Egypt’s financial regulator looks to insurance-linked securities (ILS)

The financial regulator in Egypt has become the latest government entity to look to implementation of an insurance-linked securities (ILS) framework within the country.

Egypt already has insurance and some reinsurance activity going on within the country, but insurance-linked securities (ILS) are relatively unknown and a new concept to its market.

Despite that, the Financial Regulatory Authority (FRA) of Egypt has put ILS in its strategic plan, stating that this could be an important new investment and risk transfer channel for the country.

In seeking to build out its investment markets, with a focus on instruments that can help to promote fairness and help to attract important capital sources, the ILS instrument is seen as something that complement broader insurance, reinsurance and risk transfer work in Egypt.

The FRA’s strategy lasts through 2026 and as it looks to enhance Egypt’s capital markets, for the country and investors, it wants to develop new products related to non-banking financial activities, one of which is insurance-linked securities (ILS).

These could apply to both life and non-life risks, the Authority said, although explaining that catastrophe bonds covering natural disaster risks are the most well-known.

The regulator sees the potential for ILS to play a role in helping its insurance and reinsurance market access international capital sources, to disperse risk, as well as to provide investment opportunities that can support social good projects in Egypt as well.

With Egypt’s regulator and insurance market already familiar with alternative risk transfer structures, and concept such as parametric insurance, adding the ability to access capital markets sources of capacity through ILS regulations could be a positive step forwards for the country’s capital and risk market development.

New countries looking at ILS regulatory regimes aren’t necessarily looking to attract international issuance, as we’ve seen in the past.

Increasingly, we’ve been speaking with regulators from around the world that want to add capital markets access as an option for their own insurance and reinsurance industry’s capacity needs, while also putting in place the necessary structures to allow for domestic risks to be offloaded to international investors.

Given how established the main ILS domiciles like Bermuda are, this is a far better approach for any government to take nowadays, as if successful then naturally their regulatory framework can attract others in time, but the main goal should be to modernise their own financial market’s risk transfer options to include ILS.