FAQs - Insurance special purpose vehicles (ISPVs)

You must send us a one-off, non-refundable £5,000 authorisation application fee with your form so we can process your application.

The rules relating specifically to the prudential regulation of ISPVs were made by the Prudential Sourcebook for Insurers Instrument 2006 (INSPRU). We intend to help develop a UK market for ISPVs by ensuring the authorisation requirements are proportionate to the risks posed. We will require less information from an ISPV than a conventional insurer or reinsurer and put greater emphasis on self-certification and senior management responsibility. Protection for consumers will be maintained through supervision of the ceding insurer, which for UK authorised firms will include the Individual Capital Assessment ("ICA") process.

We will still have to be satisfied that you will meet the threshold conditions for authorisation. We will, however, have regard to our existing knowledge of firms' senior management, systems and controls, to aid our assessment.

INSPRU includes guidance on what we expect you to do to meet the requirement for an ISPV to be 'fully funded'. It includes rules applying to a UK ISPV's assets and liabilities and its contractual arrangements which ensure the ISPV remains fully funded.

To be fully funded, we think an ISPV must:

• have received the proceeds of issuing debt or other method by which it is financed;
• in each contract of reinsurance, include terms which secure that its aggregate maximum liability (i.e. its exposure) under its contracts of reinsurance does not exceed the amount of its assets at any time;
• ensure that under terms of any debt it issues or other financing arrangement used to fund its reinsurance liabilities the rights of providers of that debt or other financing are fully subordinated to the claims of creditors under its contracts of reinsurance; and
• only enter into contracts or otherwise assume obligations which are necessary for it to give effect to the reinsurance special purpose for which it has been established.

We envisage there could be more than one reinsurance contract in place with an ISPV. You must demonstrate in such instances that each of the contracts is structured in a way that meets the requirement for the ISPV to be fully funded for all its reinsurance obligations.

We expect you to seek an independent legal opinion to satisfy yourself that a contractual agreement between you and a ceding insurer is legally effective and meets the requirements of INSPRU 1.6.9R to 1.6.12R. We also expect your legal adviser to confirm that the terms of the ISPV's financing agreements meet the requirement that the rights of the providers of that finance are fully subordinated to the claims of its reinsurance creditors. The application form will require you to self-certify the adequacy of contractual arrangements although we will reserve the right to request a copy of the legal opinion obtained during the course of our review.

You will be required to ensure your assets are equal to or greater than your liabilities calculated according to accepted accounting principles. You will be required to self-certify the forecast opening balance sheet position, following the initial transactions establishing and funding the ISPV and after 12 months. You will not be required to complete FSA returns but you will have to provide audited financial statements within three months of the accounting date.

A ceding insurer which has not received an authorisation within the EEA in accordance with an EU directive relating to insurance or reinsurance cannot reinsure with an UK ISPV. If such a ceding insurer wishes to set up a reinsurer in the UK it will have to apply for it to be authorised as a conventional reinsurer.

Firms operating within the Society of Lloyds will be eligible to reinsure risks through a UK ISPV. This is because the Society of Lloyds is a UK regulated entity authorised in accordance with the EU directives.

In theory you could, but you would have to ensure you met the definition of an ISPV under the Reinsurance Directive. You would also have to make sure you did not retain any insurance or reinsurance business that did not satisfy this definition.

If the ceding insurer is UK regulated, it can benefit from a reduction in its own regulatory reserving and capital requirements by claiming credit for the risks transferred to the ISPV through a waiver application.

The waiver application will be considered separately from authorising the ISPV. You can find information on applying for a waiver on our website.

INSPRU 1.6.14G to INSPRU 1.6.18G set out the information we expect to receive as part of a waiver application and the issues we will look at when we consider that application. The detail we need depends on the nature of the ISPV but we need the Pillar 1 impact of the waiver at both solo and group level for all applications.