation of risk.

Captives

A captive is an insurance company that primarily insures the risks of its parent company and related companies. A captive is typically a closely held company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries. Similar definitions are provided in the Insurance Act 1966 (“IA”) and the MAS’ Consultation Paper on the proposed PCC framework.7

Rent-a-captive

A rent-a-captive is an insurance company that provides unrelated parties access to the benefits of a captive insurance company without the up-front costs and capital investment required in forming their own captive. The rent-a-captive “rents” its core capital, surplus, insurance licence and legal capacity to engage in underwriting activities for clients who are not its voting shareholders. Internal arrangements are set up in such a rent-a-captive structure to avoid cross-liability of one client to other clients i.e. assets of one client are protected from the misfortunes of its co-users.

PCC

A PCC provides the same facility as a rent-a-captive except that protected cells are created to segregate and protect the assets of one cell from claims which are unrelated to that cell. Hence, individual cells have statutory protection to ensure that creditors of one cell do not have recourse to the assets of other cells. The PCC consultation paper provides more elaboration on the intended structure of a PCC.

Finite risk reinsurance / Financial reinsurance

It was held in Huntington v Imagine Group Holdings Ltd [2007] EWHC 1603 (Comm) at [204] that “finite risk insurance and reinsurance business” is not a term of art in the sense that it has a generally accepted market meaning. The Court set out at [205] to [220] various different usages of the term “finite risk”.

In its May 2000 media release, MAS proposed that finite risk reinsurance can be defined as a non-traditional form of reinsurance that emphasises the aspect of risk financing rather than risk transfer. Finite risk concepts are based on the spreading of individual risks over time while traditional insurance is based on the law of contribution from a large number to meet the losses of a few. Such contracts are usually multi-year arrangements and explicitly recognise time value of money unlike traditional insurance contracts that are usually renewed on a yearly basis. Cedants of finite risk reinsurance would have a greater share the net experience of the account and the reinsurer’s liability is capped within a much narrower band than it would have been under a traditional reinsurance contract. MAS noted in its Notice 208 on Financial Reinsurance that financial reinsurance is sometimes referred to as finite risk reinsurance.8

Regulatory concerns have arisen over the use of financial reinsurance. See, for example, Butler v Australian Prudential Regulation Authority [2009] AATA 570,9 in which the Administrative Appeals Tribunal affirmed the decision of the Australian Prudential Regulation Authority to disqualify the directors of an insurance company for entering into financial reinsurance arrangements that had the effect of disguising the insurer’s true financial position. The directors were found to be not fit and proper persons.10

The report of the HIH Royal Commission on the failure of the HIH insurance group, which entered provisional liquidation in 2001, states that the use of various types of financial reinsurance disguised the financial position of companies in the HIH Group. Financial reinsurance of the type discussed in the report was described as “more like a deposit arrangement, which, whether or not it is accompanied by risk transfer, is primarily directed at the appearance of the balance sheet… The evidence shows that, in considering the sufficiency of risk transfer, practitioners would take into account not only the chance of the insured event occurring and giving rise to a claim under the policy (the underwriting risk) but also the chance that the claim might arise and the reinsurance become payable in any year of the policy—for example, the first or third or fifth (timing risk)”.11

Risk securitisation

Risk securitisation refers to the transferring of insurance risks to capital market investors in the form of insurance bonds or via derivatives transactions. The SPRV Regulations provide that, in relation to an SPRV, insurance securitisation refers to any debt or other financing arrangement entered into by the SPRV with an investor, where repayment of the principal or interest (or both) to the investor is contingent upon the occurrence or nonoccurrence of an event, upon which the ceding insurer is exposed to financial loss under contracts of insurance or reinsurance that the ceding insurer has issued.

The SPRV Regulations further provide that an SPRV is an insurer licensed under section 11 of the IA as a reinsurer to carry on life or general business or both classes of business, and (i) is created for the sole purpose of entering into contracts of reinsurance with one or more ceding insurers; and (ii) at all times fully funds its obligations under the contracts of reinsurance with the ceding insurer or insurers through insurance securitisation. As explained in the PCC consultation paper, the financial instruments that securitise insurance contracts are called insurance-linked securities, or ILS.

Other relevant concepts and structures not mentioned in the May 2000 MAS media release include the following.

Catastrophe bonds

Catastrophe bonds are specialised securities through which a sponsor, such as an insurer, reinsurer or sovereign, transfers specified catastrophe risk to capital market investors by issuing bonds through an issuer (such as an SPRV in Singapore). The bonds are often used to raise capital to cover losses arising from natural catastrophes, such as hurricanes and earthquakes. They come with specific triggers, such as the size of insurance claims following a particular natural disaster.12

Collateralised reinsurance

Collateralised reinsurance is another reinsurance structure considered by the MAS when designing the PCC framework.13 Collateralised reinsurance transactions are similar in form to conventional reinsurance arrangements and deals tend to be smaller in scale when compared to catastrophe bonds, but are distinct from catastrophe bonds in that a tradable instrument is not created to facilitate the risk-transfer process. Rather than raising capital by public offering, collateralised reinsurance deals are privately placed with a small number of investors, often specialist ILS investors or ILS investment funds. 14

Industry loss warranties

The MAS had noted industry loss warranties (“ILW”) as a type of instrument to be further explored, along with other instruments available in the ILS ecosystem.15 In the Supreme Court of Bermuda case of Aeolus Re Ltd v CS ILS SICAV-SIF [2022] SC (Bda) 30 Com, it was noted that ILW swaps in that case were financial instruments which enabled the parties in effect to speculate on the occurrence and outcome of future natural catastrophe events, including in order to hedge their underlying exposures. The parties in that case had agreed that such ILS swaps were not indemnity contracts, unlike traditional insurance, as they did not require the buyer to have suffered any loss.

Moving Forward

The concepts outlined above illustrate the breadth of ART. ART structures complement traditional coverage by providing additional capacity, addressing risks that are difficult to insure, and offering greater flexibility in the financing and management of risk.

The regulatory developments of the late 1990s and early 2000s show that the foundations of Singapore’s present ambitions were laid more than two decades ago. The introduction of the SPRV framework in 2018, the subsequent issuance of catastrophe bonds, and MAS’ current consideration of a PCC framework represent further stages in that continuing development.

If implemented, the proposed PCC framework could broaden the range of structures available in Singapore and reduce some of the cost and operational barriers to accessing ART solutions. Together with Singapore’s existing insurance, reinsurance and capital markets ecosystem, it could support the development of a regional platform for the transfer of catastrophe, climate and other emerging risks.

The terminology and structures will continue to evolve as new risk transfer techniques emerge. What is currently regarded as “alternatives” may increasingly form part of the mainstream toolkit for managing complex and large-scale risks.

Alvin Ee

ILAS Committee Member

Partner, Rajah & Tann Singapore LLP

Footnotes

1 https://www.mas.gov.sg/publications/consultations/2026/consultation-paper-on-proposed-framework-for-protected-cell-companies-in-singapore

2 https://www.mas.gov.sg/news/speeches/1999/life-insurance-in-the-21st-century--16-aug-1999

3 https://www.mas.gov.sg/news/media-releases/1999/mas-issues-notices-on-financial-reinsurance--18-aug-1999

4 https://www.mas.gov.sg/news/speeches/1999/beyond-2000-implications-for-the-asian-insurance-reinsurance-markets--04-oct-1999

5 https://www.mas.gov.sg/news/speeches/2000/rethinking-risk-beyond-traditional-boundaries--23-may-2000

6 https://www.mas.gov.sg/news/media-releases/2000/singapore-positioning-to-be-a-leading-alternative-risk-transfer--art--centre- in-asia--23-may-2000

7 https://www.mas.gov.sg/-/media/mas-media-library/publications/consultations/id/2026/consultation-paper-on-proposed-framework-for-protected-cell-companies-in-singapore.pdf

8 https://www.mas.gov.sg/-/media/mas/notices/pdf/mas-208-financial-reinsurance_18-aug-1999.pdf